Explained | The proportionality test in the demonetisation verdict

The test of proportionality is typically used by courts around the world to decide cases where two or more legitimate rights clash

The Supreme Court on Monday in a 4:1 judgement ruled that the Narendra Modi-led government's move to demonetise Rs 500 and Rs 1,000 notes in 2016 was legally valid and satisified the test of proportionality.

What is the test of proportionality?

The test of proportionality is a commonly employed legal method used by courts around the world, typically constitutional courts, to decide cases where two or more legitimate rights clash.

When such cases are decided, one right typically prevails at the expense of the other and the court thus has to balance the satisfaction of some rights and the damage to other rights resulting from a judgement.

How is it determined?

To determine whether something can be said to pass the test of proportionality, courts in India typically take a four-pronged approach wherein the legitimacy, suitability, and necessity of a decision or law is examined, in addition to a balancing test to check whether said decision or law encroaches on rights to an excessive or abitrary degree.

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With regard to the Supreme Court's decision on demonetisation, a majority of the five-judge bench determined that the demonetisation move had passed the test of proportionality.

How did the demonetisation meet this test?

First, the apex court held that the move to demonetise Rs 500 and Rs 1,000 notes had a proper purpose, namely, that of curbing black money, terror funding, and counterfeit currency.

Second, with regard to a rational nexus with the purpose of the move, the court held that decision to demonetise high-value currency notes had a rational connection with the purpose for which the move was undertaken in the first place. "We hold that there was a reasonable nexus to bring such a measure," said Justice B R Gavai.

Third, the court held that no alternate measures could have been taken to achieve the intended purpose of demonetisation.

Finally, the SC held that there was a proper relation between the intended purpose of the move and the powers excercised to that end by the Centre: "The power available to the Central Government under sub-section (2) of Section 26 of the RBI Act cannot be restricted to mean that it can be exercised only for ‘one’ or ‘some’ series of bank notes and not for ‘all’ series of bank notes. The power can be exercised for all series of bank notes. Merely because on two earlier occasions, the demonetization exercise was by plenary legislation, it cannot be held that such a power would not be available to the Central Government under sub-section (2) of Section 26 of the RBI Act," read the majority judgement.

Justice B V Nagarathna's dissenting judgement

The majority judgement, however, refused to consider the effects of demonetisation, with Justice Gavai saying, "It is not relevant whether the objectives sought have been achieved or not. What is required is that there has to be an objective which is for proper purposes and there has to be reasonable nexus with the measure and the objectives."

Justice B V Nagarathna, the lone woman on the bench, however, differed from the majority view, saying, "The objective of the central government may have been sound, just and proper, but the manner in which the said objectives were achieved and the procedure followed for the same, in my view was not in accordance with law."

She went on to add 98 per cent of demonetised currency notes came back into circulation, and observed that, in her view, there had been no independent application of the mind by the RBI when consulted for an opinion on the issue.