I promise to pay the bearer the sum of X Rupees, declares the RBI governor on every Indian bank note. As fiat currency, it is the state’s guarantee that makes these pieces of paper a legitimate medium of exchange. This contract between the state and the citizen was broken, at least partially, on November 8 when Prime Minister Narendra Modi announced that the 500 and 1,000 rupee notes hoarded by “anti-national and anti-social elements” are now “just worthless pieces of paper”.
The Centre’s move rendering 86 per cent of the currency invalid raises serious legal and institutional questions. Can the promise made by the RBI governor be rescinded by the government in such a manner? Further, can the Centre restrict a citizen’s right to withdraw their own money? In this article, I examine how the demonetisation policy deinstitutionalises the state as it undermines the rule of law and instead seeks to legitimise public policy through charismatic authority. Demonetisation and the rule of law: One of the prerequisites of a state governed by the rule of law is that legal and institutional norms are stable, clear and predictable.
Decision-making cannot be impetuous or arbitrary. But unlike previous instances of demonetisation in 1956 and 1978, the latest move by the government has come via an executive and not a legislative action. The notification for cancellation of the legal tender status of the notes (the Attorney General seeks to distinguish it from demonetisation) was issued under Section 26 (2) of the RBI Act. This provision states that the Centre can, “on recommendation of the Central Board” of RBI, declare that “any series of bank notes of any denomination shall cease to be legal tender”. Hence, the government has to demonstrate with documentary evidence that the decision was indeed taken as per the advice of the RBI and not by the whims of the prime minister. There is also no clarity regarding the legal basis on which limits and conditions were placed on cash withdrawals. The RBI Act does not have any such provision.
Article 300A of the Constitution provides that right to property can only be restricted by the authority of law. Since bank notes are movable property, any restriction on its access must be provided by law. However, demonetisation was carried out without issuing an ordinance or amending any law. Further, for people without bank accounts, demonetisation amounts to compulsory acquisition of property without provision for compensation as their old currency is no longer exchangeable. Since the launch of demonetisation, there have been multiple policy somersaults which further raises legal questions. For example, while the notification clearly states that old 500 and 1000 rupee notes can be exchanged until December 30, on November 24, the government abruptly declared there will no longer be any exchange. Such U-turns go against the doctrine of legitimate expectations, an essential principle of the rule of law which provides that people have a legitimate right to expect a public authority to honour a promise or policy proclamation. – The New Indian Express, 15 December 2016
» Mathew Idiculla studied law at Christ College and is currently a fellow at the Law, Governance and Development Initiative at Azim Premji University, Bangalore. His research interests are in the field of constitutionalism, Indian democracy, public policy and urban governance.