Financial Emergency – What does the Constitution say?

By Nishita Makkar

Introduction

‘Financial emergency’; we all have been repeatedly hearing this term since the phase of pandemic has been started. From the beginning of the first lockdown period i.e. in March 2020, the economic activities have come to a complete standstill, which has retarded back the whole world’s financial status including India.

Our finance minister Ms. Nirmala Sitharaman had even announced a package of Rs.1.7 lakh crore for the biggest emergency in the Independent India.

Even the C.A.S.C. had filled the PIL before the Supreme Court seeking directions to impose Financial Emergency under Article 360 of the Indian Constitution which was denied by the Court.

In this article, we will find the Financial Emergency, its pros and cons and why government has never implemented it?

What is an Emergency?

According to Black law dictionary, emergency can be explained as “a failure of social system to deliver reasonable conditions of life.”

Part XVIII of Indian Constitution is titled as ‘Emergency Provisions’ that contains Articles 352 to 360. The constitution of India envisages three types of emergency. These are:

• Emergency arising from the threat of the security of India. It is commonly known as “National emergency ” covered under Article 352;
• Failure of constitutional machinery in a state. It is called “state emergency” or “president rule” or “governor rule” explained in Article 356;
• “financial emergency” envisaged in Article 360.

Under Article 352 i.e., a Proclamation of Emergency was issued by the President on October 26, 1962 due to Indo-China clashes.

Under Article 356 i.e., State emergency, President Fakhruddin Ali Ahmed declared an internal emergency on the night of June 25, 1975.

Interestingly, “No Financial emergency under Article 360 has been imposed in India till date.” we will find out reason subsequently.

What is the Concept of Financial Emergency and Who Can Declare It?

The Constitution exclaims about the Financial Emergency under Article 360(1) which provides: “If president is satisfied that situation has arisen whereby the financial stability or credit of India or part of its territory is threatened, he may by proclamation make a declaration into that effect”.

Hence, the President is the person who can declare financial emergency for any part of India.

Regarding the power of president, there is need to elucidate Clause 5 inserted by 38^th Amendment Act, 1975^[1] declared the satisfaction of the president as “final and conclusive” and non-questionable in any Court on any ground. But then this clause was omitted by the 44^th Amendment, 1978^[2] which says “President’s satisfaction is not beyond judicial review”.

This power allows Supreme Court to keep a check on president in case if he misuse his power.

Is there Parliamentary Approval Needed? What about the Duration of Financial Emergency?

Role of houses cannot be neglected when it comes to the any constitutional provision. Clause 2 of Article 360 states that proclamation of Financial Emergency is required to be laid before each house of Parliament. “It has to be approved by both houses within two months of date of issue.”

The resolution approving the imposition of Financial Emergency can be passed either house by ‘Simple Majority’.

Also, if the resolution is approved by both the Houses, it shall continue to operate until revoked by the president by making fresh proclamation Article 360 (2) (a).

Hence, we can conclude that:

• There is no maximum limit of for the operation of Financial Emergency.
• Proclamation of Emergency is initiated by president with the approval of two houses however, it can be revoked at any time by the president without any parliamentary approval.

What are the Objectives and Implications of Financial Emergency^[3]?

The main objective of issuing a Proclamation of Financial Emergency is to achieve ‘financial stability’. In accordance with the Constitution, Imposition of Financial Emergency has following effects:

• • During the period of proclamation of Financial Emergency, the Authority of Union extends:
    • • To give directions to state to observe such laws of Financial Propriety as may be specified in the directions,
      • To giving of such directions as the president may deem necessary for the purpose,
      • To give directions requiring the reduction of salaries and allowances,
      • All the Money bills or other bills to which provisions of Article 207 apply, to be reserved for consideration of the president.
• During this period, it should be competent for the President to issue directions for the reduction of salaries and allowances of all class of persons serving in connection with affairs including the judges of the Supreme Court and the High Courts.

Hence, in short the powers are totally centralized, the autonomy of the states is taken away and all the bills are directly given to assent of president.

Also, the well doing states have to abide by the directions of the center.

Are there any Situations arisen when Financial Emergency could be Implemented?

The Financial Emergency has been taken from National Recovery Act, 1933^[4] of U.S.A. It was opted from the restoration of circumstances arisen after ‘Great Depressions of 1930’. The main objective of this act was to ‘stimulate economic growth’.

Similarly, the makers of the constitution were in thought that if such a situation arises in the country, what ways could be opted to combat the crisis. Therefore, they came with Article 360.

But, as we have seen above, this provision has never been implemented in independent India even under disastrous circumstances. Two main situations are:

• Financial crisis -1991: India was suffering from great losses because of its inward-looking trade strategy. Gulf crisis, adverse BOPs, degrading FDI, poor PSUs, all have shaken the economic backbone of the country. This resulted in emergence of “New Economic Policy” i.e. Liberalization, Globalization and Privatization.
• Covid-19 Pandemic_2020: In the year 2020, same crisis have been taken place when all economic activities had to be shut down to preserve life from the deadly virus. Whole Indian economy had to face a pull back and G.D.P. depleted. Many steps have been to taken by the government to take the economy back to recovery.

But in both cases Government did not impose Financial Emergency.

Why Indian Government of India never used Article 360?

The government of India was well aware about the bad impacts of Article 360. That’s why, even in a situation when India was at its bottom line of the economy, they never took the risk of using Financial Emergency.

The criticism of Article 360 are:

• Since never used before, major criticism of Article 360 is that it is a vague concept and has no specifications. There is no particular definition given for the term ‘financial instability’.
• Also, as we know at the time of any Emergency, the whole power is centralized which takes autonomy of State governments elected by the people.
• As, whole economy comes under direct central control so, the states even who had performed well have to be bound by directions of the Centre.
• In addition, it can turmoil the credibility of the country in the international market that can bring losses to country even in Foreign Direct Investment.
• Moreover, Fundamental Articles 14 and 19 are suspended during National Emergency and State Emergency but not under Financial Emergency.

Case Law

• Bennet Coleman and Company Limited Vs. Union of India, 1973^[5]

Suspension of Article 19 during National Emergency-

Facts:

The plaintiff company went to court for seeking justice for the order in which the government has changed the Newsprint policy. They said it is violation of Article 19 (1) (a) to which defendant claimed that it is done for the Proclamation of Emergency which is valid under Constitution.

Held:

The Supreme Court observed that since, the restrictions under Newsprint policy were imposed before Proclamation of Emergency, it could be challenged as violating Article 19 (1) (a).

Conclusion

It has been already observed that Financial Emergency has never been imposed in India which was because of the bad effects of using Article 360.

As mentioned above, it changes Federal structure of the Indian government to the Unitary government leading more power in hands of central government. This can be a cause of abuse of power establishing totalitarianism.

With this view, constitutional provisions relating to proclamation of Emergency has been extensively amended by the constitution (44^th Amendment Act, 1978).

Also, now in the phase of Covid-19 pandemic^[6] that has retarded economy and also made it stagnant, all news about imposition of the Financial Emergency was ridiculed. With the help of the country, the government has tried to balance the situation and we are now in our recovery period.

References

• .legalserviceindia.com
• https://www.drshtiias.com/to-the-points/Paper2/emergency-provisions

1. The 38^th (Constitutional) Amendment Act, 1975, clause-5 ↑
2. The 44^th (Constitutional) Amendment Act, 1978 ↑
3. Hemant Singh, “What is Financial Emergency and its Effects on the Country?”, available at:jagranjosh.com (last visited on 29/06/21) ↑
4. The National Industrial Recovery Act, 1933 (NIRA) ↑
5. Bennet Coleman and company limited Vs. Union of India, AIR 1973 SC 106 ↑
6. Effects of Financial Emergency on Economy-Covid-19, available at:taxguru.in (last visited on 29/06/21) ↑