Demonetisation: A necessary action through unnecessary executive power

Demonetisation is the governmental action that divests a currency unit of its status as legal tender. It was an executive decision to demonetise Rs 500 and Rs 1000 banknotes through a gazette notification issued on November 8th, 2016. Those with these notes had to deposit them in the bank and get the new legal notes issued by the Central Bank. This was not an act of parliament that was legally introduced by law but a decision taken by the executive. This was recently challenged in the Supreme Court by Justice Nagarathna.

The Indian government had demonetised bank notes on two prior occasions as well – once in 1946 and then in 1978, and the major point was that on the two occasions, it was done by an ordinance. The 2016 decision was an executive decision. It was a drastic measure to curb ‘black money’ held outside the formal economic system, to curb infusion as well as circulation of fake money which was used for funding terror activities, gambling, and human trafficking. The government wanted to formalize and digitalize the economy.

Absolute Control of Power by the Government 

Justice Nagarathna questioned the Supreme Court concerning the statutory procedure under the  Reserve Bank of India Act, 1934. The demonetisation act has to be initiated by the Central Bank by a way of recommendation made to the Central Government. A Bank is the sole authority for the circulation of notes and regulates monetary stability in the economy. Demonetisation was recommended by the Central government to the Central Bank which wanted to initiate the digitisation of payments through new reforms. The Supreme Court has upheld the legality of the Demonetisation on the verdict that section 26 (2) was not violated and the consent was given by the RBI. 

The Constitution bench of the Supreme Court found no flaw in the government’s process of initiating Demonetisation. The point to be noted here would be that the bank acted at the behest of the Central Government and did not render its unbiased opinion. This questions the individuality of the Central Bank with respect to decisions taken on its account. According to the sources, even after giving consent to Demonetisation, it had cited two objections – it has said that a large part of black money was not held in cash but in the form of assets that involved illegal acquisitions of land and large amounts of gold.  Board also stated that the percentage of counterfeit currency was not very significant. 

The objective of the government to make sure to combat the distribution of cash in the form of black money was very intended. It helped in the transition from a non-formal source of money to a formal source of money. The growth of digital transactions has increased from 112 lakh crore in November 2016 to 188 lakh crore in September 2018. It was much needed considering the growth and development of the economy but the way it was introduced questions the legality of the procedure concerning the provisions of the Act and not on objectives of demonetisation. 

The government’s efforts to curb black money can be done through other significant ways not just involving the decision-making of the Central Bank. The Government can follow up closely on the SIT ( Special Investigation Team) appointed by the Supreme Court to combat Black money. Strict measures should be taken against the Benami Property transactions which are more common than it shows. India needs tax reforms with a rationalized tax structure. The government should let each organ of the government perform its duties independently so that there is a division of powers that helps in the growth and development of the country.