Was it legal for the Modi government to change the deadline for exchanging old notes?

On Thursday, the Union government introduced yet another demonetisation twist: the exchange of old Rs 500 and Rs 1,000 notes for new currency was to be stopped at banks. On November 8, the prime minister had assured the nation on television that note exchange would be allowed till December 30 – a fact reiterated by an executive order released by the Ministry of Finance. The Reserve Bank of India also made the same point.

In fact, the RBI even advised people to not hurry to banks to exchange their demonetised notes. “As there is ample time, people need not rush to exchange putting avoidable strain on the banking branch network,” said this FAQ. So sure was the Union government of this, that it even put out advertisements assuring people that they had till December 30 to exchange their old notes so there was no need to panic.

On Thursday, the Union government abruptly overturned this promise and declared that the exchange of demonetised notes would be stopped at midnight. It also made this announcement at 7.30 pm, after the banks had closed for the day. Not only did it contradict its November 8 assurance, it gave no time to people at all to make alternate arrangements.

Unfair and anti-poor

The government rationalised the sudden decision by arguing – without providing any statistics – that the number of people asking for the exchange of notes had come down. Even if this were true, it would be unfair if even if a single person’s savings were wiped out simply because she was following the government’s earlier December 30 deadline.

Moreover, the move disproportionately affects low-income Indians. The December 30 deadline for depositing notes into a bank account still remains intact. Of course, this recourse is only available to Indians who have bank accounts in the first place. Given that 167 million Indians – a population so large, it would be the world’s eight-largest nation in the world – remain outside the formal banking system, this order has the potential to cause many Indians a substantial economic loss.

Moreover, since demonetised notes can still be exchanged at Reserve Bank of India counters – even as it’s been stopped at banks – this also singles out Indians in rural areas, since these counters will only exists in large cities. Rural citizens would therefore have to travel long distances and spend substantial sums in order to exchange their own money. Earlier, they could simply have done it at the local bank.

And perhaps illegal

Given the upheaval that demonetisation has caused, the Supreme Court is getting ready to hear arguments about its legality on December 2. In this regard, the Union government’s November 24 order to take back its promise to exchange old notes might be a rather egregious fault.

Alok Prasanna Kumar, an advocate and visiting fellow with the Vidhi Legal Centre in Delhi, points out a technical illegality: right now, the decision to stop the exchange of notes has been communicated to the banks via a press release. “The decision to stop the exchange of notes at banks wasn’t made via a gazette notification or executive order,” said Kumar. “Changing the terms of the November 8 notification is not up to the RBI to do. The Union government has to issue a fresh notification to amend its November 8 order, which it hasn’t done.”

Citizen’s legitimate expectation

More substantially, Kumar noted, “the Union government’s breach of faith has broken a legal principle knows as the doctrine of legitimate expectation”.

This doctrine comes into play when a citizen anticipates certain benefits that might flow from a government promise or established practice. If the government, arbitrarily breaks its promise or stops the practice, it would be against the principles of natural justice, since the citizen had a legitimate expectation of benefit from the government’s actions. “Given that the government illogically and without warning broke its promise of note exchange, resulting in financial losses for citizens, this could be brought up in the Supreme Court,” said Kumar.

Finally, the move could also be against the Indian’s fundamental right to equality. “This clearly harms poor Indians without a bank account,” said Suhrith Parthasarathy, an advocate practicing at the Madras High Court. “This move to target unbanked Indians could be held as arbitrary and against the fundamental right to equality.”