Demonetisation of 500 and 1000 Rupee Banknotes in India

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“Demonetisation is not the end but beginning of a long deep and constant battle against black money and corruption. It will benefit the poor and the common man.

The poor and the lower and middle classes have suffered the most due to black money, counterfeit currency and corruption”.

Shri Narendra Modi, Prime Minister of India

“On November 8, 2016, the demonetization of Rs.500 and Rs.1000 banknotes were announced in India, although critics rated it as a useless exercise or monumental error, and it is one of the few movements that have forced the money black float openly. Black money grew and prospered despite the long list of laws to deal with an equally broad list of law enforcement agencies and periodic voluntary disclosure schemes.

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Currency in circulation in relation to GDP of 11.6% if it is applied to the estimated size of the shadow economy (30% of GDP) of Rs. 39,89,284 cr., Then the black cash money is resolved in a whopping Rs. 3,94,619 cr. By discounting the effect of demonetization by 50% leakage, the expected value of the black money to be trapped could reasonably be estimated at Rs.1,62,799cr. However, the corrupt league led by bank officials, jewelers, real estate developers, money laundering clerks worked overnight to return the black money in forbidden currency and wash in new pink Rs.

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2,000 notes while ordinary citizens remain in the long queen. Still, it should be qualified as a bold economic strategy in the fight against black money for countries that are in the lower range of the Global Corruption Index.”

Introduction

“A look at the past will make you realize that India is not new to demonetization. The demonetization has been implemented twice, -1946 and 1978, in the past.

The first currency ban took place in 1946, the monetary note of Rs.1000 and Rs.10,000 was removed from circulation. The prohibition did not really have much impact, since the currency of such a high denomination was not accessible to ordinary people. However, both notes were reintroduced in 1954 with an additional introduction of Rs.5,000 in currency.

The notes of Rs.500 and Rs.1000 were introduced in 1934 and, after four years in 1938, the notes of Rs.10,000 were introduced.

The prohibition of the second currency took place in 1978; the then prime minister of India, Morarji Desai, announced the ban of the currency, leaving Rs.1,000, Rs.5,000 and Rs.10,000 out of circulation. The only objective of the prohibition was to stop the generation of black money in the country.”

Similarities in 1978 and 2016 ban:

  • Morarji Desai’s ban on notes was also aimed at expelling black money from the economy. Therefore, the Law of High Denomination Banknotes (decontamination) was implemented.
  • Narendra Modi announced that the currency ban is an address that was broadcast on all news channels. Similarly, Desai announced the banning of the radio, after which the banks closed the next day.
  • Both matters were kept confidential.

Differences in the ban:

  • Unlike Modi, Desai did not have the backing of the Governor RBI. The Governor I.G. Patel believed that the ban was being implemented simply to immobilize the funds of the opposition party. Patel also believed that people never store black money in the form of currency for too long.
  • It did not have much effect on people and affected only a few privileges. While the recent ban had shaken the entire country.

Returning to 2016, there is also a rumor that smaller denomination currency bills, such as Rs.50 and Rs.100, will also be replaced by the incorporation of new features and design. And that reminds us of an incident that dates back to the early 70s, when there were rumors that the Rs.100 note was withdrawn from circulation, and immediately saw a crowd of people running to the banks to exchange their currencies of Rs.10 and Rs.20.

How Demonetisation?

The demonetization of the currency means the discontinuity of the particular currency of circulation and its replacement by a new currency. In the current context, it is the prohibition of banknotes of 500 and 1000 denominations as currency of legal tender. Demonetize, according to the Oxford Dictionary means ‘Deprive (a coin or precious metal) of your state as money.’

The declared objective of the government behind the demonetization policy is the following: First, it is an attempt to free India from corruption. Secondly, it is done to stop the black money, the third to control the rising price increase, the fourth to stop the flow of funds towards illegal activities, the fifth to make people responsible for each rupee they own and pay the tax return. Finally, it is an attempt to make a cashless society and create a digital India.

Legal Provision:

Legal provisions regarding the powers of the RBI in the prohibition of currency:

  • Section 26 (2) of the RBI Act grants powers to the Central Government to declare illegal any series of banknotes of any denomination. Section 26 (2) of the RBI Act reads as follows:
  • ‘On the recommendation of the Central Board, the Central Government may, by notification in the Official Gazette of India, declare that, from the date specified in the notification, any series of banknotes of any denomination shall cease to be legal currency, keep in the office or agency of the Bank and to the extent specified in the notification: ‘
  • Therefore, the Central Government, in exercise of its powers under Section 26 (2), the notification declared the value of Rs. 500 and 1000 will cease to be legal tender as of 09.11.2016.
  • Section 21 of the Banking Regulation Act, 1949, grants power to the Reserve Bank in the formulation of policies to control the progress of banking companies in the public interest.
  • In addition, Section 35-A of the Banking Regulation Act of 1949 empowers the RBI to issue instructions to banks in the public interest to ensure that the interests of depositors are not compromised.

In relation to the question of constitutional gaps in demonetization, the Supreme Court has been faced with questions about whether the notification of November 8, 2016 violates Articles 14, 19 (1) (g), 73 and 300-A of the Constitution of India.

  • The Indian constitution promises a property right. Article 300A establishes that no person shall be deprived of his property, except by the authority of the law, that is, by an Ordinance or Law of the Parliament. The fact that the administration has not issued an Ordinance restricts the obligation owed to the general population. Therefore, it has been alleged that denying them the right to their property impermissibly damages Article 300A. It is rightly argued that the limits on the withdrawal of cash from bank accounts and the exchange of notes are contrary to the mandate of Article 300A. The refusal to allow people to withdraw their own cash serves as an unqualified restriction on their right to property and, by imposing limits on such exchange, the government has extinguished the right altogether.
  • In the context of the right to equality, article 14 guarantees equality before the law and equal protection of the law. According to the notification, non-bank account holders cannot exchange more than Rs. 2000. This movement has been criticized by many precisely in the field that, given the Indian scenario, a large number of people, especially in rural areas, do not have a bank account. Undoubtedly, it will magnify the sufferings of people living in villages, who may even have to resort to a direct or indirect form of black transactions in order to maintain themselves. Therefore, the notification discriminates between holders and non-holders of bank accounts and, unfortunately, speeds up the channel for a de novo transaction form in black.
  • Freedom of trade and commerce is also another consideration in this matter. Article 19 (1) (g) of the Constitution of India establishes the freedom to exercise any profession, or to exercise any office, trade or business. The neglected way of announcement and implementation of the notification has caused a high degree of suffering to the masses.
  • The right to life, sustenance and freedom is one of the most important fundamental rights. Article 21 of the Constitution of India provides that no person shall be deprived of his life and liberty, except according to the procedure established by law. The abrupt withdrawal of Rs.500 and Rs.1000 market tickets has caused a serious failure of the right to the livelihood of millions of people. Certain companies that rely exclusively on the hiring of daily / weekly employees have nowhere to turn after such a severe notification, as a result of which many are suffering a considerably high dissipation rate. The sufferings and the number of deaths have only multiplied without signs of relief. These alleged circumstances explained a serious restriction of the fundamental rights enshrined in Article 21.
  • Another argument can be made with reference to Article 73 of the Constitution of India. This article confers on the powers of the Government of the Union those matters on which Parliament has the right to enact laws, as recorded in Schedule VII. The main impediment to this power is that it must be practiced according to the law made by Parliament. In this way, when Parliament has enacted a law, power must be exercised in accordance with that law, and even when it has not, the official must not act.

In this case, there is no agreement in any law that prohibits the central government from imposing limits on the withdrawals of money from banks or the exchange of money. There is also no agreement that confers this power to another office, for example, the RBI. Therefore, there is no impediment to this power and when the central government has issued notification no. 3407, has done, as such, incompletely, not in accordance with the official power under Article 73.

The context and the subject matter of the RBI Act give the RBI the sole authority to operate the country’s currency and credit system. It gives the RBI the sole right to issue banknotes and gives power to the central government and the RBI to decide on the non-issuance of banknotes. These powers extend to all banknotes and not just for some banknotes. Therefore, the power of the RBI and the central government to decide the legal tender status of banknotes should also extend to ‘every’ or ‘all’ series of banknotes and not just to ‘some’ or ‘one’ series. Consequently, demonetisation of all Rs.500 and Rs 1000 banknotes is consistent with Section 26(2), provided that the government is able to demonstrate that this was done based on a recommendation made by the RBI’s central board of directors.

Next if we take into consideration the restriction on cash withdrawal from bank, ordinarily we will observe that restrictions on cash withdrawals cannot be imposed. However, the situation when demonetisation happened was different. It was obvious that scrapping the legal status of 86% of the available cash will result in a cash crunch. If the government has the power to declare that banknotes shall cease to be legal tender under Section 26(2) of RBI Act, then it should also have the power to do other necessary things to make demonetisation work. Therefore, imposing these restrictions, in one way, is inseparable from the government’s action under Section 26(2). To argue otherwise would render the government’s power under Section 26(2) meaningless. These restrictions can also be justified under Section 35-A of the Banking Regulation Act, 1949, which empowers the RBI to issue directions to banks in public interest to ensure that the interests of depositors are not compromised. Given the cash crunch, these restrictions would ensure that all depositors are able to access some cash for their basic needs but the longer these restrictions continue the stronger will be the argument that they are unreasonable.

Critical analysis

The RBI Law grants the RBI the exclusive authority to operate the country’s currency and credit system. It gives the RBI the exclusive right to issue tickets and grants power to the central government and the RBI to decide on the non-issuance of tickets. The circular of November 8 issued by the Ministry of Finance for the demethitation of 500 and 1000 rupee notes was based on Article 26, subsection (2) of the Reserve Bank of India Act, 1934.

The plain language of Section 26 (2) of the RBI Act shows that the government can dismember through a notification, even if in the past, as in 1978, the demonetization was done through an ordinance. The central question is whether the government can declare that ‘all’ notes of one or more denominations will cease to be legal tender. This depends on how the word ‘series’ and ‘any’ are interpreted in Section 26 (2). Since the RBI Act does not define the word ‘series’, it is not clear whether ‘series’ in Section 26 (2) refers to the broader category of the ‘Mahatma Gandhi series’ of tickets that the RBI launched in 1996. And that since then it has been replaced by the Mahatma Gandhi (new) series as of November 9 or if ‘series’ refers to the more restricted category of different serial numbers with different boxes printed on the tickets. In case the ‘series’ refers to the broader category, then the government notification does not pose any problem because ‘any’ surely includes within its scope ‘one’. However, if ‘series’ refers to the most restricted category, then it means that until November 8 there were multiple series of notes and, therefore, the government notification would be legal only if ‘any’ in Section 26 (2) means ‘each.’

The context and object of the RBI Law grant the RBI the exclusive authority to operate the country’s monetary and credit system. It gives the RBI the exclusive right to issue bank notes and empowers the central government and the RBI to decide on the non-issuance of bank notes. These powers extend to all bills and not just some bills. Therefore, the power of the RBI and the central government to decide the state of legal payment of banknotes should also be extended to all or all banknote series and not just to the ‘some’ or ‘one’ series. Accordingly, the demonetization of all Rs.500 and Rs 1000 notes is consistent with Section 26 (2), provided that the government can demonstrate that this was done on the basis of a recommendation made by the central RBI board of directors.

Next, if we take into consideration the restriction of cash withdrawal from the bank, we will generally observe that no restrictions can be imposed on cash withdrawals. However, the situation in which demonetization occurred was different. It was obvious that eliminating the legal status of 86% of the cash available would result in a cash crisis. If the government has the power to declare that the notes will cease to be legal tender under Article 26 (2) of the RBI Act, then it should also have the power to do other things necessary to make the demonetization work. Therefore, imposing these restrictions, in a way, is inseparable from government action under Section 26 (2). To argue otherwise would make the power of government under Section 26 (2) meaningless. These restrictions may also be justified under Section 35-A of the Banking Regulation Act of 1949, which empowers the RBI to issue instructions to banks in the public interest to ensure that the interests of depositors are not compromised. Given the shortage of cash, these restrictions would ensure that all depositors can access some cash for their basic needs, but the longer these restrictions continue, the greater the argument that they are unreasonable.

In the context of the demonetization of 2016, the policy was designed by Prime Minister Narendra Modi to confiscate the plunder of the corrupt through a drastic announcement overnight. Undoubtedly, it has led to several cases that caused great displeasure to the general public and had its own share of rupture between theory and practice.

The former finance minister, P. Chidambaram, observed that in the demonetization movement, the RBI earned Rs 16,000 crore, but lost Rs 21,000 crore in the printing of new notes. Former Reserve Bank of India Governor Raghuram Rajan had said he had warned the government about the short-term costs of demonetization that outweigh the long-term benefits, and suggested ‘alternatives’ to achieve the goal of eradicate black money. Kaushik Basu, India’s former chief economic adviser, explained the government’s demonetization movement, describing it as ‘a big mistake’, which was a big shock and led to a slowdown in the country’s growth rate. ‘

But, on the other hand, data show that the step of demonetization has led to tax reforms in India. This is a sign that people are leaning towards white money. The direct tax collection has increased drastically after 2016, thanks to the Income Statement and demonetization Plan. The direct collection of taxes has improved in the last two years, according to the Income Statement Plan and demonetization, according to a Crisil report. ‘This indicates a significant increase in the number of new income taxpayers,’

What is interesting to note is that direct tax collection increased even when GDP growth slowed in FY17 and FY18. The income tax growth increased from 8.2% in FY16 to 26.8% in FY17 and 21.0% in FY18. The growth of the corporate tax in the corresponding years was 5.7%, 7.0% and 16.3%, respectively.

Conclusion

The demonetization of Rs.500 and Rs.1000 notes on November 8, 2016 has become a matter of intense debate. Many countries have interrupted the production of high-value banknotes because they are often used for money laundering and organized crime. The demonetization of India is considerably different from the elimination of high-value notes, since in other countries, elimination generally involves stopping the production of high-value notes and asking banks to return such notes for destruction by the government. central bank. But in the case of India, high-value notes are still legal.

The constitutional gaps indicated by many of the juridical fraternity can also be challenged. The claim that the demonetization campaign contravenes freedom of commerce and commerce under Article 19 (1) (g) of the Constitution of India is a misleading notion for the precise reason that this freedom is subject to restrictions on The liberties of that article 19 of the Constitution of India entails. Any freedom guaranteed by article 19 may be limited to the general public interest. Another constitutional provision that has allegedly been violated is the right to property under Article 300-A and it is quite clear that there is no deprivation of property as such, but only of property that has been illegally acquired. This can be recognized as an equitable restriction.

The main legal issue was with respect to the responsibility of the Center and the Reserve Bank of India for the exchange of the demonetized Rs. 500 and Rs. 1000 notes Finally, this has been established with the approval of the Ordinance of Bank Notes Specified (Cessation of Responsibilities), 2016, which establishes the possession of Rs. 500 and Rs. 1000 notes, beyond a court, a criminal offense that imposes a penalty of up to Rs. 10,000.

Demonetization is one of the most important reasons for the tax reforms that lead to strengthening the Indian economy.

Reference

  1. https://www.freepressjournal.in/featured-blog/indias-history-with-demonetisation-from-1946-to-2016/988212
  2. https://economictimes.indiatimes.com/news/economy/policy/heres-how-rbi-managed-demonetisation/articleshow/61553415.cms
  3. https://www.magzter.com/news/919/2429/112017/npfhl
  4. https://www.financialexpress.com/economy/demonetisation-effect-direct-tax-collection-rises-dramatically-after-2016-heres-proof-in-1-chart/1184986/
  5. Black Money Counterfeits and Demonetisation An Indian Experience, by Y.P.Ghosh, Taxmann’s

Cite this page

Demonetisation of 500 and 1000 Rupee Banknotes in India. (2022, Jan 08). Retrieved from http://studymoose.com/demonetisation-of-500-and-1000-rupee-banknotes-in-india-essay

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