Editorial: Mere academic interest

The apex court’s ruling on demonetisation should not be interpreted as a judicial endorsement of the success of the note ban

It would be fallacious if the NDA government treats the Supreme Court’s verdict on demonetisation as some kind of a political victory worthy of using as an electoral weapon. A five-member constitution bench, in a majority 4-1 judgement, upheld the 2016 decision to ban the currency notes of Rs 500 and Rs 1,000 denominations. However, the apex court’s post-facto ruling is only of academic interest at this juncture and should not be interpreted as a judicial endorsement of the success of the note ban. In fact, the entire country has endured enormous pain and suffering because of the ill-conceived and hastily implemented idea which proved to be a spectacular disaster, disrupting the economy and throwing millions out of jobs. It must be pointed out that the SC did not go into the merits of the outcome of the demonetisation move but only examined the decision-making process and whether there was consultation between the Centre and Reserve Bank of India. While dealing with a batch of 58 petitions assailing the government’s move, the court found no flaw in the process adopted by the Centre and also rejected the argument that the note ban decision should have emanated from the central bank. However, in a dissenting judgement, Justice Nagarathna dubbed the decision as ‘vitiated and unlawful’ and said the move could have been executed through an act of Parliament. She noted that the November 8, 2016, demonetisation notification was “an exercise of power contrary to law” and there was no independent application of mind by the RBI.

One of the key arguments made by the government to justify demonetisation was that the magnitude of cash in circulation (CIC) was directly linked to the level of corruption. According to an affidavit submitted by the Centre in the court, the ratio of CIC to GDP was 11% or more in the five financial years beginning from 2011-12 to 2015-16. This, it was argued, was much higher than that for the United States (7.74%). However, it must be noted that the CIC as a percentage of GDP jumped back to the pre-demonetisation levels within three years. The RBI’s Annual Report for 2019-20 states that the currency-GDP ratio further increased to 14.4% in 2020-21. India’s use of cash, as a percentage of the GDP, is among the highest of all major economies compared with 3% for developed nations and 5-7% for developing nations like Bangladesh and Indonesia. If the government thought that banning high-value currency overnight would discourage the use of cash, it has been proven totally wrong. It was packaged as a bold move to unearth black money, reduce counterfeit currency and choke terror funding but failed to meet any of the objectives. It was probably the worst economic folly in independent India.

---