Rs 500, Rs 1,000 notes ban: Low-value currency that dodge banking system is real challenge

Baba Ramdev must be a happy man today. For years now his prescription to curbing corruption has been a ban on currency notes of high denomination, particularly of Rs 500 and Rs 1,000. His diagnosis is uncomplicated: it would be much more difficult for the bribe-giver to offer illicit money in currency notes of lower denomination. While many saw little practical merit in this, the Narendra Modi government appears to have given it some credence by abolishing currency notes of the highest denominations, for a slightly different reason though.

Representational image. Reuters

Representational image. Reuters

The government wants to curb black money, a part of which circulates in the economic system of our country in the form of fake currency notes. A report in The Indian Express quoted a study by the Indian Statistical Institute which says that 250 out of 10 lakh notes in circulation are fakes. Such notes with a face value of Rs 70 crore are infused into the system every year. While fake notes of the denomination of Rs 100 and Rs 500 are common, those of Rs 1,000 constitute nearly half of the total value of fake notes, the study said.

The impact of bad money need not be overstated. Bad money eventually drives good money out of the market and makes economies wobbly, inflationary to be more exact. Countries, thus, have to be on alert all the time to check their circulation. Given the rather porous borders in the East and North-East, it’s true that a good quantity of such money flows into the market undetected. The single largest source of it is Pakistan, securities agencies would say. And they believe only about a third of fake currencies coming into India is detected.

It’s obvious that spurious notes of high denomination are the biggest culprits by dint of their face value. But how does it help to have currency notes of still higher face value, say of Rs 2,000? As per the government’s announcement, Rs 500 notes will also be back. That throws up some questions. What about black money that flows into the system riding on currency notes of lower value? Would not the manufacturers of fakes then focus on producing more notes of Rs 50 or Rs 100 or even lower value?

The current exercise may flush out fakes of higher value because these pass through the banking system at some stage and thus are relatively easy to detect, but the real challenge for the government is to catch the money that keeps floating among mass users and reaches the banking system late. If I have Rs 500 or Rs 1,000 I know it comes through ATMs or will reach banks at some stage. The chances of these being fakes or escaping notice are small. But what about the Rs 10 or Rs 50 notes which are likely to go around much longer?

Of course, the government would have given these questions a thought. But right now, its measures don’t appear foolproof. Coming back to Baba Ramdev, he would have reason to feel satisfied. Bribe-givers and takers would have trouble transacting in cash. The only problem is the bribe-taker may make a demand that he be paid only in Rs 100 notes or in kind, not cash.

Updated Date: Nov 09, 2016 09:59 AM

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