The Supreme Court on Monday upheld the government's decision on demonetization. However, the government figures show that the demonetization in November 2016 had no visible impact on the currency in circulation (CIC) in the country. This decision has largely failed to achieve the goals for which it was taken. On November 8, 2016, Prime Minister Narendra Modi announced the demonetization of old Rs 500 and Rs 1,000 notes. One of the main objectives of the unprecedented decision by the government was to promote digital payments and curb the flow of black money.
According to Reserve Bank data, the currency in circulation (CIC) in the country was Rs 17.74 lakh crore on November 4, 2016, which almost doubled to Rs 32.42 lakh crore on December 23, 2022.
According to statistics, however, immediately after demonetization, the currency in circulation came down to around Rs 9 lakh crore on January 6, 2017. This was about 50 percent of the currency in circulation of Rs 17.74 lakh crore as on November 4, 2016.
This was the lowest level of currency in circulation in the last six years after the ban on old Rs 500 and Rs 1,000 notes. There has been a jump of almost three times or more than 260 percent in CIC (Currency in Circulation) so far as compared to January 6, 2017. This is an increase of about 83 percent as compared to 4 November 2016.
As the impact of demonetization wore off, the CIC increased week on week and reached a peak of 74.3 percent by the end of the financial year. It then recovered to around 85 percent of its pre-demonetization high at the end of June 2017.
Demonetization led to a decline in CICs of about Rs 8,99,700 crore (as on January 6, 2017), resulting in a large increase in surplus liquidity within the banking system. On the other hand, the cash reserve ratio (as a percentage of deposits with the RBI) registered a decrease of about 9 percentage points.
This was a challenge to the liquidity management operations of the Reserve Bank. The central bank used its instruments, particularly reverse repo auctions, under the Liquidity Adjustment Facility (LAF) to absorb surplus liquidity in the banking system.
CICs increased to Rs 32.42 lakh crore at the end of December 23, 2022, from Rs 31.33 lakh crore at the end of March 31, 2022.
Since demonetization, CIC has seen an increase every year except the year of demonetization. CICs declined by 20.18 percent 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.
It grew by 37.67 percent to Rs 18.03 lakh crore in the year following demonetization and by 17.03 percent to Rs 21.10 lakh crore at the end of March 2019 and by 14.69 percent to Rs 24.20 lakh crore at the end of 2020.
In the last two years, the pace of growth of CICs in terms of value was 16.77 percent to Rs 28.26 lakh crore at the end of March 31, 2021, and 9.86 percent to Rs 31.05 lakh crore at the end of March 31, 2022.
Explain that the Supreme Court, with a majority of 4:1, has upheld the government's 2016 decision to demonetize Rs 1,000 and Rs 500 notes.
A five-judge constitution bench of the apex court, headed by Justice SA Nazeer, said great restraint should be exercised in matters of economic policy and the court cannot substitute the discretion of the executive by judicial review of the decision.
Justice BV Nagaratna, however, disagreed with the majority judgment on the point of Centre's powers under Section 26(2) of the RBI Act, saying that the demonetization of Rs 500 and Rs 1,000 notes should be done through a law Was, not through notification.
"Parliament should have discussed the law on demonetization, the process should not have been done through a gazette notification," he said. Parliament cannot be sidelined on such an important issue for the country.
He also said that no independent views were taken from the Reserve Bank of India (RBI) before taking this decision and only their opinion was sought, which cannot be said to be a recommendation.
A bench of Justices BR Gavai, AS Bopanna, and V Rama Subramanian observed that the Centre's decision-making process cannot be flawed as the issue has been discussed by the RBI and the central government. The apex court gave its verdict on 58 petitions challenging the note ban announced by the Center on November 8, 2016.
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