Supreme Court Upheld Demonetisation


    In News

    • Recently, a majority of four judges on a Constitution Bench of the Supreme Court (SC) found no flaw in the government’s process to demonetise ?500 and ?1000 banknotes through a gazette notification issued on November 8, 2016.

    Views of the Constitutional Bench

    • A Constitutional Bench of the Supreme Court in a 4:1 majority verdict has upheld the government’s demonetisation process and has held that the decision-making process was not flawed.
    • The Supreme Court’s judgement came on a batch of 58 petitions that challenged the demonetisation exercise of 2016.
    • The majority verdict rejected the two main contentions of the petitioners that: 
      • The expression “any” in Section 26(2) of the Reserve Bank of India Act of 1934 (RBI Act), cannot be interpreted to mean “all” to empower the government to demonetise currency notes of all series of any denomination.
      • The proposal for demonetisation should be initiated by the RBI Central Board and not the Union government.
    • The petitioners had also argued that the decision-making process employed while announcing demonetisation was “rushed” and “fatally flawed”.


    • About:
      • On 8th November 2016, the Government of India announced the demonetisation of all ?500 and ?1,000 banknotes of the Mahatma Gandhi Series. 
      • It also announced the issuance of new ?500 and ?2,000 banknotes in exchange for the demonetised banknotes.
      • There were three main economic objectives behind demonetisation:
        • Fighting black money, 
        • Fake notes and 
        • Creating a cashless economy by pushing digital transactions. 
    • Outcomes of the exercise:
      • Black money:
        • Among those targets, the biggest one was tackling black money. 
        • Black money refers to cash that is not accounted for in the banking system or cash for which tax has not been paid to the state.
        • According to RBI data, almost the entire chunk of money (more than 99 percent) that was invalidated came back into the banking system. 
        • Of the notes worth Rs 15.41 lakh crore that were invalidated, notes worth Rs 15.31 lakh crore returned.
        • Thus, data suggests that demonetisation was a failure in unearthing black money in the system. Meanwhile, instances of black money seizures continue.
      • Fake Notes:
        • RBI’s annual report, submitted that Rs.15.44 lakh crore worth of currency was demonetised. 
        • The withdrawn money amounted to 86.4% of the currency in circulation at the time. Only Rs.16,000 crore out of the Rs.15.44 lakh crore was not returned. 
        • Only .0027% fake currency was “captured” following demonetisation.
      • Digitisation of economy:
        • As per RBI report, demonetisation has made India a lesser cash-based economy. 
        • In the initial days of trouble conducting business in the face of an acute cash crunch, more and more entities had to shift to digital to do business. 
          • After the return of the cash, the growth in digital payment had been modest.
      • Supported in the Pandemic:
        • The creation of digital infrastructure post-demonetisation helped India in coping with the pandemic. 
        • As the tools for faceless transactions were mostly in place, it became easier to move towards contactless transactions.
    • Major Issues associated with the demonetization exercise:
      • No separate Acts:
        • Demonetisation in 1946 and 1978 were implemented through separate Acts debated by Parliament. 
        • In 2016, it was done through a mere notification issued under provisions of the Reserve Bank of India Act, 1934.
      • Central Bank had rejected key justifications:
        • The Central Board of the RBI gave its approval to the scheme but also rejected, in writing, two of the key justifications — black money and counterfeit notes.
      • Other:
        • 11 crore people stood in queue to change their own money. 
        • Farming community was at a loss. It was sowing season. 
        • Wholesale markets shut down. Prices crashed. Retail saw a “calamitous” drop in sales. 
        • Industry halted and 15 crore daily labourers were left without work.
        • Some say demonetisation broke the back of the rural economy where cash was dominated and disrupted supply chains. 
        • It is estimated that 1.5 million jobs were lost.


    • Many are still to shift or adopt digital payment systems, maybe because it is more convenient to pay cash for purchase of fruits, vegetables or a few items of grocery from a store, or due to other reasons including voucher payment.
    • While there certainly has been a discernible uptick in digital payments, it is doubtful whether the elaborate exercise to unearth black money — the stated and primary goal of demonetisation — was worth it. 

    Source: IE + TH