Cash Crunch: How Will India’s Supreme Court Respond to Modi’s Radical Move?

Last November 8th, the same day the United States elected a kleptocrat to its highest office, an executive on the other side of the world—Indian Prime Minister Narendra Modi—launched what Larry Summers called “the most sweeping change in currency policy that has occurred anywhere in the world for decades.” Prime Minister Modi’s surprise “demonetization” drive gave citizens fifty days to exchange all 500 and 1000 rupee notes (valued at about 8 and 15 USD respectively). Modi’s radical move, which will remove approximately 86% of all currency in circulation, is an attempt to combat endemic petty corruption, money laundering, terrorist financing, and tax   evasion (only 2% of Indians pay income tax). Prime Minister Modi was elected on an anticorruption platform in 2014, and pledged during his campaign to target hidden cash (so-called “black money”). Yet the demonetization campaign came as a surprise. Indeed, it probably had to be a surprise, lest those hiding fortunes in cash would have been able to prepare for the policy change.

While the Indian public generally supports aggressive anticorruption efforts, it would be hard to exaggerate the disruption resulting from demonetization. The real estate and wedding industries run largely on cash, as do most small businesses. And the demonetization program has hit regular citizens hard: People have been waiting in lines for hours to exchange their cash, which can be especially difficult for the four-fifths of women who don’t have a bank account. In the short term, consumption, the stock market, and growth forecasts have all plummeted and the agricultural sector is expected to suffer as well. Prime Minister Modi acknowledged the campaign would cause pain for many honest people, but believed it was worth it, stating that black money and “corruption are the biggest obstacles in eradicating poverty.” (Since then, the official justification for the campaign appears to have shifted to an attack on the cash economy as a whole, rather than a campaign against black money specifically.)

The fate of the demonetization program now lies with India’s judiciary:

Just two days after the demonetization program was announced, four petitions were filed directly to the Supreme Court, challenging the abruptness of demonetization and the collateral suffering it has caused. The petitioners sought to halt the demonetization process due to the impending chaos. While the Court did not order a stop to the policy, it did ignore Prime Minister Modi’s appeals and refused to block lower court cases challenging demonetization, noting the judiciary could not accurately measure the magnitude of the crisis if access to the courts were limited. In late November, the Supreme Court described demonetization as “carpet bombing” but gave the government time to file an affidavit justifying the campaign. On December 9th, the Attorney General once again went before the Court to argue that it should not interfere with policy and the government was taking all necessary measures to ease inconveniences while bringing to light the illegal, parallel economy. On December 16th, a three-Justice bench chose not to order a pause to demonetization, but referred nine questions on the constitutionality of demonetization to a five-judge bench and consolidated all other, pending demonetization cases in the lower courts. Since the deadline for exchanging old bills has recently passed (December 31st), it is unclear how a future court decision would provide relief.

The referral order and nine constitutional questions are striking in their breadth. Some of the questions concern equality before the law, no doubt because of allegations that some were tipped off before the official announcement. Another challenge asserts that the program represents an unconstitutional taking of private property. A third asks whether political parties have the right to constitutional remedies. But the most significant question, at least for anticorruption advocates, concerns the relationship between the judiciary and the political branches. At multiple stages, Modi’s Attorney General has argued that demonetization is a matter of monetary policy and is therefore beyond the scope of judicial review. Thus, while the Court decision will not settle the debate over whether demonetization decreases systemic corruption, the case presents a fundamental issue regarding the relationship between the court and the government, and the Supreme Court may ultimately have to decide whether the constitution limits the ability of the political branches to undertake aggressive anticorruption initiatives. The Court faces a difficult balancing act: it must interpret constitutional provisions to protect citizens, give the elected branches some freedom to fight corruption, and also set some limit on what counts as anticorruption policy.

As the Supreme Court deliberates on demonetization’s constitutionality, it should keep in mind that it is balancing multiple public interests: to check petty corruption and to limit public suffering. On the one hand, the demonetization campaign seems to be a legitimate, although perhaps ill-advised, effort to combat systemic corruption, and the Court should be reluctant to interfere. As long as demonetization did not unconstitutionally trample citizens’ rights, the court should not declare the old bills to be legal tender. On the other hand, the Court should not agree with the Attorney General and find that demonetization is a monetary policy entirely beyond judicial consideration. Often, powerful parties and individuals have a tendency to wield accusations of corruption in order to take out opponents. Therefore, the court should confirm the motivation of the campaign, even if it cannot accurately weigh its long-term effectiveness. If the Court were to decide that monetary decisions, labeled as anticorruption measures, are categorically beyond its jurisdictional reach, the Court might set the stage to allow future governing parties, shielded by anticorruption rhetoric, to seize opponents’ assets.

The Court can provide balance to the radical campaign with a measured response, and allow political checks to play their proper role. If the citizenry deems demonetization to be overly aggressive, they will vote Modi out. However, to the surprise of many, the general population has been remarkably accepting of the campaign, a testament to the importance they ascribe to anticorruption efforts, even such poorly executed ones.

3 thoughts on “Cash Crunch: How Will India’s Supreme Court Respond to Modi’s Radical Move?

  1. This is internal ramification of demonetization. There are external ramifications as well. Indian currency is freely available in countries like Nepal, Bhutan, Bangladesh and many more countries. The fate of the money is unknown. As for example, in the formal channel, the Government of Nepal has declared Rs34 million in Indian Currency, however, the unofficial estimate indicates from Rs10-15 billion with Nepali people as personal holdings. Millions of Nepali people are working in India and they carry back money in hard currencies. The people without bank accounts suffer. Moreover, there is already a black market for exchanging Indian and Nepali rupee notes – less for selling and more for buying Indian rupee. Sounds it is not just the corruption that hits hard on poor people, anti-corruption is also hitting hard on poor people.

  2. It is a revolutionary attempt to conduct raids on fake tones and inland black-money of Indian currency. Modi-government is a very much rightist administrative venture which is vivid in all activities of political and administrative point of views, without any basic change of previous governments. BJP is the party of major religious-political organization with Hindutava-ideology to impose in constitutional forms directly against secularism- Muslims and Christianity mainly. The BJP-party beholding major part of corruption and inland black-money business holders. BJP-party’s major organizations, RSS, Bajrang-Dal like unconstitutional organizations are patronized by the illegal donations from the said Hindu-business section which is a most corrupt-part and illegal parallel economy handlers.
    From such a most unfortunate governmental environment, a socialistic approach from the Modi-government was inevitable attempt to survive only in international business and growth parameter.
    Still peoples are welcoming the demonetization with all kind of suffers to fresh Indian economy and to help the economy a transparent one. After 50-days, we are apolitically trying to understand what actually going on. We are actually confused as the ruling BJP-party is in full swing in their party-accounts and property. The major corrupt business sectors are well saved from block-money operation.
    Common peoples dissatisfied with with the government’s role to catch-hold the known and major corporate sectors, which regulate all illegal activities in black-money concern. Government has gained a good information and data for next use in anti-corruption measure to crackdown the culprits, if only Modi-government want to do. Court has little scope to address this government’s mobilization.
    So far, it is the most advanced political stunned, nothing else.

  3. Was thinking why demonetisation was not covered by Prof Stephenson and his team. Interesting piece came finally. As a journalist with 20 years in covering Indian politics and governments, it will be interesting to see this demonetisation and its impact.
    I read Mr Summers’ blog which, in the end, showed a bit haste to arrive at conclusion. This, I feel is wrong, Demonetisation, though an economic action, is connected with black money accrued through evasion of tax and corrupt and unethical practices. This point was missed by almost 99 per cent of writers in India. They tend to look at this through the prism given by opposition parties or the ruling party. Is there a way to look at it differently (other than Mr Summers’ view)
    Yes. So, it can be a coercive disruption. No doubt. If any one who studies the Indian society through the mainstream Indian media, tend to loses the sight on realistic inputs
    In a country like India (i guess it applies to countries like the US too), top one or two percent people will get away with every possible scrutiny of law no matter who is in power (read as left, left-to-the-centre or right-wing parties). So, the argument that top one percent was not affected does not hold good.
    Then what purpose does it serve?
    Barring IT and a few other indusies a large (means large) chunk of service sector runs on black money.
    So the media crying over farmers losing crop or not getting price was not due to demonetisation. It is a tactic adopted by commission agents (have crossed this before writing here) who are the big hoarders of black money throughout the country. They want to arm twist farmers to come through old channels by way of creating panic in the media so that they can continue making black money.
    Certainly, huge chunk of businessmen across the country lost black money. No doubt.
    Then, people undergoing pain?
    For people like Summers, right of citizen is paramount. In a country like India, where democracy and fair just governance is still a dream, lower middle class and middle class people are happy with the government’s decision. Because, they keep seeing the extortionists everywhere and for the first time they see the sullen faces of these errand people.
    Does it stop corruption and unethical practice in society and in government. No.
    The government should show commitment to be fair, transparent first. Then it should act on gold and real estate sectors which many believe, is the sanctury of black money. Concurrently, it should push for less cash transaction. then perhaps a semblance of order could be seen in the society.

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