Supreme Court Decision on Demonetization

Arun Kumar

The Supreme Court’s majority judgment on demonetization is based primarily on the premise that demonetization had a `reasonable nexus’ with the objectives sought to be achieved. And, it is not relevant whether the objective was achieved or not. The dissenting judgment argues that the decision was `well-intentioned’ and well thought of, but it was unlawful on legal grounds. So, both judgments imply that demonetization was implemented to achieve desirable objectives.

Neither of them considered it important to go into the issue of whether the objectives were achieved and further, whether demonetization could at all have achieved the stated objectives. Without that, how can it be concluded either that there was a reasonable nexus or to say that the decision was well-intentioned? If the objectives were not achieved and if the expert opinion was that the objectives could not have been achieved, then one could not conclude about the reasonableness or good intentions.

Indeed, checking the black economy was important for the nation then and now. But it has been known that stopping the `legal tender character of currency’ or the broader policy of ‘demonetization’ cannot help check the black economy. It was also known that if it is done suddenly, it causes a shortage of money in the economy, which leads to the freezing of transactions in the economy and a crisis ensues. Thus, characterizing demonetization as `well intentioned’ or having a `reasonable nexus’ is unreasonable.

If the RBI is taken to be an expert in the matter and its advice historically and currently was that the decision would be futile, then how can the decision be reasonable or well-intentioned?

The step was premised on the misconception that `black means cash’, so, if cash is squeezed out of the system, the black economy would overnight vanish. It was also a misconception that it had to be carried out in secrecy and speedily. The idea was that people holding black cash should not be able to convert it into white.

The objective fact is that in spite of secrecy, those who held black cash managed to convert it to new cash so that according to the Reserve Bank of India (‘RBI’), 99.3 percent of the demonetized currency came back to it and got converted to new currency notes. In the last six years, hardly anyone has been prosecuted by the income tax department for the conversion of their black cash to new currency.

So, the objective fact is that the stated goals of demonetization were not achieved – they could not have been achieved – but the economy got damaged, and crucially, democracy was subverted.

Importance of process in democracy

For a democracy, the process by which a decision is arrived at is important. While a decision can be taken by formally following a process, it may merely be in form and not in substance. That damages democracy. For instance, consultation may be formally carried out without taking on board the discussion in a meeting, and a preconceived idea may be presented as the outcome of the meeting.

The government says that it consulted the RBI over six months prior to the announcement of demonetization. The person who was the RBI Governor for much of that time is on record as saying that he had advised the government against this step since it would not lead to an impact on the black economy. So, consultation did not mean concurrence by the RBI.

Clearly, the government had made up its mind, and consultation was for the sake of record. Historically, even when demonetization was carried out in 1978, the then RBI Governor had given in writing that it would not help tackle the black economy. Dissent is important in a democracy since it often leads to a better decision than when policymakers act unilaterally.

If the RBI is taken to be an expert in the matter and its advice historically and currently was that the decision would be futile, then how can the decision be reasonable or well-intentioned? What other evidence was there to come to such a conclusion?

Another way to subvert a process is to hold a hurried, short meeting and claim that an agreement was reached after consultation. One needs to ask, whether there was time to come to a conclusion on an important decision in such a short time.

A perfunctory meeting undermines democracy since it implies that the meeting was held with preconceived notions and there was no time to address any concerns of the members or clarify any doubts they may have had. As the dissenting judgment implies, the outcome of the Board meeting was pre-determined.

Democracy undermined

Calling a meeting of the Central Board of the RBI at 24 hours’ notice at 5:30 p.m. could not have given much time for deliberations of such a crucial decision announced at 8 p.m. that very day. Neither the RBI nor the Board members are experts who have studied the black economy. If eight members of the Board were present, each could not have got more than a few minutes to express themselves. It is also said that the Board had chalked out a plan to be put into place. Where was the time for that?

Clearly, the RBI’s plan of action had been already prepared and not worked out in the Board meeting, and the members would not have had the time to even comment on it. No wonder the plans were half-baked and had to be repeatedly altered in the next few weeks.

Clearly, the RBI’s plan of action had been already prepared and not worked out in the Board meeting, and the members would not have had the time to even comment on it. No wonder the plans were half-baked and had to be repeatedly altered in the next few weeks. Because of a lack of consultation across the government, the scheme got fouled up.

Neither were the problems anticipated nor solutions for them worked out. Even the RBI could not help since it at best ignores the black economy. Its equations do not incorporate the black economy variables. Its statements on growth of the economy or inflation never refer to the black economy.

So, when it is said that the RBI proposed the step, given the process followed and objections of the RBI top brass, it can be concluded that democracy was undermined and an important institution was discredited.

Democracy was also undermined when demonetization was carried out without prior discussion in Parliament. The Parliament was in session from November 16, 2016, but the matter was not discussed there or approval sought.

Interpretation of `any’

The key argument in the majority judgment is based on the interpretation of the word `any’ in Section 26(2) of the RBI Act. It is taken to mean `all’ the series of notes of any denomination.

The majority judgment states that reading `any’ to mean `some’ leads to absurdity. The judgment goes to great length to discuss various versions of `any’ to argue that it should be interpreted in its broadest sense. For that, it discusses the day-to-day use of `anyone’, `anything’, and so on. It cites past judgments to argue that it can be used in its widest sense.

This is strange because legal arguments often hang on the use of commas and colons. The reading of `any’ as `all’ is a stretch. If one goes by the finer interpretations of the English language used in the Gazette Notification of November 8, 2016, it does not say that an entire denomination would be discontinued. That is what demonetization implies.

The Gazette notification says, “…bank notes of denominations of the existing series of the value of five hundred rupees and one thousand rupees (hereinafter referred to as specified bank notes) shall be ceased to be legal tender…”

So, the judgment needed to clarify whether this statement can stand for the discontinuance of an entire denomination using the power conferred in section 26(2). The Rs.1,000 denomination was discontinued, but the Rs.500 denomination notes have continued.

Final thoughts

A well-functioning economy growing at about 8 percent suddenly came to a halt for months due to demonetization. Data suggests that the economy is still to recover from the blow it received in 2016. International experts treated demonetization in India as a case study to understand what happens to an economy when such a step is suddenly taken.

Clearly, a flawed process led to an erroneous policy which is counterproductive and which resulted in not only damage to democracy but to huge adverse impact on the public, especially the poor. This is evident from pictures of closed markets, the closure of small and micro units, and long lines at banks, among several things. The process by which a policy is arrived at also determines the outcomes. Can it then be said that the process was legal, even if formally, so the achievement of the objectives does not matter?

This article was first published on The Leaflet as Democracy not synonymous with `reasonable nexus’ or `good intentions’ on January 5, 2023.

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