Does the Supreme Court demonetisation majority verdict erode the institutional autonomy of RBI?
The majority judgement by four senior justices upheld both the actions of the RBI and the government in implementing the decision to withdraw all existing notes of INR 500 and INR 1,000 and to end their status as legal tender. The minimum legal formalities required for a recommendation were followed. Post the 7 November letter of the government, a meeting of the Central Board of the RBI was convened the following day on 8 November. The quorum requirement of four directors, of which not less than three must be other than connected officials, appointed from industry, non-state entities and the local boards, was also complied with. Within hours of the end of the meeting, the gazette notice was issued and the Prime Minister announced the decision. The majority judgement focused on the mechanics of the process and concluded the measure was legally sound. All the required boxes had been ticked. It made light of the fact that section 26(2) had not been used during the earlier episodes of wholesale withdrawal of high currency notes. It rationalized that, since section 26(2) empowers the RBI only to recommend to the government, it matters little whether the proposal originated in the RBI or the government. The majority judgement quotes from Volume III of the “History of the Reserve Bank of India “how business was done at the time of the January 1978 demonetisation, when Shri Morarji Desai was prime Minister and Shri Hirubhai Patel, previously an Indian Civil Service officer, was the finance minister. On 14th January 1978, a senior RBI official was summoned to Delhi for undisclosed urgent work. On arrival, he was told to draft an ordinance for withdrawing legal tender status for high-denomination currency. Never having done this before, he did the next best, smart thing. He asked for the 1946 ordinance and used the template for the draft 1978 ordinance which was approved by the President of India in the early hours of the very next day and became effective the same day. The majority judgement perceives no daylight between the government and the RBI which work as a team—the RBI advises on technical issues whilst the government manages the broader political, external, and domestic economic and security challenges. The minority judgement takes a differentiated view of the RBI Act. It agrees that the final authority for demonetisation vests with government. This is why only government can use its plenary powers to proceed through an Ordinance (in the interests of speed and secrecy if Parliament is not in session) or legislation to withdraw legal tender status from currency before RBI can extinguish that liability from its books and the Union government can extinguish its guarantee. Justice Nagarathna justifies why it is necessary for the RBI to be the sole initiator under Section 26 (2). It acts as a proxy for RBI’s autonomy in technical matters by reserving the power to recommend exclusively for the RBI. Also, a fundamental principle in administrative law is that once legislation clearly defines a process, it must be followed. Another practical reason could be to preserve an “audit trail” of how decisions were taken to exercise oversight over delegated power—in this case over the RBI if a proposal does not work as planned. Under the “innovative” consultative process, adopted by the government in 2016, responsibility gets diffused across government and the RBI. This could potentially weaken the resolve of the RBI to retain its technical focus and credibility, particularly against politically convenient but technically inferior measures, not validated by the fourth test of “the principle of proportionality” that the least cost and most effective alternative must be used to achieve the stated purpose—in this case controlling black money, counterfeiting or terrorist financing. Most importantly, once iron-clad processes for recording dissent cease to exist, over time, the habit of principled dissent also dissipates. Why was the suave Arun Jaitley, then Finance Minister and legal luminary, unable to get the RBI on board, without the awkward (and self-damning) construct of the RBI merely responding to a government request? Did Urjit Patel, Governor RBI refuse voluntary support, as did his predecessors C.D. Deshmukh in 1946 and I.G. Patel in 1958? Only time and “fly on the wall” reminiscences can tell. Possibly, the political challenges emanating from the ongoing negotiations for a new Goods and Services Tax legislation, combined with the slender majority of the BJP (without including NDA allies) in the 2016 Lok Sabha and the dominance of the opposition in the Rajya Sabha, militated against associating NDA allies closely with demonetisation—a necessity, if the ordinance route was followed. The in-house administrative route might have appeared neater and more secret. Experience shows that administrative process rigidities alone, are rarely sufficient to ensure good outcomes. Nor can institutions be built assuming the ready availability of highly motivated, high-minded individuals. The best safeguard against human frailties is an institutional architecture, which diffuses power widely but constrains its permissible exercise narrowly for optimum outcomes.
RBI is unlikely to have independently chosen wholesale demonetisation of high denomination notes as the instrument of choice for reducing black money.
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Sanjeev S. Ahluwalia has core skills in institutional analysis, energy and economic regulation and public financial management backed by eight years of project management experience ...Read More +