Author: Bhumika Grover, I year of B.A.,LL.B.(Hons.) from Rajiv Gandhi National University of Law, Punjab
The 8 pm announcement of PM Modi on 8 November, 2016 shocked each and every person of the country as it banned currency notes of 500 and 1000 which were in 86% circulation in the Indian economy. This was not expected by anyone in the country except the RBI. This gave a major blow to tax evaders. Unlike previous denominations of 1946 and 1978, any ordinance was not passed by the Parliament which throttles democracy. Moreover, the move created chaos in the whole country. However, the move was aimed at abolishing corruption, stopping fake currencies and eliminating black money which got its success to a certain point. The Supreme Court recently upheld the validity of demonetisation in 2016 a case named Vivek Narayan Sharma v. Union of India & ors, WP(C) 906 OF 2016. Demonetisation of 2016 was a turning point in adoption of digital payment methods which was not a major objective of the government in introducing demonetisation.Government’s aim was to eliminate black money, stop corruption and fake currencies whichThe government also introduced GST which further helps to weed out black money.
The word Demonetisation refers to withdrawal of official currency to be used as a legal tender and this is replaced by the new currency. When demonetisation occurs, use of old currency is discontinued and it is no longer used to purchase goods and services. People are given time to exchange their currency with new currency through banks. To stabilize currency, reduce corruption, forfeit black money, prevent terrorism and tax evasion are some of the reasons behind demonetisation. This can also help to make a digital economy by the use of digital payment methods. Though everyone is now using modern methods of payment, this cannot be replaced with currency and notes which is a crucial part of everyone’s lives.
In today’s era also, everyone did not have proper access to digital devices and the internet. That’s why demonetisation has a drastic impact on everyone’s lives. This can create chaos among ordinary people as everyone wants to replace their currency with the new ones. Moreover, this can also affect the budget as new currency is limited. In India, the Central government after a recommendation from the Central Board of RBI under Sec 26(3) of Reserve Bank of India Act, 1934 has the power to declare any currency as an illegal tender and discourage its use.
CASE ANALYSIS: VIVEK NARAYAN SHARMA V. UNION OF INDIA & ORS
Facts of the case: On 8th November, 2016, Prime Minister Narendra Modi announced the demonetisation of 500 and 1000 currency notes and replaced it with new 500 and 2000 notes. People were given 52 days to exchange the currency notes with the banks. However, demonetised notes were used in petrol pumps and hospitals for a specified time period. The main motives of the government are to curb black money, discourage illegal transactions and increase digital transactions and boost government tax revenues. The demonetisation was given statutory recognition under The Specified Bank Notes (Cessation of Liabilities) Act. A plea was filed in the Supreme Court against this decision and subsequently 58 petitions were filed.
Issues: The main contention behind the case was that the decision was taken in a haste and RBI recommendation was taken in the form of opinion only and there was no independent application of mind by the RBI. Moreover, The Parliament was not taken into consideration on such an important decision which is a core part of the democratic government. It was also contended that the Central government with the recommendation of the Central Board of RBI under Section 26(2) of the RBI Act, 1934 can demonetised only a series of banknotes and here it is for all series of currency notes.
Judgment: The Supreme Court upheld the validity of the Union government’s decision on the validity of demonetisation of 500 and 1000 notes by a 4:1 majority and stated that the motives behind the demonetisation were implemented in a proper manner and reasonable time was given to the citizens to exchange the notes. It was held that there was a proper consultation of 6 months between the central government and the RBI and the contention that the RBI’s recommendation was not taken is wrong, therefore the decision making process was not flawed. Also, power to demonetise currency is with regard to all series of currency notes and not only specific series under Section 26(2)of RBI ACT, 1934.
Minority judgment: Justice BV Nagarathna dissented with other 4 judges and stated that the Parliament was not taken into consideration in such an important decision of the country. She held that Democracy cannot progress without Parliament and thus Parliament cannot be aloof from the important decisions of the Union government. Also, the entire process of demonetisation was carried out within 24 hrs by the Central government and there was no independent application of mind by the RBI. She also pointed out that under Section 26(2), only a particular series of currency notes can be demonetised, not all. Moreover, demonetisation which was an important decision for the country should have been implemented by an ordinance which can later be aided by Parliamentary legislation, not by merely issuing a notification, which the central government did in 2016. Therefore, she held that the entire demonetisation process was unlawful and not in accordance with the law.
Minority judgment plays a very important role in judicial decision making. It paves the way for further development in law and helps to find out loopholes in the majority judgment. This can lead to strengthening democracy.
EFFECTS OF DEMONETISATION OF 2016
1. According to data from the Ministry of finance, Govt. of India, only 4% of Indians paid taxes during 2014-15. Because of this, the government lost 6-9 lakh crores. That’s why, the most important aim of the government behind demonetisation is to curb tax evasion and black money as many people were hiding their black money and were not paying taxes which became successful as currency notes of 500 and 1000 which were in high circulation were banned and black money was extricated from the system in a major proportion. Moreover, the move also stopped terror funding, corruption, and use of fake Indian currencies. More than 37,000 shell businesses involved in hawala transactions and money laundering were found by the government. The government further introduced GST(Goods and Services Tax) in 2017 which further helps to eradicate black money and corruption.
2. After the 2016 denomination, people started doing digital transactions more than cash transactions which gave rise to the cashless Indian economy and brought more people into the tax bracket, which helps to curb tax evasion. It was also found out that digital transactions surged in the range of 400-1000%.
3. However, the move also had a negative impact on the economy such as it affected the GDP growth rate of the country. According to data from Azim Premji University, 50 lakh individuals have lost their jobs since demonetization.
4. The demonetisation also leads to chaos among ordinary people as they have to stand before banks and ATMs in queues to get their notes exchanged for weeks.
5. Moreover, the Reserve Bank of India report from 2018 states that a little over 99.3% of the demonetized notes, with a total value of 15.30 lakh crore, were deposited in the bank. The value of the undeposited banknotes was merely 10,720 crores. The experts have come to the conclusion that this attempt to minimize the threat of black money entering the economy fell short of its goals.
MAJOR CHANGE HAPPENED IN INDIA AFTER DEMONETISATION?
As the notes of 500 and 1000 were 86% in circulation and ceased to be used as a legal tender after notification by the Prime Minister in 2016, people were scared to keep cash with themselves and digital transactions started rapidly increasing. As there was a shortage of cash at that time, the government encouraged poor people to use digital modes of payment.
Moreover, during COVID era, people wanted to stay away from cash and wanted to do every transaction digitally. In 2016, only paytm existed but after that, only digital methods started emerging such as Google Pay, Amazon Pay, Phone Pe. and many more. Recently, National Payment Corporation of India released data which shows that over 400 billion transactions using the unified payments interface (UPI) generated Rs 7.7 lakh crore.
Before 2016, people didn't trust digital payment methods and India was considered one of the cash dependent nations in the world. as it is now and every transaction was done with cash or cheque but now everyone has a digital payment option, from the digital vendor on the corner to the local grocery store. Whether payment is too small as Rs 5 or too big as 10 Lakh, digital methods are accepted everywhere which was not the case before. As per Saugata Bhattacharya, chief economist Axis Bank, evolving technology and digital transactions leads to formalized economic activity which further results in higher quality employment.
However, when demonetisation was introduced by PM Modi, digitalisation was not the main objective but to weed out black money and eliminate corruption was its major goal. Digitalisation was the indirect consequence of demonetisation. Many digital currencies came into being as a result of demonetisation and covid such as crypto currency, bitcoin but which was not considered legal by the government. In 2022, The Cryptocurrency and regulation of Official digital currency bill was listed before Parliament which is yet to be passed. This move was taken as people still fear holding cash with themselves and wanted to convert it into virtual currency.
India has implemented the demonetisation exercise 2 times before 2016, namely 1946 and 1978.
The first demonetisation took place in 1946 by the British government in India. Two ordinances were passed in January 2016, namely Bank Notes (Declaration of Holdings) Ordinance and High Denomination Bank Notes (Demonetisation) Ordinance. In the first ordinance, all banks and government treasuries of the British government were required to give to the RBI, a declaration of their currency notes holdings of 100, 500, 100 and 1000 as of the previous day's closure of business by 3 p.m. on January 12, 1946. A bank holiday was announced for that day.
The second ordinance demonetised currency notes of 500, 1000 and 10,000 with effect from January 13, 1946 and citizens can get it exchanged from any scheduled bank or RBI within 10 days of promulgation of the ordinance. People were allowed to exchange their notes if they explained the source of their income, otherwise not. This was the time period when the Second World War got over and black money was in high circulation in India. Businessmen were believed to generate large gains by supplying Allied war efforts and were also suspected of hiding their gains from tax authorities. The step was taken by the British government to curb black money and tax evasion. Indian leaders were not happy with this move as they were not consulted. Moreover, princely states were exempted from questioning when they exchanged their notes. New high denomination notes of ₹1,000, ₹5,000 and ₹10,000 were reintroduced in 1954. The move was not successful as it ceased to curb black money. Also high denomination notes were limited in use at that time, therefore the effect was very limited. .
On 16th January, 1978, The Indian Parliament passed an ordinance named The High Denomination Bank Notes (Demonetisation) Act, 1978, which banned high denomination currency notes of 500, 1000 and 10,000 against the wishes of then RBI governor, IG Patel. This ordinance later became an act from 30 March, 1978. The objective of the act was to weed black money from the country which was unfortunately not achieved. The denomination does not much affect ordinary people as these were high value notes. Moreover, the Indian economy was not mature at that time. The denomination of 1978 was also upheld by the Supreme Court.
Demonetisation is a British concept as first demonetisation was done by them in 1946 in India as per Section 26(2) of the RBI Act, 1934. It teaches people not to hold too much cash with themselves, instead deposit them in their respective banks which will be more safe, hence their savings will be increased. After demonetisation, people understood that it is easier to hold soft money than hard money, which thus leads to digital transactions and a cashless economy. Digital payment methods have also increased after demonetisation which provides various options to citizens of the country. Many virtual currencies also came in the market but were not recognised as legal tender by the government. Subsequently, The Cryptocurrency and Official Regulation of Digital currency was listed before Parliament for discussion. People are eagerly waiting for its approval. If passed, this will be a path to a cashless Indian economy.
But this cannot be fully implemented in India because the poor still do not have access to smartphones and Internet, so this will not benefit them. With the increase in digital payments via Point of Sale Terminal and mobile banking, transactions through ATMs (Automated Teller Machines) started declining. This move was a blow to black marketers and tax evasion for which this demonetisation was implemented. In 2017, GST (Goods and Services Tax) was implemented by the government which further helps to curb black money and corruption. Subsequently, the flow of taxes also increased which further helped people as the government started public welfare measures. However, the move was not fully successful as bulk of black money was held by the people in the form of land, gold and jewelry. According to economists,India might have had a growth rate of 8%+ had the government not implemented demonetisation. In fact, the government's claimed success in locating illegal money and shell businesses is undermined by the slower GDP growth rate.
Demonetisation exercise was also interpreted by the Hon’ble Supreme Court which upholds it by 4:1 majority by citing it lawful and achieving its objectives. Justice BV Nagarathna was the only judge who held that the demonetisation was unlawful. This minority judgment by Justice BV Nagarathna will also come under deep scrutiny.