Opinion Express View on demonetisation: Take note in noteban

Six years after Prime Minister Narendra Modi announced the demonetisation of Rs 500 and Rs 1,000 notes, a five-judge constitutional bench of the Supreme Court has upheld the controversial decision. The 4:1 verdict on Monday rejected the petitions challenging demonetisation, and upheld its legality, with the majority concluding that there was no flaw in the decision-making process. However, the dissenting judgment, authored by Justice B V Nagarathna, has not only called the entire exercise not in accordance with the law but has also raised crucial questions over the RBI’s institutional independence. The central bank would do well to heed those questions.

Justice Nagarathna notes that the proposal for demonetisation “originated” from the central government and that the recommendation was “obtained” from the RBI in the form of an opinion. She points out that the records contained phrases such as — “as desired” by the central government, and that the government had “recommended” — which showed that there was “no independent application of mind” by the RBI. The entire exercise was, after all, carried out in 24 hours. The Indian Express has previously reported how the central bank differed from the government on the effectiveness of demonetisation in tackling the menace of black money in the economy, the problem of fake currency, and its use in terror financing. However, despite those reservations, the RBI failed to convince the government of the folly of the move during the six months that it was in consultations with it on the matter, according to the majority judgment. If demonetisation was a litmus test for its institutional credibility and independence, then the RBI fell short of its duty to impose checks and balances on an executive that could be said to be shortcircuiting due process or even bludgeoning a policy through.

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While the decision to demonetise cannot be reversed, the arguments presented in court, and the judgment now, are not of academic interest alone. They have far-reaching implications for the policy-making process and institutional ethos in the country. The Court has done well in not making any pronouncements over the efficacy of demonetisation in meeting its stated objectives, which, incidentally, grew more expansive as the economic pain from the exercise became more evident. The dissenting judgment has differentiated between an exercise carried out on the basis of a mere notification in the official gazette and legislation in Parliament — this distinction seeks to place limits on the exercise of power by an overweening executive, while underlining the supremacy of Parliament. For central banks, which have become important players in the country, wielding far greater sway over economic outcomes than before in a challenging economic climate, the dissenting judgment must be read carefully for the glaring institutional gaps and weaknesses it points to.