India's top court upholds sudden move to withdraw high denomination notes

Supreme Court rules that 2016 government action that brought economy to halt was aimed at wider public benefit

The ruling by judges at the Supreme Court in New Delhi is a boost for Prime Minister Narendra Modi. Reuters
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India’s top court ruled on Monday that the 2016 decision by Prime Minister Narendra Modi's government to withdraw high value notes from circulation was valid.

A five-judge bench heard a clutch of petitions challenging the Bharatiya Janata Party government’s decision to remove 500 rupee ($6) and 1,000 rupee notes in November 2016. This brought the country’s economy to a grinding halt.

The Supreme Court judges in New Delhi said the decision satisfied the test of proportionality.

This test is used by constitutional courts to make a judgment in cases where a government decision risks infringing people's rights while aiming to provide some wider public benefit.

The ruling by the bench — despite one justice terming it unlawful in her dissenting judgement — is a boost for Mr Modi's government, which had faced criticism for the move.

Mr Modi sparked nationwide panic when in a televised address he ordered the scrapping all high value notes overnight on November 8, 2016, saying they would be “just worthless pieces of paper”.

He had claimed the move was taken to curb black market earnings, fake currency, terror financing and tax evasion.

Over 86 per cent of the total currency — 15 trillion rupees — was removed from circulation overnight, creating a shortage of banknotes.

Millions queued outside ATMs and banks for days to withdraw cash, hundreds of thousands of people in casual work lost their jobs for weeks and several people reportedly died from exhaustion and stress.

The sudden withdrawal of high denomination notes led to queues at India’s ATM, amid a shortage of banknotes. Bloomberg

The government said it was a “well-considered” decision.

But 58 petitions were filed in the Supreme Court challenging the notes ban, arguing that it was unconstitutional as the government did not follow due procedure and that it should be struck down.

Petitioners argued that the government took the decision through an Executive order and that it was not initiated by the Reserve Bank of India Act.

Such as massive undertaking as the note withdrawal requires recommendation from the Reserve Bank of India — India's central bank and banking regulator, said petitioners.

They argued that the government had instead advised the bank.

The petitioners asked the court to review the documents to assess if the RBI had considered the impact of such an exercise which caused citizens “agony, loss and hardship”.

Four judges on Monday upheld the government’s decision on demonetisation, saying there was consultation between ministers and the RBI for months beforehand.

“From the record, it appears that there was a consultative process between central government and RBI for over six months before the decision was taken,” the top court said in its majority judgment written by Justice BR Gavai.

“We find that the three purposes are proper purposes and there was a reasonable nexus between the objects and the means to achieve the objects. Action cannot be struck down on the basis of the doctrine of proportionality,” the judgment read.

However, Justice BV Nagarathna — who is in line to be India’s first woman chief justice — disagreed, arguing that the Parliament of India should have been involved.

“Without Parliament a democracy cannot thrive, and so that meaning to democracy is given. Parliament cannot be left aloof on such important decisions,” she said.

The government argued that the court cannot decide a matter when no tangible relief can be granted. That would be like “unscrambling a scrambled egg”, it said.

Raavi Birbal, a Supreme Court advocate, said the verdict set an important precedent.

“Under the Indian legal system courts are generally slow in interfering with decisions of government unless those are unconstitutional, have lack of jurisdiction, contrary to powers, palpably discriminatory or arbitrary,” Ms Birbal told The National.

“Demonetisation is a policy matter of the government. Supreme Court has time and again held that courts cannot usurp wisdom of Executive with its own.

Constitution Bench’s decision on demonetisation has reaffirmed the legal position, thus making it another important precedent,” she said.

Updated: January 02, 2023, 12:10 PM