Supreme Court’s Constitution Bench Verdict On Demonetisation Today

A five-judge constitution bench of the Supreme Court will pronounce on January 2 its verdict on nearly three dozen petitions on the government’s 2016 notification to ban currency notes of ₹500 and ₹1000.

The bench reserved its verdict on December 7 after hearing elaborate arguments from the government and the petitioners who have contended that the demonetisation decision was arbitrary, unconstitutional and contrary to the powers and procedure prescribed under the Reserve Bank of India Act.

The top court, which is currently closed for the winter recess, will reopen on January 2.

A note in the Supreme Court’s list of cases for the said the judgment will be rendered by Justice BR Gavai for the bench, which indicates that the verdict may be unanimous. The bench also comprises justices S Abdul Nazeer, AS Bopanna, V Ramasubramanian and BV Nagarathna.

As the bench concluded hearing the arguments on whether the government followed due procedure provided under the RBI Act before undertaking a massive exercise to withdraw over 86% of the currency from circulation on November 8, 2016, the court also directed the ministry of finance and the Reserve Bank of India to produce the relevant files leading to the decision.

The government undertook demonetisation under Section 26 (2) of the Reserve Bank of India (RBI) Act, 1934. The provision empowers the government to declare that “any series of bank notes of any denomination shall cease to be legal tender” after a recommendation from the central board of RBI.

RBI permitted the exchange of outlawed currency notes till December 30, 2016, and the next day an Ordinance was introduced that barred them as legal tender, while making the possession and use of the old notes a punishable offence after a limited exchange period.

Among the three dozen petitions challenging the 2016 notification are people who were unable to deposit their money within the window period available till December 30.

During the five-day marathon hearing, senior lawyer P Chidambaram, appearing for the petitioners, said demonetistion was the “worst decision-making process” that was “deeply flawed and makes a mockery of rule of law.” The petitioners said it was important to review the documents to assess if RBI considered the impact of the withdrawal of such a large volume of currency which caused agony, loss, and hardship to the people of this country. At the relevant time, ₹17.97 lakh crore currency was in circulation in the market of which the demonetised currency notes were valued at ₹15.44 lakh crore. Of this, ₹15.31 lakh crore returned to banks.

Chidambaram said that by the 2016 notification, 86.4% of currency in circulation was taken out of circulation causing extreme hardship to citizens. He pointed out that similar demonetisation exercise was conducted on two occasions in the past – 1946 and 1978, but the demonetized currency was only 11.5% by value of the currency in circulation in 1946 and 0.6% in 1978 which did not impact an overwhelming majority of people.

The government justified its action to achieve a larger public interest of ridding the economy of black money, fake currency and terror financing. The Centre said that this move brought benefits in checking counterfeit currency, increase in digital transactions and boosted compliance with income tax law. The government further stated that the impact on economy was “transient” as the real growth rate was 8.2% in FY 2016-17 and 6.8% in 2017-18 which was more than the decadal growth rate of 6.6% in the pre-pandemic years.

RBI argued that enough measures were put in place to address the genuine concerns faced by citizens, and once these measures were provided, it was wrong to suggest that the RBI was “thoughtless” in carrying out this exercise.