Decision to withdraw 86% Currency taken within 24 Hours, Demonetization Contrary to RBI Act: P Chidambaram to SC

Decision to withdraw 86% Currency taken within 24 Hours, Demonetization Contrary to RBI Act: P Chidambaram to SC

Reetu | Oct 13, 2022 |

Decision to withdraw 86% Currency taken within 24 Hours, Demonetization Contrary to RBI Act: P Chidambaram to SC

Decision to withdraw 86% Currency taken within 24 Hours, Demonetization Contrary to RBI Act: P Chidambaram to SC

The Supreme Court‘s Constitution Bench decided on Wednesday to consider the legal grounds put forth by the petitioners in opposition to the 2016 demonetization of the Rs 500 and Rs 1000 notes, rejecting the Centre’s claims that the matter is now purely “academic.”

A five-judge panel, presided over by justice SA Nazeer, stated during the hearing that the court is aware of its “Lakshman Rekha” on the judicial review of government policy.

The petitioners’ primary claim, according to the bench, is that Section 26 of the RBI Act does not give the Center the right to entirely revoke currency notes of a certain denomination. The bench also included Justices BR Gavai, AS Bopanna, V Ramasubramanian, and BV Nagarathna. Therefore, the primary issue is whether the government had the authority under Section 26 to demonetize all notes with a denomination of Rs. 500 and Rs. 1,000, the judgement said.

The Center’s 2016 decision to implement demonetization is being contested in more than 50 petitions before the top court.

Impulsive decision made without consideration: Chidambaram

Senior Attorney and Rajya Sabha MP P. Chidambaram, who formerly served as the Union Minister of Finance, began the substantive section of the discussions. He provided a brief overview of the sequence of events that ultimately resulted in the banknote demonetisation before beginning his arguments. He described –

“According to our understanding, just three occurrences occurred, and none of the documentation related to those three events have been produced. The government sent a letter to the Reserve Bank on November 7 asking for its opinion on whether the Rs. 500 and Rs. 1000 notes should be demonetized, according to information in the public domain and the counter-affidavit. Despite having its headquarters and the majority of its research team in Mumbai, the RBI meets in Delhi on November 8, less than twenty-four hours after receiving the letter. According to Section 7(1)(c), the RBI Board should include 10 independent directors, yet seven positions were open on that particular day. There were just three. The Governor, the four Deputy Governors, four officers appointed by the Central Government, and one other government representative made up the RBI Board in actuality. They’re thought to have gotten together in Delhi and adopted a resolution calling for the demonetization of currencies with certain denominations. It is communicated to the Cabinet, which is already assembled and waiting in the cabinet room, regarding that resolution or recommendation. This suggestion is accepted, and the notification is sent out shortly after it is received. As his Cabinet colleagues wait in the cabinet room, the Hon. Prime Minister then makes the announcement of demonetisation on television at around 8 o’clock. It was asked of them to wait there.”

The senior attorney then questioned in an ironic manner:

“If you are acting in good faith and exercising your authority as described in Section 26 of the Reserve Bank Act, is this the process? Demonetization, which will actually confiscate 86.4% of the cash, is a subject so serious and significant. Can a decision be made between the evening of November 8 when demonetisation is announced and November 7, when the letter was received by the RBI, in under 24 hours? The use of the mind is nowhere to be found. If so, what the law’s process is?”

As the advice should have come from the RBI rather than the Government, the senior counsel claimed that there had been a “perverse inversion of procedure.” He claimed that the selection process was “seriously defective.” The Reserve Bank should have made the suggestion in accordance with Section 26 of the RBI Act following Board deliberation. Such discourse ought to have made use of empirical facts and produced a comprehensive suggestion.

Chidambaram said –

“Before issuing such an order, the Government ought to have given it a day or two of thought. This entire process took 24 hours. 86.4% of the money was taken out. Additionally, they have not made the pertinent records accessible to the public. Is this the proper method to make a decision? Is this a sensible, prudent course of action?”

Demonetization is unrelated to the goals that were sought for

Chidambaram described the 2016 demonetization goals, contrasting them sharply with what he claimed were the true economic goals of a programme to demonetise currency –

“Demonetization’s goals are to remove inactive currency notes, squelch liabilities, or, in times of hyperinflation, replace worthless currency notes with fresh, valuable cash. They have identified three goals: the use of black money, fake currency, and fake currency for financing terrorism. Later, they added corruption, but these three factors were mentioned in the RBI notification. According to the RBI’s annual report, just 0.0027 percent of individual currency notes were false. In terms of black money, the Directorate of Revenue Intelligence of the Income Tax Department confiscated unaccounted money in the new Rs 2000 notes within days and weeks following this notification. They discovered bogus Rs 2000 notes on the bodies of two terrorists who were murdered in Bandipur within weeks regarding funds for terrorism.”

If the money could be exchanged without bias, where is it? Bench Ask

The bench questioned whether allowing the notes to be swapped would be unfair. Chidambaram responded that the decision had led to both financial and non-financial burdens.

“Overnight, 2300 crore discrete notes were withdrawn, representing 15.44 lakh crores in value, or 86.4% of all cash, with disastrous results. Many households lacked funds outright. To exchange their money, daily lines of 11 crore people formed. No deposits or note exchanges were permitted in district cooperative banks. Every member of the rural community was completely lost. It was time for planting. People did not have enough money to pay for labour, seeds, or fertiliser. Markets for wholesale goods were closed. Costs plummeted. Village weekly fairs were discontinued. According to reports, sales have fallen dramatically. Hubs of industry stopped. No wages were paid. 33% of all employed casual workers, or 15 crore people, were unemployed or living on less than minimum wage.”

He cited data that said the wholesale costs of items fell sharply and suddenly after November 8, 2016. He continued by saying that other people had passed away while lining up to swap notes.

He questioned, “Is it a proportional measure to achieve even the goals you set for yourself?”

Following Chidambaram’s discussion of the material and intangible problems endured by ordinary people, Justice Nagarathna posed the following question:

“Any law will affect a portion of the general populace. Demonetisation did indeed lead to sufferings, but may these hardships affect a constitutional issue?”

Chidambaram responded, saying:

“Yes, it will have an impact on the proportionality doctrine.”

The Supreme Court has broad authority to “issue declaratory reliefs, lay down the law, and mould the reliefs,” according to Chidambaram.

Justice Nazeer noted the arguments and informed the AG as follows:

“The anchor for the document is Section 26(2).

“Upon the Central Government’s proposal.” Show us the location of the central government’s recommendation. Then, where is the Reserve Bank’s consideration, and what was your response? These are the three questions that you must honestly respond to. Second, how to interpret the provision’s use of the word “any.” Chidambaram advises either reading it again or suppressing it. These must be covered in your pleadings.”

On November 9, the hearing will proceed.

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