A Constitution Bench on Wednesday questioned whether the government and the Reserve Bank of India (RBI) realised their stated objectives of choking black money, terror financing and fake currency through the policy to demonetise ₹500 and ₹1,000 notes in 2016.
“What about black money and terror funding?” Justice S. Abdul Nazeer, heading the five-judge Bench of the Supreme Court, asked while hearing 58 petitions challenging demonetisation.
The court’s question came despite the government urging the Bench not to “waste” judicial time on the issue. Attorney-General R. Venkataramani termed the case “academic” in nature as things had long settled.
“You may not be able to undo something that has happened, but whether in the future such power can be exercised or not can be looked into,” Justice A.S. Bopanna said.
Solicitor General Tushar Mehta questioned the very maintainability of the case which concerned a purely economic policy of the government.
Senior advocates P. Chidambaram and Shyam Divan, for petitioners, said the issue was “very much alive”. Demonetisation in 1946 and 1978 were implemented through separate Acts debated by Parliament. In 2016, it was done through a mere notification issued under provisions of the Reserve Bank of India Act, 1934. He said the court should declare the law or nothing would stop the government from repeating the exercise which had seen “horrendous consequences”.
Mr. Chidambaram, citing the RBI’s annual report, submitted that ₹15.44 lakh crore worth of currency was demonetised. The withdrawn money amounted to 86.4% of the currency in circulation at the time. Only ₹16,000 crore out of the ₹15.44 lakh crore was not returned. He said only .0027% fake currency was “captured” following demonetisation.
“Negligible?” the Bench asked.
“Absolutely negligible… Infinitesimal! Only ₹47 crore of fake currency came back into the legal system to be destroyed… So, effectively, every note withdrawn was exchanged,” Mr. Chidambaram pointed out.
But Justice V. Ramasubramanian, on the Bench, said maybe all fake currency holders had not dared to come forward to try and exchange their counterfeit currency for the new ones.. Their currency out there might have been rendered useless by demonetisation.
“But nobody knows how much that is. Besides, the new ₹2000 notes were counterfeited within days. … In fact, it was like moving a mountain by withdrawing 86.4% of currency in circulation only to catch a rat,” Mr. Chidambaram said.
“Only, here, the objective was to catch the rat and not the mountain,” Justice Ramasubramanian retorted.
Mr. Chidambaram said black money had simply got converted to the new ₹2,000 notes.
“Within days of demonetisation, IT and DRI seized unaccounted money in ₹2,000 notes. Again within days of demonetisation, killed terrorists in Bandipora were found with fake ₹2,000 notes… None of the objectives were attained. Besides, the decision-making process leading to demonetisation was deeply flawed,” Mr. Chidambaram argued.
Not in public domain
The senior lawyer said crucial documents leading to the massive exercise, including the government’s letter on November 7 to the RBI seeking recommendation for withdrawal of ₹500 and ₹1,000 notes, the agenda note of the meeting held by the RBI Board without several of its independent directors and the recommendation of the RBI Board for demonetisation were not in the public domain — he asked the court to call for them. The Cabinet took an “instantaneous decision” to clear the withdrawal and the Prime Minister announced it on TV on November 8.
“Is it a reasonable and prudent decision-making process that you withdraw 86.4% of currency in 24 hours and do not place the documents in the public domain?” Mr. Chidambaram asked in court.
He said 11 crore people stood in queue to change their own money. Farming community was at a loss. It was sowing season. Wholesale markets shut down. Prices crashed. Retail saw a “calamitous” drop in sales. Industry halted and 15 crore daily labourers were left without work.
“The number of individual bank notes amounted to 2,300 crore. The press could only print 300 crore. Simple mathematics showed it would take seven months to re-monetise. ATMs across the country had to be recalibrated. The shutters would come down in banks at 11 a.m.,” he noted.
The court wondered whether the government had thought about the consequences before going ahead with the withdrawal of the banknotes. It scheduled the next hearing on November 9 and directed the government and the RBI to file comprehensive affidavits in response to Mr. Chidambaram’s submissions.