UNRAVELLING THE ENIGMA OF DEMONETIZATION

Picture Source: Verdictum.in

8^th November 2016, was a historical and ground breaking day for Indian citizens, since its Prime Minister, Shri Narendra Modi, took to national television for an unscheduled address to announce prohibition on circulation of rupees five hundred and rupees thousand currencies which together accounted for almost 15.44 lakh crore or 86% of the total currency in circulation in India, was to be enforced from midnight onwards i.e. roughly 4 hours from the time of announcement leaving almost no time for the citizens to respond. The banned currencies were to be replaced by issuance of Rupees 2000 and Rupees 500 new currency notes. The Prime Minister described his drastic action as a planned and concerted action ‘a triple strike’ against black money, counterfeit currencies and terrorism. 

HISTORICAL OVERVIEW OF DEMONETIZATION

Did you know that it was not the first time that currency notes have been banned in the history of India or the World.

·      United States of America [1873]

The United States was one among the first countries to implement demonetization. Whereas the Coinage Act of 1873 forced the elimination of silver in favour of the gold standard as legal money. This resulted in a reduction in the money supply and, as a result, a 5-year economic downturned in the country. Due to the terrible circumstances and demand from silver miners and farmers, the Bland-Allison Act was passed in 1878, re-monetizing silver as legal cash.

·      United States of America [1969]

Another event of demonetization occurred from the USA when President Richard Nixon was elected in 1969. To combat the presence of black money, he proclaimed all banknotes worth more than $100 null and worthless in the United States of America. The move was a huge success, and it is often regarded as the beginning of the creation of the American banking system. However, the $100 note is the most extensively circulated denomination to this day.

·      India [1978]

To combat black money in the economy, the then-Janata party coalition resolved to destroy Rs 10,000, Rs 1,000, and Rs 500 currency notes. Surprisingly, the then-RBI Governor, I.G. Patel, opposed this decision. The move was said to be directed against the corrupt preceding government officials. Indian citizens were allowed a week to exchange any large denomination bills. Higher currency denominations had no significant influence on the money supply or the costs of essentials since they made up such a small fraction of the overall money stock.

·      Ghana [1982]

Ghana demonetized its 50-cedi currency in order to curb tax evasion and eliminate surplus liquidity. The effort was a flop since the people began to favour foreign currencies and actual assets. Furthermore, the general population lost faith in the financial system, resulting in the emergence of a new underground market for cash.

·      Nigeria [1984]

In an attempt to render the previous notes obsolete, the military administration of Muhammadu Buhari began producing new currency notes in new colours. The movement sought to repair a debt-ridden and bloated economy. It resulted as a colossal failure.

·      Myanmar [1987]

To combat the growing illegal trade, the military invalidated roughly 80% of the value of money in circulation. It culminated in a student protest, followed by a government crackdown the next year.

·      Soviet Union [1991]

Under Mikhail Gorbachev's leadership, 50 and 100-ruble notes were eliminated from circulation in January to combat the counterfeit economy. The discarded notes accounted for around one-third of the money in circulation. There were economic disruptions, and numerous Soviet countries, like Kazakhstan and Ukraine, suffered greatly. People began to lose trust in the government as economic activity began to deteriorate. The demonetization effort failed because Gorbachev faced a coup in August of that year. Some historians believe that these events contributed to the ultimate disintegration of the USSR.

·      Zaire [1993]

Under the dictatorship of Mobutu Sese Seko, successive currency reforms were rolled out. Obsolescent currency was withdrawn from the system in 1993. Increasing economic disruptions resulted in ouster of Mobutu in 1997.

·      Australia [1996]

The Australian Government eliminated all paper-based notes in order to increase security and reduce illicit money in the economy. They were replaced with long-lasting polymer-based notes of the same value. The change proved successful in lengthening the life of the banknotes. Despite the early expenses of producing polymer-based notes, this contributed to Australia's reputation as a business-friendly country.

·      European Union [2002]

The introduction of a single currency, the 'Euro,' on January 1, 2002, necessitated the demonetization of the current currencies of the European Union's 12 member countries. Approximately eight billion notes and 38 billion coins were dispersed via 218,000 banks, post offices, and 2.8 million retail shops. A considerable share of the nine billion national notes and 107 billion national coins were gathered at the same time. Preparation began in mid-1998, and residents were informed well in advance, resulting in a smooth currency switch.

·      North Korea [2010]

Kim Jong II's leadership implemented currency adjustments to combat the illicit market and boost the economy. The move failed when the price of necessities rose and people fiercely opposed it. This was followed by the assassination of the finance minister.

·      Zimbabwe [2015]

In order to stabilise its hyperinflationary economy, the Zimbabwean government chose to replace the Zimbabwe dollar with the US dollar in 2015. The hastily executed manoeuvre was ineffective, as most wealth holders saw the value of their collected savings decline. Along with public hostility, there were negative economic consequences, as exports suffered significantly owing to a lack of competitiveness.

·      Venezuela [2016]

Following India’s step to demonetize certain rupee notes, to combat the soaring inflation rate of 425% and the growing menace of transnational mafias blooming in the country, Nicolas Maduro's administration in Venezuela announced the demonetization of its 100 Bolivar notes (which account for 77% of the country's currency in circulation). Citizens were given a 72-hour window to withdraw their money. Following violent protests that included store destruction, traffic blocks, and ATM breakdowns, the government was obliged to extend the deadline for using old cash.

SUPREME COURT OF INDIA’S VERDICT

A civil writ petition was filed in the Apex Court in 2016 challenging the constitutional vires of the demonetization of 2016 in India through the case of Vivek Narayan Sharma v. Union of India [W.P. [C] No. 906 of 2016]. This case posed serious questions upon the central government’s decision from violating the fundamental rights of equality [A.14], freedom of speech [A.19], life and liberty [A.21] and the constitutional right of property of citizens [A.300A].

Senior advocates on behalf of the petitioner were of the view that the central government utilizing its power given under section 26 of RBI Act [the central government may on recommendation of the Central Board declare any series of bank notes of any denomination which shall cease to be a legal tender], cannot demonetize “all series” of a denomination at once, it can only demonetize a “specified series” of notes at a time. Further, they elucidated that the Central Government initiated the proposal for demonetization, sought opinion of the Central Board on 7th November 2016 and declared the same on 8th November 2016, which displays pre-meditated and rushed decision of the government.

On 2nd January 2022, after, considering the accusations and clarification of both the parties, S. Abdul Nazeer J., B R Gavai J., A S Bopanna J. and V. Ramasubramanian J., in-majority delivered the judgment through ensuing summarised points:-

·           The power available to the Central Government under Section 26 of the RBI Act cannot be restricted to mean that it can be exercised only for ‘one’ or ‘some’ series of bank notes and not for ‘all’ series of bank notes. The power can be exercised for all series of bank notes. Merely because on two earlier occasions, the demonetization exercise was by plenary legislation, it cannot be held that such a power would not be available to the Central Government under subsection (2) of Section 26 of the RBI Act;

·    Section 26 of the RBI Act does not provide for excessive delegation inasmuch as there is an inbuilt safeguard that such a power has to be exercised on the recommendation of the Central Board. As such, subsection (2) of Section 26 of the RBI Act is not liable to be struck down on the said ground;

·           The Notification dated 8th November 2016 does not suffer from any flaws in the decision-making process;

·    The Notification dated 8th November 2016 satisfies the test of proportionality and, as such, cannot be struck down on the said ground;

·    The period provided for exchange of notes vide the impugned Notification dated 8th November 2016 cannot be said to unreasonable; and

·       The RBI does not possess independent power under sub-section (2) of Section 4 of the 2017 Act in isolation of the provisions of Sections 3 and 4(1) thereof to accept the demonetized notes beyond the period specified in notifications issued under sub-section (1) of Section 4 of the 2017 Act.

However, B.V. Nagarathna J., chose to dissent with the majority decision and held that the decision of demonetization taken on 8^th November 2016, is unlawful and ultra vires of the Indian Constitution. Justice Nagarathna suggested the ensuing summarized points:-

·   Section 26 of the Act applies only when a proposal for demonetisation is initiated by the Central Board of the Bank by way of a recommendation being made to the Central Government. The said recommendation can be in respect of any series of bank notes of any denomination which is interpreted to mean any specified series of bank notes of any specified denomination.

·       When the Central Government proposes demonetisation of any  bank note, it must seek the opinion of the Central Board of the Bank having regard to the fact that the Bank is the sole authority to regulate circulation of bank notes and secure monetary stability and generally to operate the currency and credit system of the country and to maintain price stability.

·    The Central Government after receiving recommendation on behalf of the central board would have to undertake a legislative process and not carry out the measure by simply issuing a gazette notification.

CONCLUSIONS

The judgment of the Supreme Court of India showcased 2 sides of a coin where majority judges were of the view that “merely because some citizens have suffered through hardships would not be a ground to hold the Notification to be bad in law”. On the other hand, Justice Nagarathna suggested that the central government ought to have been more careful in their approach towards a major economical decision which changes lives of people, overnight.

Historical evidences prove that demonetisation as an instrument of monetary disruption has vast potential of making an impact. Nonetheless, given its capacity to cause turmoil in the lives of the ordinary people and the economy at large, it would be advisable to carry out a detailed analysis of its after effects well in advance. Demonetisation as a mere political tool has the capacity bring enormous strain on the economy and is best ill advised.