Demonetisation decision gets Supreme Court Seal

Subject : Economy

Context:

The Supreme Court upheld the government’s 2016 decision to demonetise currency notes of Rs 500 and Rs 1,000 by a 4:1 majority.

More about the news:

In its majority 4:1 judgment of the five judge bench of Justices S Abdul Nazeer, B R Gavai, A S Bopanna,V Ramasubramanian and Justice B V Nagarathna,it was held that the Centre’s notification dated November 8, 2016, was valid and satisfied the test of proportionality.
The court held that the central government’s decision was after RBI board’s approval which shows in-built safeguard against centre’s powers.
Moreover, the hardships faced by citizens following demonetisation six years ago cannot be a ground to reverse the decision.
On the issue of creating a fresh window for return of demonetised currency, the majority verdict said it did not have the expertise to frame such a scheme.

What is demonetisation:

Demonetization is the process through which a nation’s economic unit of exchange loses its legally enforceable validity.
It is a drastic intervention into the economy that involves removing the legal tender status of a currency.

Previous history of demonetisation in India

Demonetisation in India has been implemented twice before 2016 i.e:
- In 1946, RBI demonetized 1000- and 10000-rupee notes.
- In 1978, the government demonetized 1000-, 5000-, and 10000-rupee notes in order to curb the menace of black money.

Why was demonetization challenged:

More than 58 petitions were filed on the various aspects of demonetization.
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.
Moreover, they also argued that the demonetisation notification is liable to be struck down applying the test of proportionality.
- The four ingredients of the proportionality test to be satisfied are legitimate purpose; rational connection with the purpose; necessity; whether the action taken is proportional or balanced.
It was also contended that the entire decision-making process was flawed in law as the proposal should have been emanated from RBI Board, not from the Centre.

What is the test of proportionality:

The Test of Proportionality means that administrative action should not be more drastic than it ought to be for obtaining the desired result. This requires few tests like: –
- 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 proportionatee.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.