‘Demonetisation arose from the Centre …it should have enacted a law’

Source– The post is based on the article “Demonetisation arose from the Centre …it should have enacted a law” published in The Indian Express on 3rd January 2023.

Syllabus: GS3- Indian economy and mobilisation of resources

Relevance– Issues related to banking and monetary policy

News– The article explains the issue of legality of demonetisation by the central government in 2016.

What are the legal provisions for demonetisation initiated by RBI?

According to sub-section (1) of Section 26 of the RBI Act, 1934, every bank note shall be legal tender at any place in India and shall be guaranteed by the central government. This provision is subject to sub-section (2) of Section 26 of the Act.

Sub-section (2) of Section 26 of the Act applies only when a proposal for demonetisation is initiated by the RBI. It should be a recommendation being made to the central government. The recommendation can be in respect of any series of bank notes of any denomination

The word “any” will mean a specified series or a particular series of bank notes. Similarly, “any” denomination will mean any particular or specified denomination of bank notes.

If the word “any” is interpreted to mean “all series of bank notes” of “all denominations”, it would give the central board of the bank unguided and unlimited powers. It would be arbitrary and  unconstitutional.

On receiving the said recommendation made by the central board of the bank under sub-section (2) of Section 26 of the Act, the central government may accept or reject the said recommendation.

If the central government accepts the recommendation, it may issue a notification in the Gazette of India. It should specify the date from which the bank notes shall cease to be legal tender.

What are the legal provisions for demonetisation initiated by the central government?

The provisions of the Act do not bar the central government from initiating demonetisation. It could do so by using the powers under Entry 36 of List I of the Seventh Schedule of the Constitution. However, it has to be done only by an ordinance or legislation.

The central government cannot demonetise bank notes by issuance of a gazette notification under sub-section (2) of Section 26 of the Act.

When the central government proposes demonetisation of any bank note, it must seek the opinion of the central board of the bank. The bank is the sole authority to regulate circulation of bank notes and secure monetary stability.

The opinion of the central board of the bank should be independent after a meaningful discussion by the central board of the bank. If the central bank gives negative opinion, the central government may still go ahead with demonetisation after weighing the pros and cons.

What are arguments against the legality of demonetisation initiated by the central government in 2016?

The proposal for demonetisation in 2016 came from the central government. Therefore, it could not be given effect by way of a notification under Section 26 of the Act.

The decision making process did not include independent advice by the central board of the bank. The central bank acted on behalf of the central government.

Therefore, notification dated November 8, 2016 for demonetisation is unlawful.

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