New Delhi: Demonetisation of the high-value currency notes of Rs 500 and Rs 1,000 did not have any discernible impact on currency in circulation in the country, which has soared by almost 83% since November 8, 2016.
The Supreme Court on Monday, January 2, upheld the decision of the government on demonetisation.
On November 8, 2016, Prime Minister Narendra Modi announced the demonetisation of old Rs 1,000 and Rs 500 bank notes. Among the objectives that the government claimed the move would have was promoting digital payments and curbing black money flows.
However, the news agency PTI, citing Reserve Bank data, reported that the currency in circulation, in value terms, soared from Rs 17.74 lakh crore on November 4, 2016, to Rs 32.42 lakh crore on December 23, 2022.
Soon after demonetisation, the currency in circulation fell precipitously to a low of about Rs 9 lakh crore on January 6, 2017, nearly 50% of Rs 17.74 lakh crore on November 4, 2016.
This was the lowest in the past six years following the scrapping of old bank notes that accounted for around 86% of the total notes at that time, the PTI report said.
Compared with January 6, 2017, the currency in circulation has seen a more than threefold or 260% jump, while from November 4, 2016, it has seen about 83% jump.
As remonetisation gathered pace, the currency in circulation moved up week after week and reached 74.3% of the peak by the end of the financial year.
Cash is still king
As per the report, demonetisation led to a decline in the currency in circulation by about Rs 8,99,700 crore (up to January 6, 2017) resulting in a large increase in surplus liquidity within the banking system.
However, the currency in circulation rose to Rs 32.42 lakh crore at the end of December 23, 2022, as compared to Rs 31.33 lakh crore at the end of March 31, 2022.
Since demonetisation, the currency in circulation has seen an increase barring the year of demonetisation. It contracted by 20.18% to Rs 13.10 lakh crore at the end of March, 2016 from Rs 16.42 lakh crore at the end of March 31, 2015.
In the following year of demonetisation, it jumped by 37.67% to Rs 18.03 lakh crore and surged 17.03% to Rs 21.10 lakh crore at the end of March 2019 and 14.69% to Rs 24.20 lakh crore at the end of 2020.
In the previous two years, the pace of the currency in circulation growth, in value terms, was 16.77% to Rs 28.26 lakh crore on March 31, 2021, and 9.86% to Rs 31.05 lakh crore at the end of March 31, 2022.
The top court’s decision
Asserting that the decision-making process behind demonetisation was not flawed, the Supreme Court in a 4:1 majority verdict upheld the government’s 2016 decision. The majority judgment noted that the move, which came six years ago, had ‘reasonable nexus’ with the objectives it sought to achieve and that it is ‘not relevant whether the objective was achieved or not.’
The bench headed by Justice S.A. Nazeer, who will retire on January 4, and comprising Justices B.R. Gavai, B.V. Nagarathna, A.S. Bopanna and V. Ramasubramanian has heard 58 petitions challenging the decision.
Justice Nagarathna, however, dissented from the majority judgment on the point of the Union government’s powers under Section 26(2) of the RBI Act and said the scrapping of the Rs 500 and Rs 1,000 series notes had to be done through legislation and not through a notification.
“Demonetisation of all series of notes at the instance of the central government is a far more serious issue than the demonetisation of particular series by the bank. So, it has to be done through legislation,” she said.
“Parliament should have discussed the law on demonetisation, the process should not have been done through a gazette notification. Parliament cannot be left aloof on an issue of such critical importance for the country,” she said.
She also said there was no independent application of mind by the RBI and only its opinion was sought, which cannot be said to be a “recommendation”.