What the Supreme Court’s demonetization verdict says?

Published
3rd 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.

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.

How did the government and the RBI respond?

Process of Initiation: According to RBI, the Section does not talk about the process of initiation. It only says that the process will not end without the last two steps outlined in it.
Presence of the Quorum: RBI also pointed out that the quorum as determined by RBI General Regulations, 1949, was met for the Central Board meeting.
Consultations with the Reserve Bank: The government told the court that it began consultations with the RBI in February 2016.
- However, the process of the consultation and the decision-making were kept confidential.

Majority 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 hold that demonetization was not hit by the doctrine of proportionality.

Dissenting view:

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.