Courting Controversy: The Nine Lives of Demonetization

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Nakul Dewan

Those hoping for the Supreme Court of India to play Santa Clause and give an early Christmas gift in the form of an injunction against the steps taken after the November 08 demonetisation [pdf], will only be comforted by the fact that the issue has now been referred to a constitution bench of five judges.

Nine questions have been referred and these can broadly be broken down into four challenging its validity, two on its actual implementation, two related to political parties and District Cooperative Banks, and one on the scope of judicial review of fiscal and economic policy.

The reference is interesting because for practical reasons the Court would be hard pressed to allow the demonetized currency to come back into circulation even if it finds that demonetization violated the Reserve Bank of India Act or provisions of the Constitution.

Given that no injunction has been granted by the Supreme Court, all reasonable people who hold their legally earned wealth in cash would be expected to deposit or exchange the demonetized currency by 31 December 2016, after which the currency would be worthless.

Hence, it would be safe to presume that whatever currency is not deposited or exchanged is actually undeclared wealth or counterfeit currency. If allowed to be brought back into circulation because of the possible striking down of the notification, the Court’s decision will obviously only benefit those holding illegal currency.

It is unlikely that the Court would permit that to happen.

If the reference is not going to yield a practical result, then it begs the question of whether it should have been made in the first place.  No doubt, legal scholars will justify the reference because of the important questions of law that arise.

However questions relating to the actual implementation of the policy, even if it has left much to be desired, are not matters which are ordinarily heard by a constitutional bench. The issues related to District Cooperate Banks and political parties also do not go to the heart of the matter. That leaves one important legal question relating to the scope of judicial review of fiscal or economic policy.

However, even that is not a new issue. It has been considered by the Supreme Court in a number of cases and the consistent view taken is that unlike laws relating to civil rights, the Court should give greater judicial deference to legislative judgments in the field of economic regulation.

In the context of demonetization the most relevant is the 5 judge bench decision in the Bearer Bonds case.  In Bearer Bonds, the Court considered the constitutional validity of the Special Bearer Bonds (Immunity and Exemptions) Act 1981, which was a legislation enacted to bring black money into the legal system, by giving immunity to all persons who subscribed to these bonds.  Bhagwati J’s affirmation of Frankfurter J’s views in Money v Doud neatly sum up that in matters of economic and fiscal policy there is,

“good reason for judicial self-restraint if not judicial deference. ……. When these are added to the complexities of economic regulation, the uncertainty, the liability to error, the bewildering conflicts of experts, and the number of times the judges be been overruled by events – self limitation can be seen to be the path to judicial wisdom and institutional prestige and stability.

If deciding the questions regarding the legality of the measure is to lay down the law in case future governments seek to demonetize currency, then it is a very far thinking move.

Demonetization is not a perennial problem which India faces and has only taken place on two previous occasions in Indian history.  The first, as the Court in the Bearer Bonds noted, was after the Second World War when high value notes were demonetized to be able to tax the black money earned during the War, and the second in 1978 when the Janta Party was in power.

Given the monumental nature of the decision to demonetize it is unsurprising that even after a month, the issue finds itself in prime time news with an equal shares of critics and plaudits.

At one end of the spectrum are Jagdish Bhagwati’s views, who, in an interview with NDTV’s Barkha Dutt, has come out in support of the policy, slammed critics as people shooting from the hip, and taken the view that demonetization does not violate Article 300A of the Constitution.

At the other end is Sadanand Dhume, whose critique in the The Wall Street Journal paints a completely different picture and suggests that demonetization has not only been catastrophic for the Indian economy, but the decision shows that the ruling party takes policy advice from quacks”, its shabby implementation undercuts the Prime Minister’s reputation for quiet efficiency and its loudest backer is a telegenic yoga guru.

Neither of these policy perspectives will hopefully need to trouble the Supreme Court, if the current standard of judicial deference to economic policy is maintained. Of course, which of the nine questions the Court’s sword will strike down is not known.

Going by Mercutio’s call to Tybalt in Shakespeare’s Romeo and Juliet that “[g]ood King of Cats, nothing but one of your nine lives, that I mean to make bold withal, and, as you shall use me hereafter, dry-beat the rest of the eight”, ought to ordinarily mean that an affirmative decision on the first question would not require a decision on the remaining eight.

However, it is more likely than not that all nine questions will be answered and could make for some very interesting jurisprudence.

Nakul Dewan is an Advocate practising in the Supreme Court of India. He is also called to the Bars of Singapore and England & Wales.