In 2023, Can India Go Past Demonetisation Blues & Focus on Real Economic Issues?

Promoting digital payments, formalisation of economy were added only later as objectives of govt's cashless goals.

Promoting digital payments, formalisation of economy were added only later as objectives to govt's cashless goals.

Image: Kamran Akhtar/ the Quint 

The Supreme Court (SC) has, by a majority of 4:1, upheld the constitutionality and legality of the demonetisation of Rs 500 and Rs 1,000 currency notes ordered by the Central government on 8 November 2016, which had divested about Rs 15.4 lakh crore of currency (more than 85% of bank notes in circulation at that time) its legal tender status.

The demonetisation decision had led to considerable controversy. Besides questioning the legality of the measure, there were several important economic, social, security, and political questions as well.

All the 58 petitions filed to question demonetisation, pending for hearing and decision for more than five years, stands disposed of today. The judgment is definitely the last word on the legality and constitutionality of the demonetisation.

The demonetisation horse has been flogged for last six years. Will the SC decision put an end finally to the other economic, security and political questions as well?

No Constitutional Flaw in the Demonetisation Decision

Section 26 (1) of the Reserve Bank Of India (RBI) Act declares every bank note issued by the RBI, which is also guaranteed by the Central government, a legal tender in India for all payments. Section 26(2) further empowers the Central government to declare ‘any series of bank notes of any denomination’ to cease to be a legal tender, on the recommendation of the Central Board of RBI.

Four judges found the Central government fully competent to divest the Rs 500 and Rs 1,000 bank notes in circulation before 8 November 2016 of their legal tender status (demonetised or banned in popular parlance). The lone dissenting judge considered the requirement of an independent recommendation from the RBI as a pre-condition. As RBI Board had considered the matter on reference from the Central government and had also cited ‘as desired by the government’ in its recommendation, the dissenting judge found the recommendation ‘vitiated’ and declared the demonetisation decision ‘unlawful’.

The basis of the dissenting judgment is more of a legal interpretive technicality. Even otherwise, 4:1 forms a substantial majority. Therefore, as far as legal and constitutional challenge to the November 2016 demonetisation is concerned, the matter had attained its final closure.

Objectives Not Relevant

The SC, while disposing of the demonetisation petitions, did observe that it was not relevant to the legality of the decision, whether the measure achieved its objectives or not. However, from economic, social, political, and security perspectives, the attainment or the failure to do so of the objectives of the demonetisation decision perhaps, is quite relevant.

The government had stated “fight against corruption, black money, fake notes and terrorism”, as the objectives of demonetisation in the press release issued on November. The press release, though, did not spell out how demonetisation would achieve these objectives.

An unstated major one was the expectation that demonetisation would lead to the bank notes of about Rs 5 lakh crore (close to 1/3rd of the notes demonetised) not being surrendered to the banks, thereby, extinguishing the black money to that extent and enriching the government in the bargain.

The promotion of digital payments and formalisation of the economy were added only later as additional objectives.

Split Verdict on Attainment of Objectives

More than 99% of the demonetised bank notes came back to the RBI. The remaining was also fully accounted for.

The government offered a virtual tax amnesty scheme for depositing the demonetised bank notes in a Garib Kalyan Yojana. Miniscule deposits only came. The Income Tax Department examined questionable deposits of demonetised notes in about 18 lakhs bank accounts exceeding Rs 4 lakh crore. Nothing significant came out of it.

Undoubtedly, demonetisation was quite a flop show from the standpoint of eliminating black money. Likewise, there was hardly any noticeable impact on the reduction of corruption.

However, some objectives were met. Fake currency was as good as extinguished as a look-alike has no value when the principal actor itself ceases to exist. There was also a perceptible difference in terrorist activity, particularly in J&K, for some time when the cash pipeline, possibly run from across the border dried up.

Digital payments are getting mainstreamed all over the world. In India also, Aadhaar and innovations like UPI have made a significant contribution to promoting digital payments. Likewise, Goods and Services Tax or GST has encouraged formalisation of businesses in the country. Crediting demonetisation for the promotion of digital payments and formalisation of the economy in the country, however, will be a big stretch.

On the whole, if there were to be a verdict on economic, social and security impact of the demonetisation, it would perhaps be judged as a misadventure on the scale of 4:1.

Let Us Put Demonetisation Behind

Currency notes or cash was inaccurately treated as equal to black money. Unfortunately, for the government, the currency in circulation has doubled in six years. Cash continues to have its uses. The government should not worry about it. As digital payments expand, their use will get reduced gradually as the use of coins minimised over the years.

The largest banknote in circulation in India is Rs 2,000, equal to about USD 25. As Rs 2,000 notes have not been printed since July 2017, these will soon get out of circulation. Rs 500 note (about USD 6), the most valuable bank note in circulation in India, is quite a small value, even for transaction purposes.

Demonetisation took place six years ago. Its economic and social impacts were by and large, done away with within the next two-three years.

With the Court bringing finality to the legality of demonetisation, the government can think of bringing back the Rs 1,000 note now. The nation should also put demonetisation behind us and move on to deal with the real economic and financial sector issues.

(The Author is the Chief Policy Advisor, SUBHANJALI, Author: The $10 Trillion Dream and Former Finance and Economic Affairs Secretary, Government of India. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)