Legal Basis for Demonetization Policy by the Government

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This article was written by Pratheek Maddhi Reddy, a student of Jindal Global Law School via guest submission.

The Indian government’s recent policy of demonetization of Rs. 500 and Rs. 1000 was received with both applaud and criticism. Policy considerations and deliberations on its effectiveness aside, the following is a brief discourse addressing whether the policy is valid in law and if yes, wherefrom does it derive the same.

Before venturing into the above, it is of interest to understand to what extent the Judiciary interferes with matters relating to economic policy by the government. This is one of those rare arenas in which the Judiciary recognizes its purpose and takes a consequential step back.

            In the case of Balco Employees’ Union v. Union of India[1], the Supreme Court observed that, “In a democracy, it is the prerogative of each elected Government to follow its own policy. Often a change in Government may result in the shift in focus or change in economic policies. Any such change may result in adversely affecting some vested interests. Unless any illegality is committed in the execution of the policy or the same is contrary to law or mala fide, a decision bringing about change cannot per se be interfered with by the court.” The Court decided that it is not for the courts to consider relative merits of different economic policies and consider whether a wiser one can be evolved.

            This has been the view that the Supreme Court has consistently taken i.e. to remain outside the Executive wing of government when it relates to matters such as the one in question here, which are not within the judicial function.[2] “It is not the domain of the Court to embark upon the unchartered ocean of public policy in an exercise to consider as to whether a particular public policy is wise or a better public policy can be evolved. Such exercise must be left to the discretion of the executive and legislative authorities as the case may be.”[3]

            The above was the precise reason why the Madras High Court dismissed a PIL that was filed by M Seeni Ahamed, General Secretary of Indian National League praying to scrap the decision of the government.

            In the case of M. Seeni Ahamed v. Union of India, the Madras High Court says that the Court indeed has the power of judicial review. However, the question that stands is to what extent. The Court referred to the case of S. R. Bommai v. Union of India, in which the Supreme Court referred to Lord Brightman[4] who has held that judicial review is concerned with reviewing not the merits of the decision but the decision-making process itself. Further, reference was also made to Lord Diplock[5] who enunciates three heads of grounds (non-exhaustive), upon which, administrative action is subject to control by judicial review: (i) illegality, (ii) irrationality, and (iii) procedural impropriety.

            In light of this, the Supreme Court concludes that where the decision is one which does not alter rights or obligations enforceable in private law, but only deprives a person of legitimate expectations, procedural impropriety will normally provide the only ground on which the decision is open to judicial review.

            Hence, in order to overturn the decision of the government to demonetize, at least one of the grounds mentioned above, viz., illegality, irrationality, procedural impropriety or proportionality needs to be proven

Moving more specific, the crux of the issue is regarding wherefrom does arise the power to demonetize.

The power to demonetize by the government is derived from the constitutive Act of the RBI i.e. Reserve Bank of India Act, 1934. Section 26 of the Act reads as follows:

(1) Subject to the provisions of sub-section (2) bank notes shall be of the denominational values of two rupees, five rupees, ten rupees, twenty rupees, fifty rupees one thousand rupees, five thousand rupees and ten thousand rupees or of such other denominational values, not exceeding ten thousand rupees, as the Central Government may, on the recommendation of the Central Board, specify in this behalf.

(2) The central Government may, on the recommendation of the Central Board, direct the non-issue of the such discontinuance of issue of bank notes of such denominational values as it may specify in this behalf.

            The above section of the RBI Act is clear that Bank is the sole note issuing authority and has the obligation to exchange those notes except when, and to the extent, it is relieved of that obligation by the Central Government.

            It is to be recognized that this is not the first time demonetization is experienced by Indians. The first was in 1946 and the second in 1978. The Demonetization Act, 1978[6] was challenged in the Supreme Court in the case of Jayantilal Ratanchand Shah v. Reserve Bank of India for violating Article 19(1)(g) of the Constitution i.e. the right to carry on trade and commerce. Without much elaboration, the Court succinctly pointed towards clause 6 i.e. restrictions on Article 19(1)(g), saying that it was evident from the Preamble to Demonetization Act, that the Act was promulgated in public interest, given its purpose to control the problem of unaccounted money and thereby, did not in any way mount to a violation of the contended rights.

            Since the process by which demonetization is taking place currently is in adherence to the Demonetization Act, and in a manner similar to that in 1978, it is highly unlikely that the Supreme Court would come to a conclusion different from that of 1978 in Jayantilal case. The law that the Supreme Court itself adjudicated in the case will be used again, arriving at the same conclusion.

            Another Article that has come into question of being violated by the current Demonetisation policy is Article 21 [Right to life]. In the M. Seeni Ahamed case, it was argued by the petitioner that the action of the Government in not giving prior notice to the people which has caused “unnecessary and unbearable hardship” violates right to life of the people. The High Court rejected this argument by saying that the scope and ambit of right to life has been expanded time and again by the Supreme Court, taking into account the need of the hour, however, it cannot be overstretched at the same time. “If any prior notice is so issued about the proposal to demonetize, in our considered view, that would defeat the very purpose of such a measure.”

            For the same reason as above, another writ petition filed in Karnataka High Court was rejected[7].

As far as Article 14 is concerned, the same is not constrained anymore to mere test of intelligible difference and reasonable nexus. It has been expanded to the “test of reasonableness or non-arbitrariness”.[8] “Where an act is arbitrary, it is implicit in it that it is unequal both according to political logic and constitutional law and is therefore violative of Article 14…”[9] However, an act of legislature cannot be struck down merely by saying that it is arbitrary.[10] The expression “arbitrarily” means: in an unreasonable manner,… without adequate determining principle, not founded in the nature of things, non rational, not done or acting according to reason or judgment…”.[11] Hence, unless the demonetization policy of 2016 is shown manifestly arbitrary or wholly unreasonable, it cannot be violative of Article 14.

On ending note, although the procedure employed by the Government to demonetize complies with S. 26 of RBI Act, it does not so when S. 26 is read with Article 300A of the Constitution. While the Article mandates authority of law before depriving people of their property, demonetization policy involved no legislative mandate for being carried out neither by any law passed by the legislature nor through an ordinance, like in 1978. However, question still arises for the Court to address whether ‘authority of law’ in Article 300A is satisfied by S. 26 of RBI Act itself.

On the other hand, the Doctrine of Ancillary Power which is well recognized legally posits that power to legislate on a subject also includes power to legislate on ancillary matters that are reasonably connected to that subject. In exercising the power under S. 26(2) of the RBI Act, currency withdrawals and exchange limits are also traceable to the Section because they are in furtherance of a demonetization exercise and not for any other purposes. This is yet to be decided by the Court.

Finally, the actions of the government could be questioned under the Doctrine of Legitimate Expectation, which postulates that if the government has promised some benefits to citizens, it cannot arbitrarily deny the same. In the present situation, while the Prime Minister initially announced the cash exchanges would be allowed till 30th of December, disallowing exchanges from 25th of November itself, giving a 4-hour notice the previous day, after cash exchanges being restricted from Rs. 4500 to Rs. 2000 violates the Doctrine. This raises questions on how well-planned the Government is, pointing toward arbitrariness in the implementation of the policy.

            All of the above clearly conclude that demonetization policy undertaken by the government is valid in law. However, there could possibly exist pinpricks of illegality or questionable legality, as they are usually with most of the policies undertaken and laws promulgated. While these could be dealt in another detailed article, the current one addresses only the policy as a whole.

[1] 2002(2) SCC 333

[2]See, Bajaj Hindustan Ltd. v. Sir Shadi lal Enterprises, MANU/SC/1019/2010; infra note

[3]Premium Granites v. State of T.N., 1994(2) SCC 691

[4] Chief Constable of the North Wales Police v. Evans

[5]Council of Civil Service Unions v. Minister for the Civil Services

[6] High Denomination Bank Notes (Demonetisation) Act, 1978

[7]Mohammed Haroon Rasheed vs Union of India

[8] E. P. Royappa v State of T.N.,AIR 1974 SC 555 (583)

[9]Supra note.

[10]State of Bihar v. Bihar Distillery Ltd., (1997) 2 SCC 453

[11]Sharma Transport v Govt. of A.P., AIR 2002 SC 322

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