Supreme Court of India on Demonetization - A Farce in Three Acts

Vivek Narayan Sinha v Union of India

On January 2, 2023, the Supreme Court of India pronounced its judgment on the constitutionality of the demonetization of currency in 2016 by the Modi government. In the run-up to the verdict, some editors asked me to write on the topic since I had written a few columns criticizing demonetization when the policy was announced. When I declined, saying I wasn’t confident of my expertise in the matter, one editor wrote back, “your Twitter bio says ‘constitutional economist,’ and it led me to believe this would be the perfect topic for you.” 

But I wasn’t talking about my understanding of demonetization or Supreme Court judgments. I lack the expertise to critique farce, even one that is in the garb of institutional authority played out within the premises of the Supreme Court and delivered in the form of a court judgment. The day before the Court delivered its verdict, I tweeted: 

Shruti Rajagopalan @srajagopalan

Some Indian editors and many of you have asked me to write about the demonetization case in the Supreme Court. I declined because as an economist I don’t review comedy/satire/farce. Please find one of those writers. After all Adam Smith highlighted the gains from specialization.

I offered to write about why I thought the whole case was farcical, but Indian newspapers refused to publish such trivialities; because they are very, very serious and only publish important matters (not because they are scared of the contempt proceedings that will follow from criticizing the Supreme Court). 

In this post, I describe the farce by the Supreme Court. This is important because even a farce, as long as it is in the form of a Supreme Court judgment, has import for the future. Not as legal precedent—there is nothing precedent worthy in the 388-page opinion—but in conduct. If the highest court in India can double as a moot court, debating a policy that invalidated 86% of the currency in circulation through a surprise telecast without any constitutional remedy, it will surely repeat it for lesser cases.

The Supreme Court follows the standard three-act structure of judicial evasion: a six-year delay in hearing the arguments making the entire case moot, the submission of important evidence through sealed envelopes (so secret even the petitioners don’t know the facts) and completely ignoring the question raised by the petitioners about the infringement of their fundamental rights. I will not comment on the actual judgment upholding the constitutionality of demonetization because there is nothing there to analyze. 

Since six years have passed, some details to refresh your memory. It started on November 8, 2016 (when most newsrooms were focused on the Clinton-Trump election). At about 8 p.m. India time, Prime Minister Narendra Modi announced that by midnight the 500 and 1,000 rupee (approximately $7.50 and $15 at the time) denomination currency would no longer be legal tender. And those with the old currency could exchange it for the new currency notes until December 31, 2016. Modi’s surprise announcement was intentional, to not give any time for individuals to hide/launder their “black money” (the colloquialism used for income/wealth on which taxes are not paid). About 47% of the population (almost 600 million people) were unbanked at the time. The entire policy was enacted through an executive notification, followed up by dozens of Reserve Bank of India (RBI) notifications to deal with the remonetization process (i.e., introducing new currency). 

Naturally, Prime Minister Modi declared it a success. Demonetization singlehandedly won the war against tax evasion, black money, and illegal activities. India is now a completely formalized, corruption-free economy with zero illegality. 

Demonetization was a short sketch dramedy, but giving it retroactive constitutional validity required a three-act farce. 

Act 1 – 2,207 days in the making

The demonetization policy—announced through executive notification—was immediately challenged in courts as early as November 11, 2016. Before the deadline to convert the demonetized notes for new notes—December 31, 2016—it came up before the Supreme Court on November 15, 25, and December 2, 5, 9 and 15. Similar challenges were filed in various high courts. On December 16, 2016, a two-judge bench referred all these challenges to a Constitution Bench, as it raised questions of constitutional importance. The Court also ordered the withdrawal of

all the Writ Petitions/proceedings pending in different High Courts across the country and to be heard by this Court along with the Writ Petitions which are already pending in this Court raising same or similar issues, to avoid multiplicity of hearing and conflicting decisions on the same subject matter. Accordingly, we issue notice in the respective Transfer Petitions and by way of interim direction, stay the further proceedings of the Writ Petitions/proceedings in the concerned High Court. We further direct that if any other Writ Petitions/proceedings are pending in any High Court, further hearing of those matters shall also remain stayed in terms of this order. We further direct that no other Court shall entertain, hear or decide any Writ Petition/proceedings on the issue or in relation to or arising from the decision of the Government of India to demonetize the old notes of Rs.500/- and Rs.1000/-, as the entire issue in relation thereto is pending consideration before this Court in the present proceedings. (emphasis added)

The Court made itself the sole venue for challenging the constitutionality of demonetization. And then, it did absolutely nothing on demonetization for six years. The Constitution Bench, with five judges, started hearing arguments in late 2022—six years after the event. And finally gave a verdict 2,207 days after the first petition was filed. The government gave 1.3 billion people only 53 days to deposit/exchange their old currency notes. And Indians responded by returning 99.86% of currency notes before the deadline. And the Supreme Court took 2,207 days to decide on the constitutionality of the policy. Perhaps that is how long it takes to produce a farce.

If you are wondering what the Court was doing during these 2,207 days, it was correcting other grave injustices. Like setting aside the lifetime ban imposed by BCCI on cricketer S. Sreesanth charged with corruption and match-fixing. The Court also spent more than one hearing on ensuring the beautification and maintenance of a monument called “Sisodia Rani ka Bagh” in Jhalana, Jaipur. The Court’s order includes important matters like working water fountains and regulating the timing of loudspeakers past 8 p.m. The Court also sprang to correct the inaction by the Punjab government in filling the vacancies of elementary-trained teachers, a case that started because the honorable judges of the Punjab and Haryana High Court took suo moto cognizance of the plight of elementary school teachers. 

And the honorable judges never missed the opportunity to ensure that Delhi remained “livable” for them; they made sure that garbage piling up alongside railway tracks was dealt with by the Delhi government as part of the Court’s environmental policymaking. In fact, the Supreme Court had its hands full, passing 197 orders on the never-ending Delhi air pollution case, a public interest litigation that started in 1985 and is still heard by the Supreme Court to monitor progress (more on this in my post on air pollution). So they were quite busy.

The delay was not due to cases heard in order of priority or because of the 69,598 pending cases (as of December 1, 2022). Or due to the 50-odd days of vacation the Court takes every year. Nor is the Court bound by a rule to hear in order of filing date. Constitution benches, like the one created for the demonetization case, are designed to hear arguments in a few weeks and deliver a verdict on the constitutionality of government policy swiftly. 

Delay is now the most important component of the new doctrine of judicial evasion. Gautam Bhatia has defined it as: “by keeping a case pending, and delaying adjudication, the Court effectively decides it in favour of one of the parties (most often, the party in a stronger position, i.e., the government), simply by allowing status quo to continue.” I would go one step further. In cases where the policy is patently unconstitutional, and the Court knows it will be very difficult to avoid locking horns with the executive, it delays hearing the matter until it is moot. The result may not deliver justice but at the very least, promises comedic relief. With comedians being muzzled, prosecuted and arrested by the government, the Supreme Court once again comes to our rescue.

By the time the Court delivered its opinion, it didn’t matter whether demonetization was constitutional or unconstitutional. The matter was done; the dust had settled. Over 99% of the currency was returned within the deadline. More than 100 people were dead waiting in line to access their own money in late 2016. There was nothing to reverse.

In the climax of Act I, the judges asked the petitioners at the start of oral arguments whether the issues in the case had now become “academic.” The most delicious part of the farce was when the petitioners convinced the judges that their judicial delay had not rendered the issues academic. 

Act II - played out behind the curtain

The Court didn’t exhaust all available farcical elements in Act I. A large part of the charade was played out in Act II—but behind the curtain. In this instance, through another innovation of the Indian Supreme Court’s doctrine of evasion—the use of the sealed envelope. It is not unusual for Indian courts, or courts in other countries, to have some kinds of evidence submitted in a sealed form. Usually, these are sensitive/classified information, and one of the parties believes they should not be part of the court record, though they are material in deciding the case at hand. Typical examples are information relating to national security (strategic details of defense equipment/the placement of armed forces units, etc.), information withheld to protect the identity of a whistleblower witness, etc.

In the present case, one question raised by the petitioners was whether Section 26(2) of the RBI Act suffered from excessive delegation to the RBI. 

26(2). On recommendation of the Central Board (of the RBI) the [Central Government] may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender.

It came down to whether RBI’s authority to demonetize “any series of bank notes” implies it has the authority to demonetize “all series of bank notes.” The contortion by the majority to extend “any” to mean “all” deserves a special mention in comedic writing. 

But the second question raised before the Court was the meaning and implication of “recommendation of the Central Board.” The Court has to look into a set of questions around whether the executive acted on its own, if such actions must be initiated by the central bank before the executive implements the policy, if the executive acted under the advice of the central bank, how that advice was communicated, etc. Essentially, whether proper procedure was followed on a matter of policy where both institutions are involved, given that the constitutionality of demonetization hinges on the decision-making process between the central bank and the union executive, one would imagine that the details of that process are extremely relevant. In fact, they were so relevant they had to remain secret. 

The documents describing the process of decision-making between these two institutions were submitted in a sealed envelope to the court. Explaining or justifying why the contents are sensitive or classified and must remain sealed would have taken away the comedic strength of the judges’ performance. 

The public has not seen the documents, which are not part of the Court record—again, not unusual when certain kinds of evidence are sealed. But Supreme Court judges are masters of this game. In this case, they ensured that even the petitioners were not given an opportunity to see these sealed documents. It also helped keep the spirit of the farce going. They made sure that the petitioners could not challenge or respond to the contents of the document and make it a serious affair, inadvertently ruining all the fun. And for the twist in the climax of Act II: Even the judges were given these secret documents after they heard all arguments, but before the judgment. The government, clearly better trained in farce than the petitioners, refused to provide them the secret documents. The Court had to order the government and the RBI on December 7, 2022 (after arguments were complete) to “produce the relevant records.” 

Of course, there is no question of sealing evidence to protect members of the executive. Since demonetization in 2016, a new union government has taken office. The then Governor of the RBI, Dr. Urjit Patel, resigned in December 2018. The three deputy governors during demonetization, R. Gandhi, N.S. Vishwanathan and S.S. Mundra, have completed their terms and are no longer at the RBI. The then revenue secretary, Hasmukh Adhia, and finance secretary, Ashok Lavasa, have retired from the Indian Administrative Service. And the finance minister, Arun Jaitley, died in 2019. Any “recommendation from the RBI” produced in a sealed envelope cannot possibly be a post-dated face-saving measure. There is no one left in the office to save. The only person still in the same office in need of face-saving is Prime Minister Narendra Modi. And we all know that the Supreme Court of India is fiercely independent. So, the entire sealed envelope charade is only to entertain the public, not to cover up the prime minister’s ill-conceived diktat. I could be wrong, but where are the documents to prove it?

Unfortunately, the dissent ruined some of the comedic pleasure. It points out that the demonetization policy did not originate at the RBI but came from the central government, that there was a difference of opinion between the executive and the RBI and that the consultation or recommendation was not actual agreement. 

For six years, everyone in the country had been fooled into thinking that the RBI was pulling all the strings, and had unilaterally initiated demonetization without ensuring there were enough new notes, without checking if the ATMs were fitted to accept new 2,000-rupee currency notes and before designing and issuing new 500 and 1,000 rupee notes so that people could make change. But it wasn’t the RBI! The central bankers clearly have no sense of humor, taking the job of issuing and distributing currency so seriously, and disagreeing with the executive’s move to shock and awe through currency. I am shocked that the absurdity of not being allowed to access one’s own money came only from the executive. The way they ban film dialogue and jail comedians, I thought they didn’t have a funny bone. Maybe they are taking secret lessons from the judges on how to write a dramedy in exchange for secret documents.

Act III - What fundamental rights?

In Act III there is a surprising twist. It is revealed that it is actually a tragic farce after the comedy of the first two acts. The trouble was that 105 people had died in November-December 2016. The cause of death was  1) waiting in line at ATMs and banks for hours and days to exchange/deposit old currency notes, 2) being unable to get medical treatment due to the inability to access their own currency, 3) suicide due to the financial hardship they faced from the currency crunch and 4) because of overwork and stress of bank employees during the 53 days for returning the old notes. Though the idea of a policy that led to government bank employees dying from overwork is a whole other class of comedy. But the tragic loss of life and livelihood was raised by the humorless petitioners. Apparently, Indians have fundamental rights guaranteed by the constitution, and the Supreme Court is the ultimate custodian of that constitutional guarantee. 

The petitioners asked: 1) Whether it infringed on Article 300A (the constitutional right to property); 2) whether the notification infringed on Articles 14 (equal protection) and 19((1)(g) freedom to practice any profession, or to carry on any occupation, trade or business); and 3) whether the RBI notifications restricting the amount of currency each individual could withdraw in November/December 2016 infringed on Article 21 (right to life)? 

Luckily the judges did not break character and continued the farce by not acknowledging these questions and not judging if the policy violated fundamental/constitutional rights. 

Starting with property rights and expropriation:

300A: No person shall be deprived of his property save by authority of law.

The Indian Constitution guaranteed a fundamental right to property (Articles 19(1)(f) and Article 31) and checks against expropriation by the government when it was adopted in 1950. It required that property could not be taken except by the authority of law, only to serve the public interest and only after providing compensation. But over three decades of implementing socialism, the right to property was a constant battleground over questions of land reforms, nationalization, etc. After several constitutional amendments diluting the constraints on the acquisition of property, parliament deleted the fundamental right to property in 1978 and added Article 300A, which is a weaker constitutional protection against expropriation by the executive. This long history is detailed in my humorless eight-part essay series on the right to property:  one, two, three, four, five, six, seven, eight.

The main protection offered by Article 300A is that the state may not take property except by the “authority of law.” To “deprive” an individual of property, there must be legislation. The state cannot deprive a person of his property by taking recourse to executive power unless that executive order is backed by and carries out the clear mandate of some legislation that does not suffer from excessive delegation. This provides some protection to individuals against expropriation. It ensures that an overzealous minister or municipal corporator doesn’t simply issue a diktat to take property and that the actions are at least authorized by state or parliamentary legislation. 

Demonetization was implemented by executive notification and without legislation. And the express purpose of demonetization was the expropriation of black money (assumed to be held only in currency—also hilarious!). And the requirement to exchange old/demonetized currency for new currency implicitly imposed a one-time wealth loss on currency holders who are unable or unwilling to convert their entire holdings of old notes. The expectation was that those with large holdings of income/wealth on which tax had not been paid or was earned through illegal activities would not deposit the notes from fear of prosecution or scrutiny. They will simply eat their losses. And in the process, the government will make a one-time revenue gain. 

And so, we have expropriation without legislation. A plain reading of 300A and the demonetization notification (on time!!!) would have invalidated the demonetization policy unless parliament passed legislation. But the Supreme Court is too busy and too creative for a plain reading. 

Demonetization was implemented by executive notification to catch everyone by surprise. But the government has other constitutional means of surprise expropriation—an ordinance, with six months to pass it as legislation in parliament. Other surprise expropriations in the past by Indira Gandhi (demonetization in 1978 and bank nationalization in 1969) were done by ordinance, not executive notification. Even Indira Gandhi, the only Indian prime minister to impose an Emergency, was better at following basic constitutional procedure in her expropriation.

But buying time for the executive to pass an ordinance was not why the Court refused to hear the matter in November/December 2016. They were just very busy transferring challenges from high courts to themselves. At the end of the period to return the notes, on December 30, 2016, the Modi government passed the Specified Bank Notes (Cessation of Liabilities) Ordinance, which parliament subsequently enacted as legislation in 2017—after the deadline to return all demonetized/old currency notes. It made the constitutional invalidity under Article 300A moot because the Court didn’t hear the petition immediately. 

One can hardly fault the Court for not paying attention to 300A. The Constitution of India does not provide strong protection for property rights. It allows expropriation as long as it takes the proper form of legislation. All the government had to do to ensure it was procedurally sound was pass an ordinance. The additional protection is that instead of a bureaucrat in the finance ministry, the cabinet (on paper accountable to parliament) has approved the policy. It is not ideal, and the protection is flimsy, but it protects against arbitrary and predatory diktats. And we all know that Indian leaders don’t issue any arbitrary or predatory diktats. And demonetization was done in the public interest, and well-intentioned orders can never ever be arbitrary or predatory. That’s the real reason the Court has not addressed the question, and the judgment includes no discussion on whether the original notification violated Article 300A, if the ordinance and later legislation sufficiently saved the action, etc. It’s not like this situation is likely to come up anytime in the future. Why waste precious pages in a 388-page judgment on flimsy protection of property rights?

Nor does the Court address the infringement on Article 19(1)(g)—the freedom to pursue trade/occupation/profession/business. The reason is that there is really nothing to say. Demonetization would have likely passed the Article 19(1)(g) test because Article 19(6) reads in such broad exceptions—to make reasonable restrictions in the public interest—to the constitutional guarantee to make it moot even before the challenge. And keeping their tradition of relief by humor, the courts have always deferred to parliament on what constitutes public interest. And is there any restriction that can be unreasonable when fighting the great battle against untaxed income and wealth? But the humorless petitioners had raised the challenge, and the court had to opine on whether it was a restriction on people’s right to trade. 

In the weeks that followed demonetization, the RBI struggled to exchange the old currency, and Indians were once again allowed the nostalgia of the good old days of rationing and shortages under socialism. The innovation, this time, was that their own money was rationed due to a shortage of currency notes. But surely something as insignificant as currency notes cannot possibly infringe on people’s ability to carry on with their jobs/businesses.

Mahesh Vyas at the Center for Monitoring Indian Economy found a sharp decline in labor force participation in the demonetization quarter. But only 15 million dropped out of the labor force, which the judges probably considered a rounding error given India’s population. Gabriel Chodorow-Reich, Gita Gopinath, Prachi Mishra and Abhinav Narayanan used different outcome variables, including night lights data, labor force data, digitization, etc., and found that demonetization induced at least a 2 percentage point decline in GDP in the quarter of demonetization. Only 2 percentage points of GDP! Supreme Court judges are willing to bet that on poker night. India is now an economic superpower, didn’t you know?

And the question of violating Article 14 is ludicrous. The government went out of its way to ensure every single Indian was treated the same. They saw no difference between the 600 million Indians without bank accounts and those with bank accounts. Sudipto Karmakar and Abhinav Narayanan found that, in December 2016, 17% of households that didn’t have bank accounts experienced 2-7% lower consumption than the control group of households with bank accounts, the size of the effect varying by the initial asset levels of the household. See, equal treatment before the law. 

The right to life under Article 21—“No person shall be deprived of his life or personal liberty except according to procedure established by law”—was initially written and interpreted as the “due process” check against arbitrary government action. But in the last few decades, the activist Supreme Court has read a number of positive entitlements into the right to life. It now includes the right to food, clothing, shelter, a reasonable wage, clean air, clean water, medical treatment, cultural and environmental heritage, education, and anything else the Court fancies—i.e., everything except due process. The Supreme Court even included the “finer facets of human civilisation which makes life worth living” including “tradition and cultural heritage.” Like the tradition of farce, maybe? But these entitlements clearly do not include access to one’s own currency. Money cannot buy the finer things in life. That’s why the Court didn’t see it fit even to have a discussion on whether executive notifications blocking people’s access to their own currency/rationing violates the due process requirement outlined in Article 21. 

The tragedy in Act III made me appreciate the comic relief in Acts I and II more. Despite the best efforts of the petitioners to milk the tragedy in Act III, the Court ensured that the audience leaves laughing. There was absolutely no discussion or clarification of the status of expropriation by executive notification under 300A, the limits to reasonable restrictions on trade in 19(6), and whether the policy violated Articles 14 and 21. So it ended on a funny note.

My only quibble, it was too short at only 388 pages.