On the evening of 8 November 2016, India’s Prime Minister Narendra Modi, in a televised public address, announced that the highest denominations of the Indian Rupee — Rs 500 and 1,000 notes — would cease to be legal tenders starting midnight. A hugely momentous but polarising move that it was, the renewed monetary policy sent shockwaves across the gigantic consumerist economy of post-liberalisation India that is heavily dependent on cash transactions.
But, as stated by Modi in his hour-long speech, the decisive move is designed to curb the very real menace of ‘corruption, black money, and terrorism’. In a categorical-yet-measured reference, the prime minister also weighed in on the significance of the decision in suppressing the counterfeit notes racket in the country, run by "enemies from across the border".
By now, it is a well-established fact that India faces a serious threat from what is officially referred to as Fake Indian Currency Notes (FICN). The fake notes find their way into the country through several entry points, the hot ones being the India-Nepal and West Bengal-Bangladesh border sectors. Although there exists no precise estimates for the scale of this counterfeit economy, the Ministry of Home Affairs states that up till September 2015, “high quality FICN” worth Rs 22.90 crore was seized and recovered. The fake money not only dilutes the strength of the national economy but also sponsors an expansive web of illegal non-state and anti-state actors, in the likes of arms suppliers, drug smugglers, and terror groups.
Will the demonetisation policy have an impact on this cancerous racket of fake currency? Yes
Will it permanently crush the FICN supply chain? No
The reason is simple: The largest share of the FICN that circulates in India is believed to be originating not from nondescript local presses inside the country, but from high-grade, state-owned minting factories in Pakistan. A mountain of evidence, made public by both domestic and international agencies including the National Investigation Agency (NIA), Financial Action Task Force (FATF), and Interpol have pointed fingers at the Government of Pakistan for creating and sustaining a transnational FICN racket that spans from West Asia to Southeast Asia.
In May 2011, the US government identified a serving officer of Pakistan’s Inter-Services Intelligence (ISI), Major Iqbal, as the supplier of FICN to the infamous Pakistani-American Lashkar-e-Taiba (LeT) operative David Coleman Headley. He, however, recently denied the allegations. Another key LeT operative arrested by India in 2013, Abdul Karim Tunda, confirmed that the entire FICN supply chain was run by the ISI.
A day after the demonetisation policy was made public, Kiren Rijiju, the Union minister of state for Home Affairs, stated that the “the printing press in Karachi and Peshawar will now be jobless” as a result of demonetisation. He wasn't entirely wrong in his brisk assumption, although it was at best myopic. Most of the FICN in circulation is indeed denominated in Rs 500 and Rs 1,000 notes, and since counterfeiting notes is a capital-intensive business that requires significant investments, the introduction of a new series of notes will certainly draw the curtains on FICN factories in Pakistan for now.
However, it would only be sheer ignorance to believe that the FICN supply chain can be killed by introducing new notes, even with upgraded security features. There is no strong ground to believe that the production machinery cannot re-calibrate itself to the new design. There are more than one reasons to posit this.
The FICN production facilities run by Pakistani entities are more sophisticated and technically advanced than most of us would like to believe, particularly because they enjoy state patronage. This was categorically confirmed by a NIA forensic report deposed in front of the Parliament’s Standing Committee on Finance in 2013, which stated that the FICN, bearing fundamental similarities with the Pakistani legal tender, “have been printed on highly sophisticated machines involving huge capital investment”.
The formidable level of technical depth achieved by state-sponsored FICN producers in Pakistan is well reflected in the narrowing gap of divergences between genuine and counterfeit notes that have been seized over the past few years. In fact, earlier this year, the Union Home Ministry had informed the Parliament that the increasing accuracy of fake notes had led to a 30 percent dip in FICN recovery over the past three years.
With such an impressive degree of operational sophistication, it is highly unlikely that the FICN production system would simply collapse in totality with the entry of a new series of Indian notes. This is even more so because the Reserve Bank of India (RBI) hasn’t really clarified on whether the new series will have remarkably better security features than the outgoing one. Despite this, a large section of the Indian media created a brouhaha over how the new notes come with geo-satellite detection chips and state-of-the-art security features, rendering them ‘impossible to fake’. Besides the obvious antithesis that non-duplicable currency is quite a long shot for any country, a recent report in The Hindu quotes a senior government official stating that the new notes do not carry any new security features.
Why? Simply because the RBI did not have sufficient time to develop those.
If this is the case, then Pakistans’s FICN factories will barely have any trouble re-configuring their minting templates to the new size and design.
In addition to the above, there is something far more worrying about the entire FICN production and supply process. Till this date, the RBI, through the Security Printing and Minting Corporation of India Limited (SPMCIL), imports a bulk of the paper used in minting currency notes from European companies like Louisenthal (Germany), De la Rue (United Kingdom), Crane (Sweden,) and Arjo Wiggins (France and Netherlands). So does Pakistan.
In fact, in 2015, New Delhi barred Louisenthal from supplying currency paper to India for this very reason. Besides, India imports the OVI Intaglio security ink — a distinctive security component of every currency note — from SICPA, a Swiss company that manufactures high-performance security ink; and it is a known fact that SICPA also deals with Pakistan. Intriguingly enough, the company has a manufacturing unit in Sikkim, from which a five kilogram consignment of ink went missing during transit back in 2009.
If the RBI continues to import paper and security ink for the new notes from the same foreign companies as Pakistan, then the new series will remain as vulnerable to counterfeiting as the older ones. As of now, India does not have a full-capacity infrastructure for indigenously manufacturing all of its currency paper and most certainly, not the high-grade Intaglio ink.
However, last year, Modi and Finance Minister Arun Jaitley did talk about indigenising the printing process as part of the 'Make in India' campaign. Indeed, an RBI-owned currency paper mill — known as the Bank Note Paper Mill India Private Limited (BNPMIPL) — began operations in Mysuru last year. According to a senior government official, all the new Rs 2,000 notes are being printed at this facility. But, we do not yet know if the same is true for the new Rs 500 notes, which would have to be produced in higher numbers than the Rs 2,000 notes.
What is perhaps most crucial is that Pakistan’s illegal export of FICN to India isn’t merely a support line for shadow networks, but also a self-serving profit enterprise. The ISI is understood to be running its fake currency business on a significant profit margin of about 30 to 40 percent on the face value of each fake note. This naturally implies the existence of several other stakeholders — including but not limited to Dawood Ibrahim’s international criminal syndicate — who financially benefit from this dastardly trade, and wouldn’t favour a cessation of their profits. In such a situation, introduction of new notes is hardly a potent disincentive for the producers and suppliers to pull their shutters down vis-à-vis easy adaptation to the new series.
There is no doubt that the invalidation of higher denomination notes will render the existing modules and stashes of FICN useless. An abrupt hault in operations is bound to cripple the core of a massive shadow economy run by international mafias, arms smugglers, drug dealers, and extremist groups. The MHA already claims that Kashmir is quieter after the demonetisation, indicating a suspension of the nefarious hawala operations to illegally move money. With the wholesale replacement of the Rs 1,000 note with a 2,000 note, the existing counterfeiting enterprise might even see its profit margins hunker down, since higher denominations are costlier to replicate.
From Multan to Malda, the subcutaneous economy of guns, drugs, and terror faces bleak prospects. The glaring question, however, is — for how long?
Not unlike hackers who ultimately succeed in crawling into upgraded operating systems by mutating their way through security updates, the sophisticated fake currency web is designed to survive structural disruptions — change of currency notes being one of them. Hence, the Indian government needs to do much more to permanently impair this hugely complex international trade, and in this case, regional cooperation is paramount.
Ironically, the “surgical strike” on financial terrorism (which was more of a “carpet bombing” campaign) can bear only limited dividends in the longer run as a standalone policy move — just like the Indian Army’s cross-border adventure of late September.
The author is a researcher at the Institute of Peace and Conflict Studies in New Delhi
Updated Date: Nov 15, 2016 11:54 AM