Political Finance and the Poor in India


[This post has been taken from the term paper authored for my Law and Poverty course taught at NALSAR. During the semester, we were tutored and lectured by Prof Amita Dhanda, Justice S Muralidhar, and Prof Upendra Baxi]

          Elections in India have never been so mammoth, gigantic and encompassing. Notably, the 2014 General Election to the lower house of the Indian Parliament (Lok Sabha), positing an electorate of more than 800 million adults, holds the unique distinction of being the largest democratic exercise in the world.[1]

            At the same time, elections have never been more expensive than they are today. ‘Big Money,’[2] which fuels and propels the electoral wheels is despised for its notoriety and exclusivity by the civil society and those who repose strong faith in substantive freedom and fairness in elections. The prima facie unsurpassable divide between the ‘haves’ and the ‘have nots’, when it manifests itself in the largest democracy of the world, must instruct us to go beyond mere numbers and figures to find out more about the qualitative nature of elections, democracy and republicanism in India.

            Political finance these days can give a tough competition to any stock indices or figures.[3] The only role ascribed to a poor in an election is that of a voter, one whose apathy lies in standing in a queue to vote for a person who has probably bribed him and purchased his franchise overnight. While this may be a little too barbaric to assume for all voters to have undergone, it is nonetheless not untrue that voters are susceptible to mass waves where when they do not know where to go, just proceed in the direction where the herd seems to be moving. Such populist outcries are often an outcome of high election spending and political financing.[4]

            It is in the backdrop of such state of affairs that proposals such as state funding of political parties have gained prominence. This paper is divided into six parts:

  • The first part will trace the way in which electoral processes are subjected to constitutional supervision and legal regulation.
  • The second part will seek to delineate and exposit the fundamental aspects relating to funding of political parties contesting elections from various sources and its regulation thereto.
  • The third part shall look at the ways in which the policy suggestion of state funding of elections has come about to be articulated in the Indian polity and legal system.
  • The fourth part shall look at the qualitative demography of Indian elections and the relationship between the elected and the electorate.
  • The fifth part seeks to answer the question: What do elections convey about poverty?
  • The sixth and the most important part shall attempt at demystifying the implications that state funding may have at the involvement and role that the lower rungs of the society could perhaps play in the electoral process once state takes up this new domain of exchequer.

Legal Regulation of Electioneering

        Elections are constitutionally mandated recurrent acts which are aimed at the formation of legislatures, and consequentially, of the government. An independent body, called the Election Commission of India is constitutionally provided for in Article 324 of the Constitution of India to conduct free and fair elections. This commission seeks to ensure transparency, fairness, just and regular elections in the democratic setting.[5]

        Finance is a crucial pillar required in the conduct of elections[6]. The major stakeholders who deal with money are the candidates and the political parties. It is impossible to conceive of elections without expenditure on the part of these two stakeholders.[7] Therefore, as expends are an inevitable feature of electoral process, it is imperative to regulate and monitor the channelization of funds and mobilization of resources in the same.[8] Fairness commands that money from illegal activities, which is not accounted for in the taxation scheme does not make its inroads into elections and thereby vitiate their purity and sanctity. Similarly, too much expenditure in elections, the source of which would somehow be in the financial big wigs and corporate houses is seen as an onslaught on the independence and integrity of a true democracy where the will of the people will take a back seat and the will of the rich and well-to-do will rule the roost.

           The electoral system as it stands today, pivots on a balance where the fulcrum makes some compromises. While the idea of donation from corporates is not rejected in wholesale at the outset, certain limits have been imposed in terms of spending by candidates contesting elections.[9] As per the Finance Act, 2017[10] donors can from now on use electoral bonds to make anonymous donations. This is done with the intent of protecting donors form any backlash from a party for whom they did not make any donation. The recent statute also does away with the limits prescribed for corporate funding. It would be trite, but nonetheless noteworthy to point that quantitative limits on spending by candidates is flouted with immunity sans any due regard to “legalism.” Thus, legal regulation of electioneering is faced with a major concern on how to implement these regulatory checks at the grass root level on the field. Thus, it must be noted that the role of law vis-à-vis politically colored processes such as elections is limited by constraints such as ignorance, high-handedness, and a lack of will power.

Regulation of Political Finance: Key Aspects

           The Indian law pertaining to election finance traverses across inter-sections of election law, company law, and taxation law. Firstly, we have the Representation of People Act, 1951[11] coupled with Conduct of Election Rules, 1961 which mandates the parties to disclose and act on certain occasions of receipt of donations. Secondly, The Companies Act, 2013[12] alongside Foreign Contribution (Regulation) Act provides for the form of companies which could donate to the political parties. Thirdly, the Income Tax Act, 1961[13] operates to carve out some tax exemptions in the favor of political parties and donors.

          Section 77 of the Representation of People Act, 1951 mandates every candidate contesting an election to maintain a proper account of all expenses incurred by him or by his agent in connection with or in furtherance of his election campaign. By virtue of Conduct of Elections (Amendment) Rules, 2014, the limit that has been prescribed for candidate expenditure under Section 77 (3) is up to rupees 70 lakhs for parliamentary constituencies, and up to rupees 28 lakhs for state assembly constituencies. If any candidate is found to have expended more than the said amounts, he is liable to be prosecuted for having committed a corrupt practice under Section 123(6) of the RP Act and may lead to disqualification for a further period of six years, both as a candidate and a voter, under Sections 8A and 11A of the RP Act.

          The Explanation 1 (a) to this Section however declares that:

“the expenditure incurred by leaders of a political party on account of travel by air or by any other means of transport for propagating programme of the political party shall not be deemed to be the expenditure in connection with the election incurred or authorised by a candidate of that political party or his election agent for the purposes of this sub-section…”

           The Explanation effectively serves to provide that expenses incurred by parties (not their candidates) will not be subject to any limits that the statute seeks to impose. It provides full immunity to political parties to expend as much as per their will. Since parties are not within the purview of Section 77, their election expenses sky-rocket. Below is the data for the expenses incurred by three most spending parties in 2014 General Election:[14]

Political Party Expenditure in 2014 Elections

(in Rupees crore)

Bharatiya Janata Party 714.28
Indian National Congress 516.02
Nationalist Congress Party 51.34

As per Section 29B of the RP Act, political parties are entitled to such any contributions “voluntarily offered to it by any person or company other than a government company.” However, Section 29C of the RP Act provides that such contributions which exceed the quantum of Rupees 20,0000 must be disclosed in the form of an annual report submitted to the Election Commission. This disclosure further operates as a condition precedent for the party to avail any tax relief under Section 29C (4) of RP Act read alongside Section 13A of the Income Tax Act. The Supreme Court, in Gajanan Krishnaji Bapat v Dattaji Raghobaji Meghe[15] strongly noted of this requirement as follows:

“We wish, however, to point out that though the practice followed by political parties in not maintaining accounts of receipts of the sale of coupons and donations as well as the expenditure incurred in connection with the election of its candidate appears to be a reality but it certainly is not a good practice. It leaves a lot of scope for soiling the purity of election by money influence.” [Emphasis is mine]

         While holding that the maintenance of “absolute purity in elections” was of utmost importance, the Supreme Court in Ashok Shankarrao Chavan v. Madhavrao Kinhalkar [16] recorded its observations in the following manner:

“…Even the explanation to Sub-section (1) to Section 123 makes it clear that incurring of election expenses and the maintenance of account of those expenses are not an empty formality but the very purpose of stipulating such restrictions and directions under Section 77(1) and (3) read along with Section 78 explains the mandate to maintain absolute purity in elections by the contesting candidates. This is required in order to ensure that the process of the election is not sullied by resorting to unethical means while incurring election expenses.” [Emphasis is mine]

         Until 1975, the courts[17] were reluctant to hold that third-party expenditure could be included within the candidate’s expends so as to test the same at the touchstone of ceiling limits. In  that year, the Supreme Court in Kanwar Lal Gupta v. Amar Nath Chawla,[18] held for the first time as follows:

“When a political party sponsoring a candidate incurs expenditure specifically in connection with his election, as distinguished from expenditure on general party propaganda, and the candidate knowingly takes advantage of it or participates in the programme or activity or consents to it or acquiesces in it, it would be reasonable to infer, save in special circumstances, that he impliedly authorised the political party to incur such expenditure; and he cannot escape the rigors of the ceiling by saying that he has not incurred expenditure but big political party has done so.”

        This was however undone by the court when it upheld the validity of a 1974 amendment which negated the verdict in Kanwar Lal Gupta (supra), in P. Nalla Thampy Terah v Union of India,[19] where the apex court unfortunately held as follows:

Election laws are not designed to produce economic equality amongst citizens. They can, at best, provide an equal opportunity to all sections of society to project their respective points of view on the occasion of elections. The method, somewhat unfortunate, by which law has achieved that purpose, is by freeing all others except the candidate and his election agent from the restriction on spending, so long as the expenditure is incurred or authorized by those others.” [Emphasis is mine]

        The order of the day was however restored by the apex court in its “seminal” exposition in Common Cause, a Registered Society v. Union of India,[20] where it reversed the onus of proof on the candidate who alleged to have claimed the benefit of the exception created by the Explanation appended to Section 77, holding:

“The expenditure (including that for which the candidate is seeking protection under Explanation I to Section 77 of R.P. Act) in connection with the election of a candidate – to the knowledge of the candidate or his election agent – shall be presumed to have been authorised by the candidate or his election agent. It shall, however, be open to the candidate to rebut the presumption in accordance with law…”

        Finally, the said explanation came to be deleted by the effect of Election and Other Related Laws (Amendment) Act 2003. The 255th Report of the Law Commission on Electoral Reforms records the current law on this subject matter as follows:

“Thus, the current position is that the expenditure incurred by (a) the leaders of political party on account of travel by air or by any other means of transport for propagating the party’s programme and (b) the political parties or their supporters for generally propagating the party’s programme shall not be deemed to be expenditure in connection with the election incurred or authorised by a candidate of that political party under Section 77, RPA.”

          Thus, the attempt of this part of the paper was to show the way in which political finance and its legal regulation works out in the Indian context. A lot of work needs to be done before state can lumber in glory by merely providing funds to political parties. How that funding would come about to be utilised will be a major question that must be answered before state funding is given a green signal.

State Funding of Elections: A Brief Account

         With this backdrop in mind, it is now appropriate for us to move on to understand and analyze the prospect of state funding of elections. Indirect state funding of elections is not entirely unknown even in the present context. The 2003 Amendment to the RP Act brought in place Section 39A which allows “partial in-kind subsidy in the form of allocation of equitable sharing of airtime on cable television networks and other electronic media” where the magnitude of such subsidy was pegged to the past performance of the respective political parties. Sections 78A and 78B were also introduced which allowed free supply of copies of electoral rolls with names of eligible and enrolled voters to the contestants.

        The first in (now) a long line of landmarks and milestones of deliberation around state-funding of elections was the report penned by the Dinesh Goswami Committee on Electoral Reforms in 1990, which made out a case in favor of “partial state funding of elections in the form of limited in-kind support for vehicle fuel (which is a primary campaign expense); rental charges for microphones; issuance of voter identity slips; and additional copies of electoral rolls.[21] The question as to from where would the state mobilize funds to fuel election got an answer from the Task Force constituted by the Confederation of Indian Industry (CII) in 1993. This force hinted at a possibility of imposition of either a tax or a special cess on the industry.[22]

         Then came about the Report dated 1998 from the Indrajit Gupta Committee on State Funding of Elections, which wholeheartedly endorsed and supported the idea of state funding of elections, seeing “full justification constitutional, legal as well as on ground of public interest” in order to establish a fair playing field for parties with less money power. It saw political parties as though being private bodies performing a “vital public function of sustaining sustaining democracy.” The Committee recommended phased partial state funding to be given to political parties. The only disagreement that the members of this committee had (which notably included who later was to become the Prime Minister, Dr. Manmohan Singh) was in relation to the existence or banning of funding by corporates or private individuals alongside a state fund. The Committee did not say anything per se on this issue and left it open to the wisdom of the Parliament to decide upon.

        Building upon this report was the Law Commission under Justice B.P. Jeevan Reddy, which in its 170th Report dated 1999, on on the Reform of Electoral Laws, ratified the policy recommendations of the Indrajit Gupta Committee Report on partial state funding in the immediate short-run back then, which was to be later converted into a total funding. Pertinently, the Commission was also alive to the dangers that loomed large among many parties which operated and functioned as dynastic fiefdoms, sans any sign of internal democratic fair processes. It noted that it was:

“…absolutely essential before the idea of state funding (whether partial or total) is resorted, the provisions suggested in this report relating to political parties (including the provisions ensuring internal democracy, internal structures) and maintenance of accounts, their auditing and submission to Election Commission are implemented…The state funding, without the aforesaid pre-conditions, would merely become another source of funds for the political parties and candidates at the cost of public exchequer.[23] [Emphasis is mine]

        In 2001, the National Commission to Review the Working of the Constitution concurred with the Law Commission’s observations and suggestions in its 170th report that the question of permitting state funding “should not even arise” without:

“an effective systemic acceptance of full audit of party funds including a full audit of campaign funds, deletion of explanation 1 to section 77(1) of the Representation of People Act 1951, a fool proof mechanism to deter expenditure violations, and until the government is convinced that these improvements have been institutionalised and are no longer being breached.”[24] [Emphasis is mine]

         On the same lines was the Second Administrative Reforms Commission’s 2007 Report on “Ethics in Governance” which while recommending partial state funding of elections to curb the scope of “illegitimate and unnecessary funding” of elections expenses hinted at the double-edged nature of such a move considering the inept state of Indian electoral system.[25]

         The Law Commission under Justice A.P. Shah, in its 255th Report dated 2015 on Electoral Reforms discusses the policy suggestion of state funding for election expenses. It recommends that since “it clear that complete public funding of elections or political parties in India is not a practical option; instead, indirect state subsidy is a better alternative for various reasons provided below.[26] The report speaks in terms of economic impact, and how it would be impossible for the Indian state to match the magnitude of grants in United Kingdom and Germany. It recommends continuance of the existing scheme of indirect transfers in the form of media coverage and supply of electoral rolls.

         Thus, the support that the prospect of state funding political parties has received seems to be of mixed proportions. A condition precedent that has been imposed before proceeding with such a policy in place, must also be first tested in the most strenuous manner possible. Political parties should become more public to get public funding.

Demography of Elections: The Electors and the Elected

        Elections are festivals of democracy where the citizenry unleashes its desires and commands one of those in electoral fray to rule them for the next five years. It entails inter-mingling and interaction of the electors and the elected at an unusual level which does not seem to happen throughout the five-years. In this context, elections represent an opportunity of making one’s government accountable, answerable and responsible. The Indian voter has time and again proved his mettle through his ballot. But this romanticist vision and notion of the Indian electoral process is just one side of the coin.

        Record bespeaks of great divergence between the Indian populace and the Indian state. Those who occupy constitutional posts, sit in legislatures and command the public purse, are not identical to their constituencies. Demographically, both come from distinct economic strata, and are thus not mirror-images of each other. The sixteenth Lok Sabha (constituted by way of General Election of 2014) has been labelled as the richest ever coterie of legislatures India has ever had. As per the data accessed and Election Watch report prepared by Association for Democratic Reforms (ADR), a whopping 82 percent of MPs in Lok Sabha possess assets or value more than rupees one crore.[27] Further, this trend of filling legislatures with rich people seem to be an upward moving trend as in 2009, this figure was just 58 percent, and in 2004, 30 percent.[28] This is at stark contrast with the general wealth levels of Indian society. The Indian state in 2013 accounted for the largest number of people who were spending their lives below the poverty line (BPL) with roughly 30 percent of Indians living below a two-dollar a day poverty measure.[29]

        The humungous reliance on money power in elections limits the mobility of the electorate into the electoral fray. This translates economic inequality into political inequality. This was cautioned against by the visionary constitutionalist Dr. Ambedkar in the Constituent Assembly when he said:

“On the 26th of January 1950, we are going to enter into a life of contradictions. In politics we will have equality and in social and economic life we will have inequality. In politics we will be recognizing the principle of one man one vote and one vote one value. In our social and economic life, we shall, by reason of our social and economic structure, continue to deny the principle of one man one value. How long shall we continue to live this life of contradictions? How long shall we continue to deny equality in our social and economic life? If we continue to deny it for long, we will do so only by putting our political democracy in peril. We must remove this contradiction at the earliest possible moment or else those who suffer from inequality will blow up the structure of political democracy which this Assembly has so laboriously built up.”[30] [Emphasis is mine]

        The Supreme Court articulated this reality in the case of Kanwar Lal Gupta v. Amar Nath Chawla:[31]

“…money is bound to play an important part in the successful prosecution of an election campaign. Money supplies “assets for advertising and other forms of political solicitation that increases the candidate’s exposure to the public.” Not only can money buy advertising and canvassing facilities such as hoardings, posters, handbills, brochures etc. and all the other paraphernalia of an election campaign, but it can also provide the means for quick and speedy communications and movements and sophisticated campaign techniques and is also “a substitute for energy” in that paid workers can be employed where volunteers are found to be insufficient. The availability of large funds does ordinarily tend to increase the number of votes a candidate will receive. If, therefore, one political party or individual has larger resources available to it than another individual or political party, the former would certainly, under the present system of conducting elections, have an advantage over the latter in the electoral process”. [Emphasis is mine]

         Thus, the electoral processes come across as poignant reminders of the sad state of the poor, where all constitutionally opened doors for them, suddenly seem closed by the contemporary socio-political realities. In this regard, not only the means that the poor have (that is, to contest elections) are curtailed, but even the ends which an elected representative may seek to secure, are far away from their reach. It is this vicious cycle that ensures that the voice of the poor is somehow silenced by the weight of their class’s ballot.

What do elections tell us about poverty?

         Elections bring home two important rights. While the first one entails voting, the other relates to contesting in an election. These rights, in my opinion are two embodiments of an important human capability. Professor and Nobel Laureate Amartya Sen has, in his seminal work The Idea of Justice laid down a framework to address questions of deprivation and poverty. He contends that since wealth is a poor indicator of what human beings want and are able to be and to do, we must look beyond wealth and identify other factors which influence and impact their abilities. This has been developed by him as the capabilities approach.[32] While Sen does not enlist what he thinks could be these human capabilities, since political participation and affiliation in a democratic set up entails an important pivot in an individual’s life, I would like to read the same as a capability into his work.

         Martha Nussbaum, a philosopher who has had some association[33] with Sen on the same approach, has postulated in her Frontiers of Justice, what to her, seem to be the most important and most central human capabilities, sans which, life would not be worth living. There she has contended that an individual must be capable to affiliate and have control within one’s socio-political environment. Thus, an active political participation manifests the achievement of an important marker in the road to a just and well-lived life.[34]

       The Supreme Court has recognized the same in Kanwar Lal Gupta v. Amar Nath Chawla[35] as follows:

“…it should be open to individual or any political party, howsoever small, to be able to contest an election on a footing of equality with any other individual or political party, howsoever rich and well financed it may be, and no individual or political party should be able to secure an advantage over others by reason of its superior financial strength.” [Emphasis is mine]

      Regularly held free and fair elections in this sense are in stark contrast to undemocratic, authoritarian and dictatorial regimes, and provide pre facto avenues for what John Rawls and Sen have termed as “public reason.[36] Ballots, it has been contended have a very important role to play in the expressive phase of democratic functioning; but this role will be circumscribed in the larger species of nature and form of a democratic society. A polity will always operate in conjunction with the society; both are inseparable yet distinct parts of one whole. Therefore, economic inequality will not provide for political equality unless some steps against the same are not only taken but are also actively pursued.

        Elections therefore will (and I contend, that in contemporary India, are) mirror socio-political realities and the great divides between the ‘haves’ and the ‘have nots.’ The majority of Indian population just goes out to vote and mark the ballot. The “public reason,” an intersection of democracy and justice, seem to be a void in the Indian context, where peoples’ right to vote, and their right to contest elections, are marred by the ground realities of income gaps. Further, since elections are not just ends in themselves, but are supposed to serve as useful means towards some larger socio-political ends in the form of governance and administration, any disputation vis-à-vis electioneering carries with it the possibility of vitiating efficient and socially just and benevolent welfare politics from the state’s dome.

Evaluating the proposal of State Funding from the lens of the poor

            My arguments from now on, will operate on an in-principle-level of allowing state to fund political parties at an unprecedented level, which at the same time, in a system which would also make it imperative for parties to abstain from receiving any contributions from corporates or private individuals. State funding of elections comes across an attractive idea which suggests a road until now not taken in many democracies. It has the charm of ensuring zero reliance by political parties (which have come about to play a paramount role in the running of democracy) on ‘Big Money’ which may not always be either white or clean. At once, it is made to believe that state funding will make the menace of black money finding its ways into the electoral process end for once and for all.

            However, the problems are more serious and immediate. Elections, as have come to happen, run on a lot of money. The first and foremost problem that we would encounter in state-funding would be that of matching to these gargantuan proportions. Even if we assume for a while, that state funding would leave parties better-off per se, there is hardly any conclusive and cogent basis to believe that corporate funding would come to an absolute standstill.

           Election law operates in ways that are strange and mystic. In this province, any true “reform” requires a great wave of political will and political capital. Laws and rules relating to election practices are perhaps the best examples of a pre facto nemo judex in causa sua, where the fact that laws that will ultimately affect the law makers, does end up affecting the way in which laws are framed, is most strikingly visible. Therefore, we must accept that the idea of altogether banning private donations will fail to find any political currency. This sentiment also resonates with the lack of consensus in the Indrajit Gupta Committee (1998) and the observations of the apex court in the case of Ashok Shankarrao Chavan v. Madhavrao Kinhalkar:[37]

“In recent times, when elections are being held it is widely reported in the press and media that money power plays a very vital role. Going by such reports and if it is true then it is highly unfortunate that many of the voters are prepared to sell their votes for a few hundred rupees…This view of ours is more so apt in the present day context, wherein money power virtually controls the whole field of election and that people are taken for a ride by such unscrupulous elements who want to gain the status of a Member of Parliament or the State Legislature by hook or crook.” [Emphasis is mine]

           On the other hand, we even run the risk of making elections even more expensive when seek to open the floodgates of tax-payers’ hard-earned money! This psychological prediction is not hard to conceive when one pays a little attention to the electoral history of India where pure legalism has always gone for a toss in light of short-term considerations of winning elections. This is also in line with the Supreme Court’s words in Ashok Shankarrao Chavan v. Madhavrao Kinhalkar:[38]

“…it is a hard reality that if one is prepared to expend money to unimaginable limits only then can he be preferred to be nominated as a candidate for such membership, as against the credentials of genuine and deserving candidates.” [Emphasis is mine]

            This would further undermine the capability of the poor people to stand in elections and fight for representative offices. At the present, exclusion of majority of Indians from contesting elections is happening at the cost and expense of corporates and rich capital owning individuals who fuel political finance. If we allow for state funding now, there is a looming danger that then the same sort of exclusion would be happening at the cost of public exchequer. This is not to contend that corporate funding is devoid of any increments by virtue of exploitation of the poor; so in that sense, even the current set up is happening at the cost of exploitative transfers from the poor to the rich. But, the point remains that state funding would make this exploitation more apparent, and proximately connected, which might end up making the poor Indian voter more apathetic and disillusioned than he is today. What is contended is that it is relatively better if bad money goes and fuels bad activities, than good and clean money of the public being put to such nefarious purposes. A solution cannot be detached from the reality, which is plagued by corruption and lack of respect for public trust. The lack of political will to reform elections was exposited by the apex court in People’s Union for Civil Liberties v Union of India:[39]

“One of the most critical problems in the matter of electoral reforms is the hard reality that for contesting an election one needs large amounts of money. The limits of expenditure prescribed are meaningless and almost never adhered to. As a result, it becomes difficult for the good and the honest to enter legislatures. It also creates a high degree of compulsion for corruption in the political arena. This has progressively polluted the entire system. Corruption, because it erodes performance, becomes one of the leading reasons for non-performance and compromised governance in the country. The sources of some of the election funds are believed to be unaccounted criminal money in return for protection, unaccounted funds from business groups who expect a high return on this investment, kickbacks or commissions on contracts etc.” [Emphasis is mine]

            When the state would be asked to fund political parties, and not ensure that conditions for free and fair elections are there in place; it will be under a duty to commit a positive act of funding. This would be in distinction from the negative omission to not to interfere with the election commission’s conduct of elections. Henry Shue, in his Basic Rights[40] casts serious reservations on any such watertight distinction. In that regard, state funding of elections will necessarily have to be tested on the touchtone of its ability to democratize and non-marketize elections. That possibility, as has been shown above, seems not only bleak, but also remote in the system as it operates today.

            Sixty-seven years of India’s Republicanism have pointed out how election reforms time and again have gone in vain where only money, force, and caste rule the day. There is absolutely nothing that we can further afford to lose at this juncture. What I contend is rather this: political parties must earn trust, faith, and confidence of tax-payers’ so as to gain any entitlement from the national treasure. Thus, what is required is a change in the practice and not just a change in laws. This change in practices will be the only condition precedent to even contemplate state funding of elections. Any other form of state-finding will only act counter to the voters’ interests and would work to disillusion them.


            The recent trends in the form of Finance Act, 2017 suggest a route contrary to public funding. While previously there used to be a cap of “seven and a half per cent of a company’s average net profits during the three immediately preceding financial years,” now the same has been done away with by the said statute. This will further pump up the funding that political parties expect to get by way of donations from corporates and private individuals.

            As has been pointed out, state funding of elections, in the current legal set up, or even if the legal set up is reformed, but without any on ground practical change, will only run counter to the interests of the poor. Public exchequer funding parties will only go on to disillusion and traumatize the poor voters who will only see these parties dancing in state’s rain.

[1] Rajdeep Sardesai, 2014: The Election that Changed India (2015).

[2] Law Commission of India, 255th Report on Electoral Reforms, March 2015, Available at: http://www.lawcommissionofindia.nic.in/reports/Report255.pdf.

[3] Joo-Cheong Tham, Money and Politics: The Democracy We Can’t Afford (2010).

[4] Organization for Economic Cooperation and Development (OECD), Money in Politics: Sound Political Competition and Trust in Government: A Background Paper, November 2013, Available at: http://www.oecd.org/gov/ethics/Money-in-politics.pdf; Yasmin Dawood, Democracy, Power, and the Supreme Court: Campaign Finance Reform in Comparative Context, 4 International Journal of Constitutional Law, (2006) pp. 269-293.

[5] P.C. Jain et.al., DD Chawla’s Election Law and Practice, (8th ed. 2004).

[6] Dr. S.Y. Quraishi, An Undocumented Wonder: The Making of the Great Indian Election (2014).

[7] P.D.T. Achary, Law of Elections, (1st ed., 2004).

[8] Mcconnell, United States Senator v. Federal Election Commission, 540 U.S. 93(2003).

[9] R.N. Choudhry, Election Laws and Practice In India, (2nd ed., 2005).

[10] Act No. 12 of 2017.

[11] Act No. 43 of 1951.

[12] Act No. 18 of 2013.

[13] Act No. 43 of 1961.

[14] Election Commission of India, Background Paper on Political Finance, 2015, Available at http://eci.nic.in/eci_main1/Current/BackgroundPaper23032015.pdf.

[15] Gajanan Krishnaji Bapat v. Dattaji Raghobaji Meghe, (1995) 5 SCC 347.

[16] Ashok Shankarrao Chavan v. Madhavrao Kinhalkar, (2014) 7 SCC 99

[17] Karimji Rehmanji Chipa v. Abdurahim Tajuji, 36 ELR 283; Rananjaya Singh v. Baijnath Singh, (1955) 1 SCR 671; Magraj Patodia v. R. K. Birla (1970) 2 SCC 888.

[18] Kanwar Lal Gupta v. Amar Nath Chawla, (1975) 3 SCC 646

[19] P. Nalla Thampy Terah v Union of India, (1985) Supp. SCC 189.

[20] Common Cause, a Registered Society v. Union of India, (1996) 2 SCC 752.

[21] Government of India, Report of the Committee on Electoral Reforms, May 1990, Available at http://www.lawmin.nic.in/ld/erreports/Dinesh%20Goswami%20Report%20on%20Electoral%20Ref


[22] Samya Chatterjee, Campaign Finance Reforms in India: Issues and Challenges, Observer Research Foundation Issue Brief 47, December 2012, Available at: http://www.orfonline.org/cms/export/orfonline/modules/issuebrief/attachments/Issue_47_1360754 379618.pdf.

[23] Law Commission of India, 170th Report on the Reform of Electoral Laws, Available at http://www.lawcommissionofindia.nic.in/lc170.htm.

[24] See Chapter 4, Electoral Processes and Political Parties, para 4.14 on “High Cost of Elections and Abuse of Money Power” in Ministry of Law and Justice, Report of the National Commission to Review the Working of the Constitution, Available at http://www.lawmin.nic.in/ncrwc/finalreport/v1ch4.htm.

Options, January 2001, Available at http://www.lawmin.nic.in/ncrwc/finalreport/v2b1-9.htm.

[25] Fourth Report of the Second Administrative Reforms Commission, Ethics in Governance, (2007) Available at http://arc.gov.in/4threport.pdf at para

[26] Law Commission of India, 255th Report on Electoral Reforms, March 2015, Available at: http://www.lawcommissionofindia.nic.in/reports/Report255.pdf.

[27] Association for Democratic Reforms, Analysis of Criminal and Financial background details of Lok Sabha 2014 Winners, 18 May, 2014, Available at http://www.adrindia.org/research-and-report/election-watch/lok-sabha/2014/lok-sabha-2014-winners-analysis-criminal-and-finan.

[28] Rukmini S., 16th Lok Sabha will be richest, have most MPs with criminal charges, The Hindu, 18 May, 2014, Available at http://www.thehindu.com/news/national/16th-lok-sabha-will-be-richest-have-most-mps-with-criminal-charges/article6022513.ece.

[29] India has highest number of people living below poverty line: World Bank, Business Today, October 3, 2016, Available at http://www.businesstoday.in/current/economy-politics/india-has-highest-number-of-people-living-below-poverty-line-world-bank/story/238085.html

[30] Constituent Assembly Debates, Volume XI on 25th November, 1949.

[31] Kanwar Lal Gupta v. Amar Nath Chawla, (1975) 3 SCC 646.

[32] Amartya Sen, The Idea of Justice (2009) p.231.

[33] See Martha Nussbaum & Sen (eds.), The Quality of Life (1993).

[34] Martha Nussbaum, Frontiers of Justice (2006) pp. 69-81.

[35] Kanwar Lal Gupta v. Amar Nath Chawla, (1975) 3 SCC 646.

[36] Jürgen Habermas, Reconciliation through the Public Use of Reason: Remarks on John Rawls’s Political Liberalism, Journal of Philosophy, 92 (1995) pp. 127-128.

[37] Ashok Shankarrao Chavan v. Madhavrao Kinhalkar, (2014) 7 SCC 99.

[38] Ashok Shankarrao Chavan v. Madhavrao Kinhalkar, (2014) 7 SCC 99.

[39] People’s Union for Civil Liberties v. Union of India, (2003) 4 SCC 399

[40] Henry Shue, Basic Rights: Subsistence Affluence and US Foreign Policy (1980) pp. 13-34.


Alcoholic Patriotism : Economic Analysis of two judgments of the Supreme Court


This post seeks to analyse the two judgments passed by the Supreme Court through the lens of law and economics. These two judgments are:

  • Shyam Narayan Chouksey v. Union of India (National Anthem in Cinemas Case)
  • K. Balu v. Union of India (Liquor Vends on Highways Case)

Critical Introduction

The progress of the Law and Economics movement can best be attributed to the global advance in business, commerce, and trade-related transactions. Oliver Wendell Holmes’ prediction in his The Path of Law did not come to be interpreted as a mere truism, but s a guiding inspiration to imbibe in the reading and analysis of laws, a sense of inter-disciplinarily with economics. He remarked:

For the rational study of the law, the black letter man may be the man of the present, but the man of the future is the man of statistics and the master of economics.[1]

The extensive use of economic analysis in the study of the legal system helps in developing a unique understanding of the same; providing perspectives which are unknown and sometimes unthinkable for a lawyer who is usually uninterested much in economics.

In the recent times, a few judgments of the Supreme Court of India have been able to extensively capture the attention of mainstream news reporting, and editorial writing. Not that this does not happen very often. But, what is unique about these judgments (which are the focus of this paper) is the prima facie constitutional significance that they command; and the corresponding anxiety and tumult that that seem to have created in the public sphere.

Unlike legislative activity, which has an inherently engrained theoretical popular element, judicial activity in the form of litigation and consequent adjudication of disputes in courts of law, does not (on all occasions) makes national front-page headlines. The reason that lawyers attribute to this is that judicial function is not that of law-making, but that of law-interpreting on a case-to-case basis. Economists might argue that judges do not engage in macro-economic policy making; and engage with individuals and organizations at a micro-level. But, this is now true only in theory; with judges acting through instruments such as Public Interest Litigation (PILs), which some have called has Social Action Litigation,[2] courts have increasingly been able to command a significant amount of power at a the macro-level.

Murphy and Coleman have credited the law and economics movement as:

having sought to explore the extent to which virtually all areas of the law could be understood as the institutional embodiment of the principle of economic efficiency.[3]

They also go ahead to say that the subject matter in falling within the commonality of this interdisciplinary approach has both analytic and normative dimensions. The first one in the sense that questions of law and justice are quintessentially questions of economics such as allocation of resources, and of efficiency; while the latter as providing economically sound terms of reference for law-people to legislate, execute and adjudicate so as to further economic efficiency. I am of the opinion that the subject-matter also has a descriptive dimension in the sense that laws and precedents can describe how economic considerations have played a major role in the development of what has come to be called the “law.”

In this sense, courts of law have been modelled by Richard A. Posner as mimicking the market, and practicing something termed as the “jurisprudence of prudence”.[4] Nonetheless, the law and economics movement is not sans its criticisms. Since a market system predominantly works in the favor the of the rich, the law, in that sense cannot be partisan, and resound and reverberate the tilted balance of power prevailing in capitalist markets.

The National Anthem Case

Shyam Narayan Chouksey v. Union of India[6] was a petition moving the Supreme Court in the form of a public interest litigation, asking for placing “emphasis…on showing requisite and necessary respect when the National Anthem is sung or played”, and asserting “that it is the duty of every person to show respect when the National Anthem is played or recited or sung.” The petitioner was seeking the issuance of directions from the Court to effectuate the assertion, and provide for the fulfilment of the purported objects behind the enactment of Prevention of Insults to National Honour Act, 1971. On the 30th of November, 2016, the bench comprising of Justices Mr. Dipak Misra and Mr. Amita Roy issued interim directions, out of which, the following will be used for the purposes of this paper:

(d) All the cinema halls in India shall play the National Anthem before the feature film starts and all present in the hall are obliged to stand up to show respect to the National Anthem.

The bench went ahead and sought to explain theoretical underpinning for this direction in the concept of “constitutional patriotism” postulated by Jürgen Habermas, a German sociologist.[7] The judgment made national headlines. In a day or two, the newspapers were flooded by editorial writings by lawyers, law professors, civil society activists and sociologists; expressing solemn disapprobation of the aforesaid direction. However, some scholars like Professor Faizan Mustafa, went as far as to question the very theoretical grounding of the judgment by the judges, when he said:

Justice Misra used the term “constitutional patriotism”. Jurgen Habermas uses this term (verfassungspatriotismus) to argue for “individual autonomy” and “super-national identity”. For Habermas, the term is different from “aggressive nationalism,” based on majoritarinism; it is a compromise between nationalism and cosmopolitism.”[8]

The economic analysis is visible in the form of curtailment of individual freedom and liberty that is manifest in the compulsory nature of the direction. The dilution of freedom is an important corollary of going away from Adam Smith’s theory of Invisible Hand. Can we say that nations are held together by cohesive forces generated by something like the invisible hand, where the citizenry unconsciously (which need not be told to “show respect” to symbols) through its active participation at an individual level constitutes the nation? Aggressive tendencies to cause certain economic outcomes may, in fact be comparable to what, Harsh Mander, in an article in the Hindustan Times has said:

This ruling of India’s highest court, carrying the weight of law, troublingly mirrors the aggressive hyper-nationalism that is sweeping the country today. In this discourse, the nation, its leader, the government and the country’s religious majority all converge. Opposition to majoritarian politics and vigilantism, as much as dissent with central government policy and criticism of the Prime Minister, are all painted alike as impermissible disloyalty to the nation.[9]

Pratap Bhanu Mehta went on to the extent of saying that the judgment bespeaks of a court that has undone itself over the past few years with judgments such as these; and entails “biggest crisis of legitimacy” that the court is now facing since the times of National Emergency of 1975-1977.[10] His criticism comes from the libertarian perspective of the Rule of Law. The tall pillar of Indian legal academia, Professor Upendra Baxi came to the rescue of the Supreme Court who in his piece Unfair to Justices pointed at the slippery slope of Mehta’s argument that criticizing the entire court for decision by a bench of two was unfair and unwarranted overblowing.[11] The counter-intuitive nature of the direction is perhaps best captured by the term popcorn nationalism used by Bhairav Acharya, writing for The Wire.[12]

Also pertinent would be to reproduce what Shivam Vij of the Huffington Post has to remark on what he feels is judicial over-reach by the apex court judges:

With due respect to the honourable apex court, sometimes you wonder why they spend time on things best left to the government. Or, on really inconsequential things.[13]

This form of exercise of judicial power is comparable to the analysis by Richard A. Posner when he gives an economic understanding in terms of how a balance must be created in terms of high transaction costs and enhancement of efficiency when governmental powers are separated amongst the legislature, executive and the judiciary in Montesquieu’s terms. While separation of powers allows the government to exploit the economies of specialization, the breach of separations is not seen as substantive breaches of skill and ability, but of procedural limitations that go against the rules.

Alok Prasanna Kumar, in his article on First Post, brings home the point similar to what economists prefer in the making and interpretation of the laws: stability, coherence and consistency. He contends as follows:

In the next direction, demanding that entry and exit doors be closed while playing the National Anthem, the Supreme Court ignores its own earlier judgment in the Uphaar tragedy case[[14]] where the court, for good reasons, had held that under no circumstances should doors to a cinema be shut from the outside. Perhaps it should be considered that unlike laws written by institutions, the laws of physics can’t be suspended or struck down by a judicial order, and if a fire breaks out, all the patriotism in the world won’t save you from a horrible death in a closed room.[15]

In pure economic terms, let us now discuss as to what were the choices before the court. It had the absolute liberty to sit silent over the petition or dispose it of. It however, chose to pass a decision. This decision was to take effect in commercial establishments (cinema theatres and multiplexes) which run for profit maximization. The question now is, whether there were any costs involved in the implementation of such an order. From the perspective of the cinema theatres, the cost was negligible. They had to anyway screen the movies; and now had to precede the screening with the playing of the national anthem. From the side of the consumers of films in cinemas, for the viewers, the only cost was that of the physical cost of standing. The differently abled persons were exempted from this otherwise blanket requirement of standing erect in reverence of national anthem. Through this cost-based analysis, we may conclude that there was no economic impediment or restraint that was acting on the judges to not to pass the direction that they did pass.[16] It was thus, in the absence of such an economic restraint, that the criticism which the direction received, was more or less, only ideological in nature. This economic understanding is important to move on to discuss the next judgment, which is under consideration in this paper.

The Liquor Vends on Highways’ Case

From what some have remarked to be a “frivolous” petition moved by a person who had too much “time on his hands,”[17] we come to what seems to be actually a serious business Public Interest Litigation petition, now at the stage of a Special Leave before the Supreme Court. This SLP was being heard against the decisions rendered by the Madras High Court and Punjab & Haryana High Court while they were hearing two different PILs on a similar question. K. Balu was the petitioner at Chennai, while Arrive Safe Society had moved the Court at Chandigarh. The matter was being heard by Chief Justice Mr. T.S. Thakur, and Justices Mr. D.Y. Chandrachud, and Mr. L. Nageswara Rao. The call was whether to ban liquor vending outlets in and around National and State Highways. These roads carry the most burden of vehicular traffic as they serve long-distance travel in a seamless manner. It was brought out through ample statistics that drunken driving was one of the predominant curable causes behind accidents and deaths on roads.

The backdrop was the case was such that the court had to conduct a balancing act between the cost of human lives, and the commercial benefits arising out of revenue generation through liquor vends. It must also be borne in sight that for many a people, their livelihood is contingent on the functioning of these vends. In this regard, the court’s exercise of jurisdiction seems to resemble and resound the paternalistic notions of state responsibility.

Separation of powers between the legislature and judiciary is not a trite, it is a recurring theme in Indian constitutionalism due to the looseness of the concept in Indian terrain of law. It does increase the transaction costs since the number of agents (who have a say in the decision-making process) increases with the compartmentalisation of government, but the efficiency in governance is achieved due to the division in functional domains. If the court, as Advocate Gautam Bhatia has noted, loses sight of this important principle in a legal setup such as ours, the efficacy and true purpose for the establishment of courts of law, goes for a toss.[18] In economic analysis of law, efficacy of legal action does matter to a great extent.

It is also arguable that the principle of federalism, which implies separation of Centre’s powers from the states instils greater efficiency into the governmental process. Detailed inquiry has been attempted in this sphere in relation to the Constitution of the United States. In India, this division of is manifested in Schedule VII to the Constitution of India. However, as is not often observed in the context of the US, which is a totally federal polity, in India, the quasi-federal nature, and the unitary tendencies in India at times cause deadlock in the cooperation between the central government and the constituting states. This gives a whole new shape to the economic question in the Liquor Vends Case. It is stated on record that on the elapse of thirteen long years since the Union government first mooted the idea of banning liquor vends on national highways, nothing moved on ground due to state governments’ inaction. The subject-matter governing policy relating to excise on liquor falls within the ambit of the states. In this 2016 judgment, the Supreme Court paved the way for this plea to be given effect to, by observing the impediments imposed by federal nature of the question; and went ahead to do the job itself. States were unwilling to give effect to the Union government’s policy since they had an economic incentive in permitting liquor vends on highways; since they were the direct beneficiaries of consequent revenue collection out of the process. At a distinct yet relatable level, perhaps this points to a further understanding of judicial and legislative functions. Guidance to law-making is often sourced to public opinion prevailing at particular points of time. A.V. Dicey has pointed out how “judicial legislation” (judge-made law) which seems to have been the phenomenon in courts banning liquor vends is always guided by principles of coherence and consistency, as against legislative rule-making which is more often than not guided by lobbyists.[19] Perhaps, this might explain why the state governments were sitting silent on the Union government’s advisory to do what the apex court finally did in 2016!

A point to be noted from the commercial point of view is that there is no absolute bar on the presence of liquor vends on all kinds of roads. First limitation comes in when only state and national highways are selected of all. Second restraint is in the form of allowing liquor vends beyond a distance of 500 meters from the road. While the judgment makes it clear that the prohibition will apply even to sections of highways passing across towns, cities and within municipal limits, the ball is now in the court of state governments as to whether they will decide to de-notify certain sections of such highways so as to indirectly allow vending of liquor in certain parts of such roads.

Comparative Economic Analysis of the Judgments

The two judgments have both, similarities and differences. Both of them apply to commercial establishments operating for profit maximization: cinemas and liquor vends. However, in the Liquor Vends Case, there is a clear directive policy from the union executive, which the apex court ostensibly gives effect to; in the National Anthem Case, there is little basis in the law to allow for the direction that the court has issued.

Another interesting aspect that an economic analysis of the two judgments can look into is the weightage accorded to fulfilling and giving effect to the Directive Principles of State Policy (DPSPs) and enforcing Fundamental Duties. Both of these are non-justiciable and legally non-enforceable by courts of law. However, the recent trend followed by courts suggests slightly the otherwise. In the National Anthem Case, the Court relied on the following:

51A. Fundamental duties – It shall be the duty of every citizen of India – (a) to abide by the Constitution and respect its ideals and institutions, the National Flag and the National Anthem”.[20]

 It must be noted that there is no basis in law to pass such an order. Apparently, the court seems to read a few statutes together with a constitutional provision to come up with something absolutely new and alien to Indian law.

In the Liquor Vends Case, the following DPSP is quoted by the Court:

47. Duty of the State to raise the level of nutrition and the standard of living and to improve public health: The State shall regard the raising of the level of nutrition and the standard of living of its people and the improvement of public health as among its primary duties and, in particular, the State shall endeavor to bring about prohibition of the consumption except for medicinal purposes of intoxicating drinks and of drugs which are injurious to health.[21]

The way the court goes on to place reliance on these two constitutional provisions is reflective and instructive to lawyers interested in economic analysis of the law. While the judges had to react to the jurisdiction invoking what they felt was a public interest matter, they did so in the ambit and scope defined by economic considerations. They did not absolutely placed prohibition on liquor vends on roads since they understood the potential economic repercussions of the measure. At the same time, they placed an absolute positive requirement on cinema theatres to play national anthem, and on viewers to stand while it played taking into account the low costs entailed in the execution of such measure. Therefore, the court showed a zero tolerance towards what was supposed to follow in cinema halls, while it was determined to reach a compromise on tolerating liquor vending on roads. Thus, the normative conclusion that is reached is that since all apparently purely legal doctrines also have underlying economic costs,[22] the court must estimate the same before delivering its verdict.

Analytical Conclusion : A Theory of Anticipatory Costs

Thus what seems to be the case through the two judgments which were the focus of this paper is that judges are guided not only by ideologies (which unlike economic principles) prima facie speak through their judgments, but also by principles of economics to minimize costs and maximize utility. In this, regard, they anticipate the costs inherent in any probable verdict that they would hand out.  The two judgments are perfect examples where the Supreme Court’s judgment varied with the length of its feet,[23] and its influence on the law of the land was in a sense, allowed (in the National Anthem Case) and limited (in the Liquor Vends Case) by market forces of demand and supply, which form the core of economic analysis.

Constitutional Economics in this sense perhaps also captured by Charles Evans Hughes’s famous statement when he said that a “constitution is what judges say it is,” where judges like all human beings are not absolutely immune from economic considerations, and what they will say, might at times be in consonance with what economists would also say.

[1] Oliver Wendell Holmes, Jr., The Path of the Law, 10 Harvard Law Review 457 (1897).  His ostensible object was “the prediction of the incidence of the public force through the instrumentality of the courts.

[2] Baxi, Upendra, Taking Suffering Seriously: Social Action Litigation in the Supreme Court of India, 4 Third World Legal Studies,108, 107-132 (1985).

[3] Jeffrie G. Murphy and Jules L. Coleman, Philosophy of Law, 181 (Oxford University Press, 1997).

[4] This is a major theme of the book Richard Posner, How Judges Think, (Harvard University Press, 2008).

[5] Richard A. Posner, Free Speech in an Economic Perspective, 20 Suffolk University Law Review 1 (1986).

[6] Writ Petition (Civil) Nos. 855 of 2016 in the Supreme Court of India; Reported as (2017) 1 SCC 423.

[7] Müller, Jan-Werner, A General Theory of Constitutional Patriotism, 6 (1) International Journal of Constitutional Law. 72–95. (2007).

[8] Faizan Mustafa, Making playing of national anthem mandatory goes against its spirit, The Indian Express, December 7, 2016. Available at http://www.indianexpress.com/article/opinion/columns/national-anthem-in-theatre-supreme-court-national-flag-4414157/.

[9] Harsh Mander, SC order on national anthem in cinema halls mirrors aggressive hyper-nationalism, Hindustan Times, December 1, 2016. Available at http://www.hindustantimes.com/opinion/sc-order-on-national-anthem-in-cinema-halls-mirrors-aggressive-hyper-nationalism/story-vL1QM3xibtppLQW7c08tGI.html.

[10] Pratap Bhanu Mehta, Unconstitutional patriotism: Order on national anthem shows what is wrong with the Court, The Indian Express, December 3, 2016. Available at http://indianexpress.com/article/opinion/columns/national-anthem-cinema-halls-supreme-court-order-unconstitutional-patriotism-4407560/.

[11] Upendra Baxi, Unfair to Justices, The Indian Express, December 12, 2016. Available at http://indianexpress.com/article/opinion/columns/supreme-court-national-anthem-cinema-halls-unfair-to-justices-4422239/.

[12] Bhairav Acharya, The National Anthem and the Supreme Court’s Popcorn Nationalism, The Wire, December 3, 2016. Available at https://thewire.in/83910/the-national-anthem-and-the-supreme-courts-popcorn-nationalism/.

[13] Shivam Vij, Just Why should the National Anthem be Played in Cinema Halls?, The Huffington Post, December 30, 2016. Available at http://www.huffingtonpost.in/2016/11/30/just-why-should-the-national-anthem-be-played-in-cinema-halls/.

[14] MCD v. Uphaar Tragedy Victims Association, (2011) 14 SCC 481.

[15] Alok Prasanna Kumar, Supreme Court’s National Anthem order mocks judicial process, Constitution, First Post, December 1, 2016. Available at http://www.firstpost.com/india/supreme-courts-national-anthem-order-mocks-judicial-process-constitution-3134204.html.

[16] Richard A. Posner, The Constitution as an Economic Document, 56 George Washington Law Review 4, (1987).

[17] Bhairav Acharya, The National Anthem and the Supreme Court’s Popcorn Nationalism, The Wire, December 3, 2016. Available at https://thewire.in/83910/the-national-anthem-and-the-supreme-courts-popcorn-nationalism/.

[18] Gautam Bhatia, The Supreme Court’s Judgment on the Sale of Liquor along National Highways, Indian Constitutional Law and Philosophy, December 17, 2016. Available at https://indconlawphil.wordpress.com/2016/12/17/the-supreme-courts-judgment-on-the-sale-of-liquor-along-national-highways/.

[19] This possibility is hinted in Why are States speaking the language of liquor vendors, asks SC, The Hindu, December 3, 2016. Available at http://www.thehindu.com/news/national/Why-are-States-speaking-the-language-of-liquor-vendors-asks-SC/article16774246.ece. For understanding the concept See A.V. Dicey, Law & Public Opinion in England, (Macmillan, 1905).

[20] Article 51A, Constitution of India.

[21] Article 47, Constitution of India.

[22] Maxwell L. Stearns, The Economics of Constitutional Law, in The Oxford Handbook of the U.S. Constitution (Mark Tushnet, Mark A. Graber, and Sanford Levinson ed., 2015).

[23] Reference is made to the comment made by John Selden, an eminent seventeenth century jurist to point to the inconsistency of decisions of the Equity/Chancery courts functioning in England: “Equity varies with the length of the Chancellor’s foot”.

Why demonetisation of Rupees 500 and 1000 Bank Notes is legally valid?

As a law student, Ms. Indira Jaising’s article in the National Herald comes to my aid in days when most debate surrounding this hyped issue takes place in economic terms. The need to comprehend or determine the legality of any governmental action is grounded in John Adams’ famous adage that we are ruled by a “government of laws, and not of men [or women].” Procedural soundness of any action increments to the aims sought to be achieved by that action.

Practical action in the field has also been witnessed in the form of a few petitions which challenge the move, filed in the Hon’ble Supreme Court, purportedly impugning the decision on the basis of “at least five significant legal grounds”.

On a closer reading, however, I strongly feel that the move is legally sound, and procedurally valid. Thus, in this post, I would proceed to show that (a) the government was competent to declare the cessation of legal tender character of high value denominations, and (b) that the action was legally covered and the power was exercised in furtherance of the law.

In this light, I somehow fail to digest the claims made by my very very senior in the field, Ms. Jaising vis-à-vis the legality of Central Government’s move to demonetize the denominations of Rupees 500 and 1000 bank notes in order to tackle the myriad and challenging problems such as black money, terrorism, corruption inter alia. I am in one way indebted and thankful to Ms. Jaising to have brought to the fore the issues of legality surrounding the government’s move. I shall be attempting to explain how the legality of the executive action is fairly covered within the contours of the law.

While I wish to express no reservations to the arguments concerning the nature of currency in our hands, I would straight away proceed to analyze the process entailing the issuance of notification by the Department of Economic Affairs of the Ministry of Finance New on the 8th November, 2016.

Firstly, it has been said that the notification exceeds the scope of the exercise of power provided for in Section 26 (2) of the RBI Act, 1934. The said section reads as follows:

“(2) On recommendation of the Central Board the [Central Government] may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender [save at such office or agency of the Bank and to such extent as may be specified in the notification].” (Emphasis supplied.)

It has been pointed out that the phrase “any series of bank notes” limits or restricts the scope of power to declare the cessation of legal tender character of bank notes to particular and definite series as against a denomination in its entirety. This seems to be a very restrictive interpretation conferred upon the statutory provision, with no clear backing from any legislative intent to that effect. My take on this is that the word “any” is very broad and wide in its ambit and import, in a sense of conferring a discretion onto the competent authority to declare any (which may mean all) legal tender to be illegal therefrom.

It does not mean that the government’s power is restricted to declare illegal only a particular series of currency at a particular point of time. Therefore, the statutory text places no restriction, and the power is of a very wide import to declare any and not only some of the series in currency. The Hon’ble Supreme Court in the case of Lucknow Development Authority v. M.K. Gupta, observed that “the word ‘any’ dictionarily means ‘one or some or all’. In Black’s Law Dictionary it is explained thus, “word any’ has a diversity of meaning and may be employed to indicate ‘all’ or every’ as well as ‘some’ or ‘one’ and its meaning in a given statute depends upon the context and the subject- matter of the statute”.

In Balaganesan Metals v. M.N. Shanmughan, it observed that the “word “any” has a diversity of meaning and may be employed to indicate “all” or “every” as well as “some” or “one” and its meaning in a given statute depends upon the context and the subject matter of the statute.” Thus, there is no substance in the argument that the government cannot subject all series of bank notes to the incident of Section 26 (2).

The second point which has been made relates to the modus operandi followed to declare the move. It has been said that, as has been done in the past (in the form of The High Denomination Bank Notes (Demonetisation) Act, 1978), the power under Section 26 (2) can only be exercised through an act of the parliament (or an ordinance to be followed by a legislation, when the legislature is not in session), and not through an executive notification in the gazette. My response to this is two fold: firstly, that the express words used in Section 26 (2) allow for the ‘Central Government’ to take such a move via a notification in the gazette, and secondly, that the precedent is inapplicable to the situation as it persists for now, since the statute of 1978 created criminal offences (See its Section 10) for usage of the currency notes as tenders by persons, as against the current notification dated 8th November 2016. Therefore, the court as of now, before at least 30th December (till the point I think there can be a legislation passed in the winter session), pronounce the petitions filed as premature of cause of action.

Interestingly, reliance has been placed upon the Supreme Court’s judgment in Jayantilal Shah v. Reserve Bank of India, wherein it had been held that cessation of currency results in “extinguishment” of a debt owed to the bearer by the government, resultant into a deprivation of property that could be carried out but by a “law”. Then again, it must be remembered that the right guaranteed by Article 300A is not a fundamental right as it was when Jayantilal (supra) was decided. Further, since the definition of law in Article 12 of the Constitution is broad enough to include within the law, which is what one must rely on while challenging the decision on grounds of being violative of fundamental rights; the exercise of power seems grounded in constitutional authority.

As to why the ordinance route was not taken up becomes a redundant question, if one sees the legislative majority of the ruling political party in the Lok Sabha. This should be enough of any realpolitik explanation to the raised eyebrows on the government’s decision to choose the notification path in the interests of secrecy and efficiency. Even then, Section 43A of the RBI Act should come to the rescue, which seeks to protect the Bank for anything done in furtherance of good faith. It is most reasonable to believe that elimination of black money, curbing terrorism, and tackling counterfeit currencies are necessarily beyond doubt objectives in line with good faith, and public interest. This should be the guiding factor for the court to consider the merit of the move, and decide the issue accordingly.

Further, there are catena of cases where it has been held by the apex court, that matters of policy which are distinctively within the domain of the executive should remain outside the purview of the courts. Thus, it is my sincere opinion and expectation that courts, as partners in progress and good governance, ought to exercise mindfulness of exercising their powers to review official action at times. And this i, just one such point in time.

Thus, the governmental action, in my opinion fails to fall short of legal requisites. And, is therefore, within the four corners of the law.