One month after demonetisation, the Supreme Court is hearing several public interest petitions challenging the constitutional validity of the “demonetisation notification”, which declared that Rs 500 and Rs 1,000 notes would no longer be legal tender post midnight on November 8, 2016.
The preamble to the notification stated that its objective was to eliminate fake currency used for financing terrorism and to address the problem of “unaccounted money” in the economy. The notification permitted unlimited deposit of the now illegal Rs 500 and Rs 1,000 notes, and over the counter exchange of the notes up to a limit of Rs 4,000. The notification also imposed limits on ATM and bank withdrawals. Since then, the government has made many changes to the applicable limits.
According to some estimates, 86% of Indian currency was in the now illegal Rs 500 and Rs 1,000 notes. Since 68% of all transactions in India are cash transactions, drastically restricting the use of 86% of the currency has predictably caused chaos. Endless queues at banks, reports of slowdown of trade and more than 80 reported deaths have led many to question the wisdom of this move and its efficacy in achieving its objectives visà-vis the costs to the people and abridgement of their rights.
The Supreme Court will not entertain arguments regarding the efficacy of demonetisation since it rightly defers to government on matters of economic policy. It must, however, decide the legality of this move. The demonetisation notification is illegal because it goes beyond the scope of what is permitted under the Reserve Bank of India Act, 1934, (RBI Act), the stated source of authority for the notification. Nor is it saved by Section 35A of the Banking Regulation Act, 1935, as the government has argued in court. There is also a prima facie case of abridgement of fundamental rights to movement Article 19(1)(d); trade or business, Article 19(1)(g); livelihood and, in case of those dead, life (Article 21); equality (Article 14); and the constitutional right to property (Article 300A).
Section 26(2) of the RBI Act empowers the government to declare any series of notes as illegal tender. Twice before, in 1946 and 1978, the government demonetised to address the problem of “unaccounted money”. While the Banking Regulation Act empowers the RBI to issue directions to banks in the “public interest”, that stipulation cannot reasonably justify the continuously shifting restrictions on cash withdrawals and deposits that we have seen in the past month. Nor does it enable the RBI to discriminate between holders and non-holders of bank accounts, as the present notification has done. Such actions require an authorising legislation, either an act of Parliament or by ordinance.
Both in 1946 and in 1978, similar actions were authorised by an ordinance. The failure to issue an ordinance to provide the legal basis for the demonetisation notification this time renders the exercise illegal.
The demonetisation notification is also likely unconstitutional on three counts. First, it violates the constitutional right to property under Article 300A. In Jayantilal v RBI, in the context of the 1978 demonetisation, the Supreme Court held that demonetisation is not merely a regulation of property, as the government is presently arguing, but constitutes compulsory acquisition of a “public debt” owed to the bearer of the notes declared illegal. Under Article 300A, the state may deprive an individual of property only by “law”, and not by executive notification as the government has done here. The government’s failure to issue an ordinance (since Parliament was not in session at the time) to extinguish the RBI’s debt to the people impermissibly violates the constitutional right to property. However, even if the demonetisation had been sanctioned by ordinance, there is a strong claim that the rationing of currency constitutes a form of creeping expropriation for which there has been no compensation, which nevertheless violates Article 300A. Second, the extraordinary hardship caused by demonetisation has impacted fundamental rights to trade, business and livelihoods of vast sections of the population and the right to life of those who have died.
While the government may “reasonably” restrict fundamental rights in the interests of the “general public”, it bears the burden of showing that these restrictions are reasonable. The test of reasonableness is whether the measure was necessary to achieve the government’s objectives, and whether less risky, less harmful alternatives were available. The reasonableness of a measure must be assessed in terms of its “immediate effects” on the affected population. Unlike the 1978 demonetisation that impacted only 1% of currency held, the 2016 demonetisation insofar as it impacts an estimated 86% of total currency has had punitive effects on many sections of the population, including, daily wage earners, those without bank accounts and those dependent on the informal cash economy for their livelihood and business. The notification is unconstitutional for violating their fundamental rights under Articles 19 and 21.
Third, the notification also discriminates between holders and non-holders of bank accounts. While the government has argued that such a classification is necessary to achieve their objectives of eliminating unaccounted money, insofar as the government failed to ensure that 100% of the population had bank accounts prior to the issuance of this surprise notification, the classification may be assailed as arbitrary and violative of the right to equality under Article 14.
We live in a country governed by the rule of law, and not by the rule of men. The objectives of the demonetisation notification may be laudable, whether the notification will achieve those objectives is debatable. But, as it exists, the demonetisation notification is illegal and violates the Constitution.
The author is Fellow at Centre for Policy Research, Delhi.