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Demonetisation: Whether it ended the corruption or terrorism?

Indian_Demonetisation_2016
On the night of 8th November, 2016, in a 48 minute speech, Prime Minister or rather the Central Government struck down the legal tender of 500 and 1000 rupees notes which constituted 86.4% of the total currency in circulation which worth around 14 trillion of cash. There was a huge setback in different economic sectors due to this step, and which was also reported subsequently. India’s informal sector which constitutes almost 50% of the economy was totally shattered as 76% of the transactions in the sector is conducted in cash. Also this is the section which provides 78% of the employment and the employees in this sector are mainly paid in cash and they also spent in cash. Even the organized sector suffered a lot due to this, the SMSEs and MSMEs had and is going through a huge revenue loss as well as the job losses which common people went through. As the demonetization step was totally depended upon the banking system so it would be easy to understand the implication after understanding the banking conditions in India. In India, there are approximately 20 ATMs per 100000 people[1] which is even less the global average of 38 ATMs per 100000 people which is even lower than South Africa. Now coming to the bank accounts, approximately 16 crores people in India don’t have a bank account. Demonetisation_India_2016

The larger effects of demonetization on the Indian economy are debatable. There are questions raised on the ways in which demonetization has been implemented, it was clear from that the implementation process that it was not well thought and planned. As per the preamble of the ‘Demonetization notification’ it says that the sole objective of demonetization was to eradicate the black money and terrorism which is dependent upon that. Now as per the report of Indian Statistical Institute, Kolkata published in April, 2016 only 3% of the black economy is in cash and there are many other ways to hide the black economy except cash. The government besides countering all those sources of black economy concentrated on one source which contribution is nominal. Also the predominant corruption in the system, lack of elementary implementation and misconduct of the bank let the people convert their black money into white by way of pink.

Several petitions had and have been filed in the High Courts and the Supreme Court as well, challenging the demonetization or its specific aspects. The grounds on which the High Courts upheld the demonetization back in November 2016 was that it was in ‘larger public interest’. Now in the economic survey report published by the government recently, it (Economic Survey) defines demonetization as aggregate demand shock, aggregate supply shock, liquidity shock. So how the decision of demonetization was in public interest when even the government accept it was not, so the sole ground on which demonetization was upheld stands incorrect.

Now the question comes to whether the Central government has the power to take the decision of demonetization. This was even challenged in Sheeni Ahmed case. The decision of demonetization or the cancellation of legal tender of certain currency notes as per the Section 26(2) of the RBI Act, 1934 can be only taken by the Central Board of Reserve Bank of India and whatever the decision is that is to be informed to the Central government for implementation by passing a notification in the Gazette of India. The central government cannot take a decision on its own without the concurring consultation of the Central Board of Reserve Bank which has the sole authority to do so. Also there was no legislative mandate as the present demonetization was carried out without any law passed by legislature. In the demonetization move of 1978 the government demonetized the notes through ordinance.

The demonetization move was against the constitutional mandate and there were violation of constitutional provisions under this of Art 14, Art 19, Art 21, Art 73 and Art 300A. We will analyse each of the provision subsequently.

Article-14 of Indian Constitution enshrines the rule of classification. Demonetization step led to the creation of two different classification which was invalid at the very first instance under Art 14 as it did not satisfied either of the test of classification that are intelligible differentia and second that there should be reasonable nexus between the intelligible differentia and the object of the law/notification. The demonetization created two different classifications, first classification was with regard to the bank holders and non-bank holders and second classification was with regard to the banks between the Central, State Co-operative banks and the District Co-operative banks, the District Co-operative banks were not recognised by the RBI as bank as they did not function as per the Banking Regulations Act, 1949. So these banks were not involved into the demonetization process, and approximately 40% of the people’s accounts are in these banks, hence both the classification stands invalid which clearly violates the rule of classification under Art 14.

Article 19(1)(g)
of the constitution of India provides for the freedom to practice any profession, or to carry on any occupation, trade or business. The manner in which demonetization was implemented it, there was lack in even elementary implementation that created huge uproar among masses and affected the businesses at large. One of the petition filed in Madras High Court defined the demonetization as “extreme measure”. The loss that demonetization caused is irretrievable in terms of revenue and the job loss. Petitions had been filed in the apex court regarding the unprecedented loss that has been caused to the businesses and also that such loss cannot be excused under the garb of article 19(6) which talks about government’s discretion.

In Olga Tellis v. Bombay Municipal Corporation, Supreme Court held that the right to livelihood is an inseparable part of Article 21 because no person can live without the means of living. Due to the abrupt withdrawal of 500 and 1000 rupees notes from the market it caused the failure of the right of livelihood of millions of people. Workers employed in the informal sector who are paid in cash were deprived of their right to livelihood. Also the deaths caused due to the demonetization should also be considered as violation of article 21 of the constitution.

With respect to Article 73 of the constitution of India which vests the Union Government on the subjects the Parliament has the power to make laws on, as enumerated in Schedule VII. The main contention would be that none of the powers enumerated in Schedule VII or any of the statute, law does not give the Government the power to freeze or put a limit on the withdrawal of the cash from the citizens own bank account. So the extent of executive power that the central has had been totally defied.



The most discussed violation under demonetization was of Right to Property which is constitutional rights under Article 300A and states that no person shall be deprived of his property, save by authority of law, by an Ordinance or an Act of Parliament. But for demonetization no Ordinance was issued by the Parliament. The government freeze the bank account of the people or put some limit on the withdrawal of the money which was clear violation of right to property under Article 300A.


Overall the decision of demonetization was taken in haste and the objective seems to have not met anywhere. The manner in which it was implemented was in serious question and was even considered by the court. The day to day announcements and the notification undermined the rule of law in the country which is represented by stability and certainty in norms and law. We live in a nation administered by the rule of law, and not by a few individuals. The goals of the demonetization exercise might be praiseworthy, whether the said notifications will accomplish those stated policy goals is easily questionable. In any case, as it exists, the demonetization notification, in my view was unlawful and illegal.

[1]https://data.worldbank.org/indicator/FB.ATM.TOTL.P5?view=chart

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