Demonetization policy upheld in 4-1 Supreme Court verdict

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Demonetization policy upheld in 4-1 Supreme Court verdict

Recently, the Supreme Court by a majority of 4:1 upheld the central government’s notification of demonetisation of Rs 1,000 and Rs 500 denomination notes in the year 2016.

The decision of demonetization was taken by the central government under section 26(2) of the Reserve Bank of India (RBI) Act, 1934.

Supreme Court’s comments-

  • Section 26(2) of the RBI Act, 1934 empowers the government to demonetize any series of bank notes.
  • This right is not limited to only one order of currency, that is, the whole order of currency can also be demonetized under this section.
  • There was a discussion between the government and the RBI six months before demonetisation.
  • The time period given for the action of demonetisation and currency exchange has not been affected by the doctrine of proportionality.
  • In the year 1978, initially three days and later five more days were given to exchange old notes with new notes.
  • And in the year 2016, the public was given 52 days to exchange the notes.
  • However, the judge (Justice Nagaratna), who gave a different opinion from the majority decision of the Supreme Court, has expressed objection to the process of demonetization.
  • According to him, the process of demonetisation was based only on notification issued in the Official Gazette without bringing full legislation in the Parliament.

Demonetization-

  • It is the process of withdrawing the legal tender status of a currency unit. Demonetization was resorted to in the year 2016 to reduce corruption and black money in the economy.
  • Earlier in the year 1978, the government had demonetised Rs 1,000, Rs 5,000 and Rs 10,000 notes under the High Denomination Bank Notes (Demonetisation) Act, 1978.

Merits and Demerits of Demonetization

Merits:

  • Tax evasion decreases and tax revenue increases. The size of GDP increases in the long run due to higher tax revenue and reinvestment.
  • Innovation is encouraged in the field of digital currency and digital transactions. Increase in transparency and reduction in black money leads to reduction in crime.

Demerits:

  • The burden of changing the currency is on the citizens. Currency exchange costs more. As economic growth declines, more money has to be spent in changing currency.
  • Cash-strapped sectors/businesses are negatively impacted. Micro and small enterprises are examples of this. The threat of digital forgery / cyber crime increases.

Source – The Hindu

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