A version of this article first appeared on the author’s blog, Indian Constitutional Law and Philosophy, and has been published with permission.
In its judgment – Vivek Narayan Sinha vs Union of India – delivered on January 2, the Supreme Court upheld the demonetisation policy by a 4-1 majority.
This article analyses some of the features of the judgment(s).
The relationship between the government and the central bank
As we have discussed previously, at the core of the case was the interpretation of Section 26(2) of the RBI Act, which states, in relevant part, that “on recommendation of the Central Board the [Central Government] may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender.”
Two issues arose. The first was whether the phrase “any series” included all bank notes of a certain denomination (e.g. Rs 500 or Rs 1000).
The second was: what role did the phrase “on recommendation of the Central Board” accord to the government?
As we have discussed previously, the government’s response to these two issues set up an internal contradiction in its own case.
The petitioners argued – among other things – that if “any series” included “all series”, then the section suffered from excessive delegation, as parliament had provided no guidelines or principles on the basis of which such extensive action could be carried out.
The government responded by saying that the very presence of the central bank – an independent body comprising of experts, whose status under the RBI Act was higher even than parliament – in Section 26(2) was sufficient.
But when it came to the phrase “on recommendation” – where the petitioners argued that if central bank independence meant anything, it meant that the recommendation would have to be initiated by the bank – the government switched tracks and downgraded the central bank’s role to “collaborating” with the executive.
Unfortunately, the majority opinion – which spends the better part of 259 pages reproducing the government’s arguments and then agreeing with them – replicates this internal contradiction.
With respect to the interpretation of the phrase “any series”, the majority holds that “pragmatic interpretation” requires it to find that “any” means “all.” As an interpretive argument, this is fair enough. But, having held that a power of this nature – and this extent – vests in the executive, one would then expect the majority to engage seriously with the excessive delegation argument. It does not do so. After citing a plethora of cases on excessive delegation, the majority holds – in paragraph 203 – that: “we, therefore, find that there is an inbuilt safeguard in sub-section (2) of Section 26 of the RBI Act inasmuch as the Central Government is required to take a decision on the recommendation of the RBI.”
The majority therefore agrees with the government’s argument that the protection against excessive delegation is found in the fact that an independent, autonomous, and technical body – charged with managing currency in India – is the body that will recommend demonetisation.
Now, on its own terms, this is a dubious argument: the doctrine of excessive delegation is meant to preclude the legislature from outsourcing its essential functions of lawmaking to other bodies, of whatever kind they may be. But let us, for the purposes of argument, take this point on its own terms.
In paragraph 205, the majority does ask the correct question: that the question of whether the RBI Act provides adequate guidance to the delegate, or not, has to be determined by examining “the express provision empowering delegation or the other provisions of the statute, the preamble, the scheme or even the very subject-matter of the statute.”
Having said that, you would then expect the majority to highlight some of these “express provisions”, or the “preamble”, or the “scheme”, or the “subject matter” that provide adequate guidance. However, the majority does not do so. It does not refer to a single provision, or the preamble, or the scheme, or the subject matter, to demonstrate what the legislative guidance to the delegatee is. It does not do so because of course, as anyone who reads the RBI Act will see, there is no guidance. Instead, therefore, the majority retreats once more to the presence of the central bank and its “experts” as the safeguard against excessive delegation.
Having made this brief – and abortive – attempt to engage with the real issue, the majority then holds in paragraph 208, that the delegation under the RBI Act is “the delegation is made to the Central Government and not to any other body.” It then holds that the Central Government is “the highest executive body of the country,” which is responsible to Parliament, who – in turn – are the representatives of the people. For this reason, again, it holds that section 26(2) does not suffer from excessive delegation.
This is both mystifying and badly wrong.
Up until paragraph 203, the argument seems to be that section 26(2) does not suffer from excessive delegation because of the presence of a technical, expertise-filled, autonomous body like the RBI. The underlying premise here is that demonetisation (as an aspect of currency management) is a technical issue, and the “guidance”, therefore, will come from a technical body; consequently, the guidance need not be in the legislation itself, as it is the RBI that will formulate it, keeping in mind its technical and autonomous status.
But then, in paragraph 208, we see a complete flip: section 26(2) is fine because the delegate is the highest political body in the country. But if that is the justification, then the doctrine of excessive delegation bites back with a vengeance: the whole point of the doctrine is that the legislature is not meant to delegate essential lawmaking functions, to administrative bodies such as the executive.
The majority’s argument that the executive is answerable to parliament gets Constitutional Law 101 wrong: it confuses democratic legitimacy with the separation of powers.
The majority, thus, sets up two contradictory premises within the same argument: that section 26(2) is fine because the essential legislative task has been delegated to an independent, technical and autonomous body, but also, it is fine because the ultimate delegate is the political executive.
It is here that Justice Nagarathna’s dissent is instructive, because she recognises this fundamental dichotomy.
Justice Nagarathna therefore draws a distinction between two kinds of demonetisation: demonetisation that is a simple function of currency management, and demonetisation that is undertaken to serve legitimate political goals (in her view, these include dealing with black money, terror financing etc).
She then argues Section 26(2) is only meant to deal with the first kind of demonetisation, and that for this reason, the word “any” is not intended to include “all.” The contrary interpretation would mean that Section 26(2) did suffer from the vice of excessive delegation, as – Justice Nagarathna correctly recognises – neither the provision nor the Act contains any legislative guidance.
In essence, therefore, Justice Nagarathna’s argument is this: if you are going to argue that Section 26(2) is fine because of the presence of the central bank, then you must limit its scope to the limited, technocratic, currency-management demonetisation that the central bank is competent to make recommendations on.
Wholesale demonetisation – that removed 86% of the currency, as the 2016 demonetisation did – in express service of stated political goals – cannot be done within the remit of Section 26(2).
Does this mean that wholesale demonetisation – as in 2016 – is impossible? Of course not. Pointing to the two previous instances of demonetisation in our history, Justice Nagarathna holds that if the government does want to engage in that kind of demonetisation, it must be through legislation: Parliament – as the representative of the People – must be involved (and if speed and secrecy is of the essence, the Ordinance route is always possible).
And this makes eminent sense: if indeed the goals are tackling black money and terror financing, then these are exactly the kinds of things that Parliament should be debating. Justice Nagarathna’s dissent, therefore, is a powerful argument against the increasing drift to the Imperial Executive that we have been seeing in recent times, and that has – regrettably – been enabled by multiple judgments of the Supreme Court.
The ‘independent’ central bank
The majority’s internal contradictions are further heightened when it comes to the interpretation of “on recommendation of the Central Board.”
The key question – whether the proposal under Section 26(2) has to be initiated by the Bank or whether it can also be initiated by the government – comes down to what role the Bank has under the scheme of the RBI Act.
Here again, the majority essentially reproduces the government’s argument that there has to be “consultation” between the RBI and the government as a precursor to the recommendation under Section 26(2) (paragraphs 239 and 243).
And once again, we have the two parts of Section 26(2) at war with each other: Schrodinger’s RBI is simultaneously both independent and autonomous enough that parliament can leave demonetisation to it without any legislative guidance, essentially making it – as the government itself argued in its affidavit – equal to or even higher than Parliament in this domain; but simultaneously, the process not only permits, but is entirely saturated by executive entanglement.
The majority, thus, simultaneously upgrades and downgrades the RBI, and picks and chooses whichever version justifies the government’s argument at whichever time. Previously, on this blog, we have referred to this as a ‘constitutionalism of convenience.’
The dichotomy is, once again, recognised in Justice Nagarathna’s dissent, when she notes that under a Section 26(2) demonetisation, the initiation has to be by the central bank, otherwise the basic logic of the section fails; and under the basic principles of the rule of law, if it is prescribed that something must be a done in a certain way, it must be done that way, or not at all.
There are some instructive parallels here with the Kenyan Supreme Court’s judgment in the BBI Case, which considered the question of whether the President of Kenya could initiate a constitutional amendment through a “popular initiative route.” The Kenyan Supreme Court held that while the President had other routes to initiate constitutional amendments, he could not take over a legal pathway that specifically contemplated that another body – in this case, the People – would commence the process.
Underlying Justice Nagarathna’s dissent is the insight that if the central government is vested with the power to initiate demonetisation under Section 26(2) – what the majority euphemistically refers to as “consultation” – central bank independence has essentially become a fig leaf.
We now come to the process itself. This part of the majority’s judgment is riddled with conceptual errors and confusions, but before we go there, it is important to reiterate just how deeply irregular and problematic the apex court’s approach to this issue has been.
The documents on the basis of which the majority gives a clean chit to the government were secret documents, submitted after the hearing was over. The petitioners were given no chance to see or respond to them. The public has not seen them (other than a couple that were published by the newspapers). But nonetheless, the majority assures us that everything is fine, and that on the basis of the documents that it has seen, the RBI evidently applied its mind and acted independently when recommending demonetisation.
In a constitutional democracy, the judiciary’s only source of legitimacy is the exercise of public reason. Public reason demands that (barring a few exceptional cases), a judicial order set out the legal basis of the holding, and the facts that underly the reasoning. If the facts and evidence are secret, then it is no longer public reason.
Not only have the petitioners been deprived of a opportunity to fairly argue their case, but the Supreme Court has also completely shielded itself from any scrutiny of its own judgment: if we don’t know the basis on which the Supreme Court has held in favour of the government, we have no way of examining its reasoning, or scrutinising whether it stands up to accepted standards of legal and factual analysis.
It is the judicial equivalent of me asking you for a source for your claim that Lionel Messi is going to play for Manchester United, and you answering: “trust me, bro.” That may be good for football banter, but it is not good for a constitutional court.
What is further problematic is that in paragraph 236, when discussing whether the quorum was made out, the majority refers to an affidavit filed on December 6, 2022. The record of the proceedings shows that judgment was reserved on December 7, 2022. So essentially, the majority relied on an affidavit filed by the government one day before the hearings got over, and which the petitioners had no chance at all to address.
Now, if you’re going to do this sort of thing, why engage in the farce of a month-long hearing? Why waste so much judicial time on listening to oral arguments? You can just ask the government to (secretly) submit its documents (in a sealed cover), and write an order based on those documents. It would simply save everyone’s time, and the outcome would be the same in any event.
Moving on, though, let us come to the majority’s legal analysis. As I have said earlier, it is impossible to assess the majority’s application of the law to the facts, as the facts are secret, so we must limit ourselves to the legal standard. The majority first applies the Wednesbury standard of irrationality (paragraph 226) to hold that “upon perusal of [the secret] material on record, we are of the considered view that the Central Board had taken into account the relevant factors” when recommending demonetisation. It then holds that whatever hardships caused by the policy were irrelevant, as “every noble cause claims a martyr” (paragraph 257) (more on this in a moment). H
aving said that, however, the majority then inexplicably goes on to write a full section on whether demonetisation failed the test of proportionality. This is baffling. Wednesbury irrationality and proportionality are two very different legal standards. You use one or you use the other. You can’t use both, because Wednesbury irrationality is partially contained within one of the prongs of the proportionality standard (rational nexus with objectives).
So, which is the correct standard? We do not know.
The proportionality test
However, having invoked proportionality, the majority goes on to make a dog’s dinner of it. In paragraph 273, it asks:
Can it be said that demonetizing high denomination bank notes of Rs.500/- and Rs.1000/- does not have a reasonable nexus with the three purposes sought to be achieved? We find that there is a reasonable nexus between the measure of demonetization with the aforesaid purposes of addressing issues of fake currency bank notes, black money, drug trafficking & terror financing. As such, the second test stands satisfied.
But what is the reasonable nexus? The court undertakes no analysis. Its argument literally takes the form: “Can it be said that A is not B? We find that A is B. QED.” What kind of reasoning is this?
And what it makes it worse is that the RBI’s own documents (see pages 707-709) state that prior demonetisation attempts did not succeed in tackling the problem of black money; consequently, the argument that there was no rational nexus between the policy and the goal – and argument that, incidentally, has been borne out by history – deserved serious analysis, not bombastic rhetoric.
The majority’s reasoning is even more non-existent when it comes to the third prong of the proportionality test, which is that the measure must be the least restrictive alternative available to the State. The third prong is the one that, in theory, has the most bite, as it requires the state to justify why it picked a more restrictive alternative out of a range of possible ones.
The majority however, turns this completely on its head, by holding that “what measure is required to be taken to curb the menace of fake currency, black money and terror financing would be best left to the discretion of the central government, in consultation with the RBI” (paragraph 274). Now, this is in no way an application of the proportionality standard – it is a reverse of the proportionality standard, which – even in its most relaxed form – requires some justification to be provided by the state.
As far as the fourth prong of the test goes, the majority chooses not to apply it at all.
The fourth prong requires a balance between the importance of the goal and the extent of the restriction. It is here where the “hardships” of demonetisation – and where the majority is so anxious to make martyrs out of human beings – is legally relevant: if you remove 86% of the currency in one fell swoop and unleash severe hardship upon people in terms of their lives and livelihoods, then the proportionality test requires you to justify that that level of hardship is proportionate to the goal.
Instead of engaging with the issue, however, the majority once again takes refuge in rhetoric. Indeed, it goes further. When considering the second prong, it merely asked: “can it be said?” Now it asks: “can it really be said that there is no proper relation between the importance of curbing the menace of fake currency, black money, drug trafficking & terror financing on one hand and demonetizing the Rs 500 and Rs 1000 notes, thereby imposing restriction on the use of demonetized currency?”
It’s no longer just “can it be said?” It’s now “can it really be said”? The “really” has changed everything.
We can therefore see that while purporting to apply proportionality, the majority does nothing of the sort. It either gets the legal standard wrong, or refuses to apply it, substituting analysis with “can it be said?” and “can it really be said?”
Indeed, this is of a piece with the rest of the judgment: wherever you look for reasoning, what you find is rhetoric and a refusal to seriously engage with the crucial constitutional issues that this case raised.
It is worth briefly flagging Justice Nagarathna’s analysis of process. In a section titled “Affidavits and Records of the Case”, Justice Nagarathna observes that the RBI’s own documents show that it was the government that “recommended” demonetisation, that a draft scheme was being made “as desired” by the government, and that a recommendation had been “obtained” from the bank for this (paragraph 17).
She also notes that the documents show a conflict between the bank’s goals for demonetisation and the government’s, showing that the so-called “consultation” was illusory (paragraph 17.8); and that furthermore, the records showed that the hurry in which these communications were exchanged (in under 24 hours) – clearly pointing to an absence of application of mind by the bank (paragraph 19).
These observations are important, because they show us precisely what we miss when decisions are based on documents submitted to the apex court in a sealed cover.
Had there been no dissenting opinion, the majority’s glossing over of some truly damning evidence about procedural flaws underlying demonetisation would have remained glossed over. It is worth repeating that a judgment based on secret evidence is no judgment at all: it fails the most basic tests of the rule of law in a constitutional democracy.
‘Every noble cause claims its martyr’
In paragraph 257 of its judgment, the majority – citing previous precedent, with approval, quotes, “Every noble cause claims its martyr”, to dismiss the petitioners’ arguments about the hardships caused by demonetisation.
Lest you think this is a clumsy euphemism, it is worth remembering that in the week after demonetisation, thirty-three people died. These people – human beings – died while waiting in interminable bank queues to withdraw their money, they died by suicide because their money had become worthless, and children died because hospitals or ambulances refused to accept 1000 rupee notes.
A martyr is someone who voluntarily suffers death because of their adherence to a faith or a belief.
The majority now tells us that all these people who died – including infants – sacrificed themselves as martyrs in service of the great religion of demonetisation. They did not die because of state failure and governance failure, no, they sacrificed themselves instead.
In so saying, the majority does not simply demonstrate callousness and a disregard for human life. It does the worst thing one can do: it denies the dead the dignity of honestly acknowledging how and why they died, and tries to wrap them up in the tattered flag of martyrdom instead. Long after the dust has settled on this case, and long after demonetisation is itself a memory, this line will remain an indelible stain in judicial history.