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Supreme Court’s demonetization verdict

  • Published
    6th Jan, 2023
Context

The Supreme Court has upheld the decision taken by the government in 2016 to demonetize the currency notes. The court also said that the decision, being the Executive's economic policy, cannot be reversed.

About

What is the Supreme Court’s verdict on demonetization?

  • In its majority 4:1 judgment, it was held that the Centre’s notification dated November 8, 2016, was valid and satisfied the test of proportionality.
  • Procedure Followed:
    • RBI Approval was taken: The central government’s decision was after the RBI board’s approval which shows an in-built safeguard against the center’s powers.
    • No Excessive delegation of power: It cannot be said that there is an excessive delegation of power under the RBI Act to the Centre which is answerable to the Parliament.

What is the test of proportionality?

  • Proportionality means that administrative action should not be more drastic than it ought to be for obtaining the desired result. This requires few tests,
    • State action must have a legislative mandate
    • The action must show that the objective of its law is founded on a legitimate governmental aim
    • It must be proportionate, i.e., such state action — both in its nature and extent, must be necessary for a democratic society. Further, such action must have no alternative and less intrusive measures available to achieve the same objective
    • The principle of proportionality calls for striking down laws that are excessively harsh or disproportionate.

Why was demonetization challenged?

  • The matter primarily revolved around the procedure prescribed in Section 26(2) of the RBI Act, 1934, which appears to have not been followed.
  • According to Section 26(2) of the RBI Act, 1934 the Parliament should have discussed the law on demonetization.
    • The process should not have been done through a gazette notification.
    • Parliament cannot be left aloof on an issue of such critical importance for the country.

Majority view

Dissenting view

  • The Centre's decision-making process was not flawed as there was consultation between the Reserve Bank of India (RBI) and the Union government.
  • There was a reasonable nexus to bring such a measure.
  • The court holds that demonetization was not hit by the doctrine of proportionality.
  • Parliament should have discussed the law on demonetization.
  • The process should not have been done through a gazette notification.
  • Parliament cannot be left aloof on an issue of such critical importance for the country.

 

Increasing Federal Disputes and role of SC

  • India is a federal (sometimes quasi-federal) country having governance/state authorities at the federal/national, state and local levels.
  • It is often the case that such federal units (such as: federal/union and different states) have disputes and conflicts amongst each other.
  • Resolution of such federal disputes (disputes arising amongst federal units) requires an independent and impartial arbiter.
  • In the Indian polity and constitutional setup such a role of arbiter is exclusively entrusted on the Supreme Court of India (“SCI”) under Article 131 of the Constitution of India, 1950 (“Constitution”)

How SC puts restrictions on its exclusive jurisdiction?

  • The Supreme Court itself has placed certain limitations on its exclusive jurisdiction, role and duty as the federal Court to the extent of handicapping itself in the effective dispensation of justice in federal disputes.
  • In State of Madhya Pradesh v. UOI the SCI has held that under its Article 131 jurisdiction, as the federal Court, there can be no challenge to the constitutional validity of a law, and has implicitly ousted the power of the SCI to entertain challenges to the constitutional validity of a law under this jurisdiction.

Article 131 of the Constitution confers on the SCI exclusive original jurisdiction in any dispute amongst the states or the Government of India and state(s) (in any combination) where the dispute involves any question (whether of law or fact) on which the existence or extent of a legal right depends.

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