• Legis Scriptor

Demonetization-recent steps taken by the government

Authored By- Aishwarya Bhat NS

Keywords- Black Money, Counterfeit Currency, Digital Banking, Micro ATM, E- Payments.


Demonetization was a good step taken by the government to curb black money from the nation. The scope of this article is to observe how the government has taken steps with respect to demonetization. The study also covers impact, constitutional validity, case laws with respect to demonetization.


Demonetization is the process by which a particular currency is declared as invalid after a decided date. Under section 26(2) of the RBI Act, the Central Government is empowered to declare a new currency in place of the banned currency.

History of Demonetization in India:

Demonetization by the Government was first implemented in the year 1946, by removing Rs. 1000 and Rs.10000 notes from circulation. And for the second time, demonetization was done by banning Rs. 1000, Rs. 5000 and Rs. 10000 out of circulation. Coming back to November 8th, 2016 our honorable Prime Minister Narendra Modi has banned Rs. 500 and Rs. 1000.[i]

Objective of Demonetization:

1. To curb black money and corruption by preventing hoarding of cash.

2. To prevent counterfeiting of currency notes.

3. To fight against terrorism by cutting off cash funding of terrorist groups operating in India.

4. To control Inflation.

5. Tax Evasion.[ii]

Constitutional validity of demonetization in India

a) Legal Issues:

- A legislative mandate: The present demonization was carried out without any law being passed by the legislature. In 1978, the government demonetized the notes through an ordinance.

- Misuse of the RBI Act 1934: Although section 26 of the RBI Act allows the Central Government to demonetize any series of notes, it has been contended by petitioners that, the government doesn’t have the power to declare all series of notes as legal tender.

In the case of Jayantilal Ratanchand Shah v. Reserve Bank of India & Others[1], A Constitutional Bench comprising of 5 judges in the Supreme Court of India upheld the constitutional validity of the Demonetization Act, 1978. The preamble of the Demonetization Act, 1978, makes it clear that where the availability of high denomination banknotes facilitates illicit transfer of money for financial transactions and is harmful to the national economy or which serves illegal purposes, the Reserve Bank of India can demonetize high denomination banknotes in the public interest. Thus, when the Constitutional Bench of the 5 judges of the Supreme Court has upheld the constitutional validity of the Demonetization Act, this policy decision of the government can only be considered by another Constitutional Bench comprising of more than 5 Judges.

Also, in the case of M. Seeni Ahmed v. The Union of India[2], it was held that it does not violates Section 24 or any other provisions of the Reserve Bank of India Act, 1934, or any other enactment for that matter and since it does not violate any of the provisions of the Constitution, it would free the country from corruption, black money, terrorism and other evils. Thus, no merit was found in this Writ Petition. As a result, the Writ Petition failed and the same was, accordingly, dismissed. Consequently, the connected miscellaneous petitions were also dismissed.[iii]

b) Constitutional Issues:

- Violates Article 300A: Article 300A guarantees that no one can be deprived of his property without any authority of law. Demonetization lacks legislative mandate & restricts people in withdrawing money from banks.

- Violates Right to Equality: The demonetization notification discriminates between holders and non-holders of bank accounts.

- Violates Right to life: Poor people are unable to earn their livelihood due to cash crunch.

- Violates freedom of trade & occupation: Freedom to trade & occupation have suffered after demonetization. Businesses of many small vendors and sellers are affected due to currency shortage.[iv]

Impact of Demonetization:

a. Positive Impact:

- Demonetization has pushed all excess cash in circulation to the banking sector which has enabled the banks to pass on interest rate cuts by the central bank to the borrowers. It has enhanced the ability of banks to offer loans for development projects and business activities at reasonable rates.

- Demonetization enabled digital economy i.e. cashless transactions which will not only make transactions easier but will also create employment opportunities.

- People are not required to go to the banks for withdrawing money because demonetization led to digital banking.

b. Negative Impact:

- International money lending (Hawala) has been affected.

- Demonetization reduces consumption patterns, income, investment etc., which may slow-down India’s growth rate in terms of liquidity ratio.

- Demonetization leads to cash shortages in the country which proves detrimental to a number of small business, agriculture and transportation.

- Demonetization has a negative impact on real estate property, construction and household consumption in general.

Recent steps taken by the government with respect to demonetization:

- Micro ATMs have been deployed to dispense cash against Debit/Credit cards up to the cash limits applicable for ATMs. The handheld Micro ATMs have the facility of mobility and deployment at the required places.

- To expedite the process of recalibration of ATMs, a Task Force is being set up under the Deputy Governor, RBI, consisting of representatives of the Banks and Finance Ministry.

- The withdrawal limit of Rs 20,000/- per week has been enhanced to Rs 24,000/-. The withdrawal limit of Rs 10,000/- per day has been removed.

- Adequate cash will be made available with District Central Cooperative Banks (DCCBs) to facilitate withdrawal from existing accounts. The cash withdrawal limits for Banks will apply in case of DCCBs also.

- All Central Government Departments and Public Sector Enterprises are being instructed to use the method of e-payments to the maximum extent possible and many others[v].


The author concludes that demonetization is the best measure taken up by the government to curb black money, counterfeiting currency notes, etc., and thereby implementing digital banking instead of cash transactions.

[1]JT 1996 (7), 681 1996 SCALE (5)741.

[2] 1994 (72) ELT 3 Mad.

References: [i] [ii]

[iii] [iv]