When, on December 30, 2016, Indian prime minister Narendra Modi persuaded president Pranab Mukherjee into promulgating the Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016, little did the government know what was to follow.
Barely two days later, on January 2, 2017, in an unrelated matter, the Supreme Court, delivered a verdict that has changed the law of ordinances in a significant way. Ordinances now face constitutional fire in ways they never have.
The immediate fallout or impact could well be the Modi’s demonetisation decree: this ordinance has now, overnight become constitutionally suspect.
What did the De-Monetisation Ordinance contain?
Twelve short provisions introduced two key changes.
First, currency notes demonetised on November 8, it was declared, shall no longer be liabilities of the Reserve Bank of India (RBI).
What does this mean, really?
Pick up a random currency note and read the fine print: “I promise to pay the bearer the sum of X rupees,” reads the piece of paper signed by the governor, RBI. All currency notes are promises—I Owe Yous. Take a Rs 500 note to any branch of the bank and officials must exchange it for a new one or smaller denominations, say, of five Rs100 notes.
The ordinance shot this down. It let the RBI off. Now if you take a Rs 500 or Rs1,000 note after December 31 to the RBI, it is not bound to pay up in exchangeThe promissory words, the fineprint, no longer mean what they say. They mean nothing at all. (A limited window of exception applies till Mar. 31, 2017.)
The broken promises help beef up the bank’s books, too. Why?
Imagine a person borrows money. He must repay in, say, two years. The period has elapsed. The loan is still unpaid. But the creditor hasn’t come calling; he doesn’t care. In fact, he has given up on the loan. What, then, of the borrower? He gains; it’s a windfall for him. The borrowed sum isn’t a liability anymore.
The RBI, oddly, is like a borrower. It must recompense its creditors—those in possession of the demonetised currency. But some creditors didn’t care; they didn’t deposit their demonetised hoard. They can no longer do so, the ordinance says. And these are “loans” the RBI needn’t repay—it’s a windfall.
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How much windfall? As of March 2016, some 15,707 million pieces of Rs 500 notes and 6,326 million pieces of old Rs1,000 notes were in circulation, the RBI revealed. This totalled to nearly Rs14.5 lakh crore, which is the amount of currency by value that Modi demonetised on November 8. Initial estimates of a windfall had a euphoric air. The State Bank of India speculated that about Rs 6 lakh crore—nearly 40% of the demonetised sum. Government sources were more guarded; that about Rs 3 lakh crore, is what they estimated.
The real numbers are much, much smaller. A January 10, 2017, report in The Indian Express newspaper, citing top officials, said Rs 75,000 crore remain unclaimed, which is a paltry 5% of the demonetised sum. This, too, is an estimate. The RBI is quiet and the unclaimed sum is an unknown figure.
Two things are certain, however; one that the RBI will enjoy a windfall, big or small—one created entirely by an ordinance. Two, that ordinance also ushered in a new crime.
According to the ordinance, knowingly or voluntarily holding, transferring or receiving demonetised notes is a felony.
A constitutional cesspool
Ordinarily, parliament makes laws in India. But the constitution also dignifies the president with lawmaking powers: Article 123. He may make laws—ordinances—if one or both houses of parliament aren’t in session, and he feels that such laws are immediately needed. These need to be ratified by Parliament within 6 months,
however.
Article 123 says: Governments may promulgate ordinances if they are “immediately necessary.” In practice, reasons other than necessity have dominated ordinances. Governments, especially minority ones, have used the Ordinance Route to bypass parliament. They lacked necessary votes, but still wanted laws.
This violation of the Constitutional scheme never attracted judicial comment or criticism.
Article 123 says: Ordinances must be presented to the houses when they reassemble. But governments often don’t.
Article 123 says: Ordinances cease to operate if the houses do not approve them. That is, without the houses’ nod, they cannot remain law beyond the six-month period.
But what of the official actions already taken? For decades, courts read the words “ceases to operate” faintly. All actions completed, or even initiated, remain forever valid, they intoned.
Governments and their lawless instincts, felt further emboldened. They could issue ordinances, let them fail, and still profit from the official business already transacted without following constitutional procedure.
Article 123 was made a mockery of. Ordinances after Ordinances: in almost 70 constitutional years, we have had almost 700 ordinances.
A Fresh Look
On January 2, 2017, the Supreme Court passed a decisive verdict. Seven Judges of the Supreme Court struck down the vague interpretations and grafted a new, set procedure for Ordinances.
This decision has three highlights.
One, governments are no longer the sole purveyors of “immediate necessity.” Ministers may insist an Ordinance is necessary. But like other constitutional claims, this, too, is now vulnerable to a legal audit. If assailed, judges will assess if the ordinance was necessary.
Two, at least in parts, Article 123 really means what it says, the unusually strident court clarified. Article 123(2) reads: “An ordinance promulgated under this article… shall be laid before both houses of parliament.” The provision says shall, it means shall. There’s no wriggle room. Governments shall present ordinances to the houses.
They must. If they don’t, ordinances will immediately lapse; they shall cease to operate.
Three, if ordinances cease to operate, the can of official acts already taken will be reopened. Gone are the days of automatic validity. Instead, judges will quiz: Does public interest demand the official acts be left undisturbed? Is it necessary to let them stand? Or should the actions be reversed?
These precepts, taken together, are a watershed. They have radically reset the rules on ordinances in India, and they portend distress for Modi’s demonetisation decree.
Is this the Modi Government’s moment of reckoning ?
What happens now?
Parliament will assemble for the budget session, reports indicate, on January 31. When it does, the ordinance must be placed before the houses. The SC verdict makes this obligatory. The opposition, finally, will get to have its say on demonetisation in parliament. It will get to vote, too. How cogently they make their case, what they say, and how they behave will matter. It will set a new precedent.
The Modi government is in a minority in the upper house. Short of a miracle, it will lose the vote. The ordinance will fail and cease to operate. (Ordinances must be approved by both houses to become law.)
A simultaneous plot will unfold a short distance away, in the Supreme Court. All aspects of demonetisation, the decision, its execution and its aftermath, are already under judicial scanner. Doubts will be tagged with them. Two issues will demand judges’ attention: Was the demonetisation ordinance necessary? In what way has it ceased to exist?
Parliament was in session until December 16, 2016. The need for such a law, one that vaporises the RBI’s liabilities, was already known. There couldn’t be a windfall without it, governor Urjit Patel had already indicated. The necessity of the ordinance, then, is a laboured claim. It stands on weak legs.
And the second question? Recall what the demonetisation ordinance does. It delivers the RBI from liabilities, generates a windfall in its accounts, and makes hoarding of demonetised notes a crime.
Will a catastrophe descend if the liabilities are reinstated? Hardly. Is it ruinous to erase the windfall? Not at all. Indeed, neither public interest nor the constitution demands these changes become permanent. Doing so will undermine the new verdict and the principle of parliamentary supremacy it affirms.
Undoing the demonetisation ordinance will reinstate the promises. The fine print could again mean what they say. Those in possession of demonetised notes may again demand that their “borrower,” the RBI, pay up.
As significantly, the government may be compelled to abandon its ordinance binge. With the opposition firmly set against it, and the upper house still beyond reach, it may return to a quaint idea: parliamentary negotiation.