The government’s note ban proposal has no legal flaws, according to the Supreme Court.

The Supreme Court ruled on Monday that the government’s contentious 2016 move to withdraw all high-value currency notes from circulation had no legal or constitutional flaws. In a 4:1 majority ruling, the Supreme Court stated that the decision-making process could not be blamed simply because the procedure was initiated by the government rather than the Reserve Bank of India (RBI), or because prior such occurrences were preceded by legislative authorization.

In what may come as a comfort to the administration, the Supreme Court opted not to comment on the “wisdom” of the decision, stating that it was irrelevant whether the government’s aims for the action were met or not.

“The (demonetisation) notice (issued on November 8, 2016) fulfils the test of proportionality and, as such, cannot be knocked down,” a five-judge Constitution bench led by Justice SA Nazeer wrote in a 258-page decision.

On the surface, it appears that the primary aim of reducing cash in circulation (CIC) and so conducting a direct assault on black money has not been met. Contrary to popular belief, 99.3% of the invalidated notes were returned by the public, despite the fact that a significant portion would have been destroyed by alleged tax evaders. CIC was at Rs 32.42 trillion, or 12.6% of GDP, as of December 23, 2022, according to RBI statistics, up from Rs 18 trillion, or 11.7% of GDP.

The day demonetisation was declared was November 8, 2016.

Though tax collections and buoyancy have increased slightly faster than the trend for various periods following demonetisation, most notably in FY22 following the outbreak, the government has provided no persuasive evidence to link this to the controversial decision. Furthermore, the economic cost of the change has been estimated to be significant in terms of missed growth rate, in addition to unquantifiable human sorrow.

However, digital payments have increased significantly, with UPI transactions growing from Rs 100 crore in the month of demonetisation to Rs 12.82 trillion in December 2022.

Justice BV Nagarathna gave a dissenting ruling, where she characterised the move to withdraw 500 and 1,000 rupee notes “unlawful” and “vitiated, although being “well-intentioned”. She believes the initiative should have been debated in Parliament and implemented through legislation. “.The initiation of the demonetisation process and the exercise of power emanates from the Central Board of the Financial institution, which has to recommend to the Central Government, and the latter could accept the suggestion and in such event it would issue a gazette notice,” the dissenting judge noted, noting that the method was “started” by the Centre in the present case.

The judgement, however, had a legitimate link with its aims, such as removing black money, terror funding, and so on, according to the majority opinion. The court also stated that the 52-day deadline for exchanging demonetised notes for legal cash was “not unreasonable” and that it could not be extended presently.