The Supreme Court of India upheld the decision of the Central Government taken in 2016 to demonetise 1,000 and Rs 500 currency notes.
A five-judge Constitution bench headed by Justice S A Nazeer pronounced its verdict on the matter, they dismissed a batch of petitions challenging the centre's 2016 decision by citing that there was consultation between the Centre and the RBI before demonetisation. there was a reasonable nexus to bring such a measure, and we hold that demonetisation was not hit by the doctrine of proportionality.
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| Supreme Court on demonetisation |
What is Demonetisation?
Demonetization is the act of stripping a currency unit of its status to be used as legal tender.
In simple words- Demonetisation is a process by which the demonetised notes cease to be accepted as legal currency for any kind of transaction.
whenever demonetisation is done, the old currency is replaced by a new currency, which may be the same denomination or a higher denomination.
Demonetisation in India
Demonetisation in India has taken place three times till now, namely in the years 1946, 1978 and 2016.
On Nov 2016 at 8:15 PM Indian Prime Minister Narendra Modi announced the decision to withdraw Rs 500 and Rs 1000 denomination notes with the ultimate aim of reducing corruption and black money in the economy.
Who has the power to demonetisation in India?
it refers to the decision of RBI/Government to recall the status of a currency note to be used as legal tender. usually, all the currencies issued by RBI can be used as legal tender as the value they carry is promised by RBI and once the value has been demonetized/recalled/revoked, the currency note cannot be used.
If demonetisation is to be initiated by the Central Govt, such power is to be derived from Entry 36 of List I which speaks of currency, coinage, legal tender, and foreign exchange.
Objectives of Demonetisation
- To Stop the circulation of black money in the market.
- To help in reducing the interest rates of the prevalent banking system
- To help in the creation of the cashless economy
- To formalise the informal Indian Economy.
- To remove counterfeit notes from the market.
- To help reduce anti-social activities and their finances.
Impacts of Demonetisation in India
Positive Impacts :
- The biggest effect of demonetisation was the reduction of fraudulent acts.
- we got some control over the black money.
- It eliminated counterfeit currencies that harm the economy.
- The government has taken a significant step toward establishing a cashless economy.
- The scheme targeted illicit money circulation in the elections.
- Lower Inflation
Negative Impact :
- All the black money is not stored in the form of cash, this measure controls the usage of black money but cannot control the causes.
- Panic amongst the common man
- The small trade/shopkeepers are facing difficulties
- Black marketing of the new notes/currencies is on the rise
- The establishments such as banks, hospitals, etc are under a lot of stress
Impact on the Economy -
- GDP becomes down because the circulation of currency is less because of the cash crunch in the country. with the reduction in consumer demand.
- Impact on Purchasing Power - it has also affected the purchasing power. this mainly affected those assets that are used as long-term investments like Real Estate, Vehicles and core sectors of cement and steel.
- On Real Estate - Demonetisation smashed the real estate market and resulted in a more than 50% drop down and remained for a further 5 to 6 months.
- Banks & Financial Institutions
- Impact on Ecommerce
- Impact on Tourism
Advantages of Demonetization
The main benefit is to curtail criminal activity as their supply of money is no longer legal tender. this process affects counterfeiters as well as they cannot exchange their "merchandise" for fear of discovery. it can prevent Tax Evasion.
Mainly it can usher in the digital currency age by slowing down the circulation of physical currency.
Disadvantages of Demonetization
The Main disadvantage is the costs involved in printing and minting the new currency. somewhere demonetization may not have the intended effect of reducing criminal activity as these entities might be savvy enough to hold assets in other forms other than physical currency.
and finally, this process is risky as it can plunge the nation into utter if not handled with the utmost competence.
Supreme Court on Demonetisation
- A Constitutional Bench of the Supreme Court on 2 Jan 2023 upheld by a 4:1 majority the decision taken by Govt. six years ago in 2016.
- The court said - It is not relevant whether the objective behind the decision was achieved or not.
- Justice B V Nagarathna - Demonetisation initiated by Central Government was unlawful.
- According to Justice B N Nagarathna: though demonetisation was well-intentioned and well-thought-of, it has to be declared unlawful on legal grounds
- Demonetisation power is to be derived from entry 36 of list-I
- Parliament's views on demonetisation are critical.
- 'Legislation made in secrecy is an ordinance'
- Demonetisation can't be struck down on grounds of proportionality: SC
- The Court's interpretation of the RBI Acts is pragmatic and not pedantic.
Conclusion
However, the currency that was demonetized may vary, but largely the objective is inflation, combating black money, curbing illegal activities, getting fake currency out of the economy, and unaccounted money under the scrutiny of tax agencies, but the involvement of The Supreme Court may raise the question on the govt. the decision.