On Tuesday, the 8th of November, 2016, the Prime Minister of India announced in a live telecast that midnight onwards, all existing Rs. 500/- & Rs. 1000/- notes shall no longer be legal tenders. A parallel press conference was called by the Governor of the Reserve Bank of India, and press statements and FAQs were put out by both the RBI and the Ministry of Finance to further elaborate on the issue. On this background, the purpose of the demonetisation drive, can be understood to be twofold – one, the move aims at curbing the menace of fake Indian currency notes (FICN); and two, it helps to take a step along in the fight against corruption. The focus of this article is to discuss the subject of FICN and demonetisation.
The challenges posed by FICN are massive. Data from the National Crime Records Bureau shows that between 2011-2015, a total of 26.54 Lakh notes of Rs. 500/- & Rs. 1000/- denomination were seized by Indian law enforcement agencies such as the Directorate of Revenue Intelligence (DRI), the Customs Department, the Income Tax department and the National Investigation Agency (NIA). The Minister of State for Finance, Sh. Arjun Ram Meghwal, recently stated in the Rajya Sabha that the total value of FICN currently in circulation is estimated to be around Rs. 400 crore.
As per the Reserve Bank of India, the total currency in circulation increased by 40% from 2011 to 2016. In the same time, Rs. 500/- and Rs. 1000/- notes increased in volume by 76% and 109% respectively. A World Bank study estimates the size of the shadow economy in India in 2007 to be equal to 23% of the actual economy.
Popularised by hawala channels, FICN notes are often smuggled into India from Pakistan, Bangladesh and Nepal, and are used as a primary source of finance towards a host of illegal and unlawful activities, including terror financing, human trafficking, arms smuggling, money laundering and trade in narcotics and psychotropic substances. Similarly, FICN pose a serious monetary threat to the nation’s economy by increasing the government’s liabilities (since a currency note is a legal tender, counter-signed by the RBI Governor, that is to be honoured by the government), and by generating inflationary tendencies by increasing liquidity in the markets.
The demonetisation move has struck a massive blow against existing stocks of FICN. In one move, the existing stocks of FICN, lying across the country (and abroad) have been substantially rendered useless. This will generate a huge setback for the unlawful activities that were so financed. Indeed, Nobel Laureate Kailash Sathayrathi, has stated that this move will break the backbone of child traffickers. “Every single rupee earned by the traffickers and slave masters is black money”, he said.
In the annals of law enforcement, it is understood that policy moves are far more effective at achieving stated goals, in comparison to specific, target enforcement moves such as “raids”, searches, seizures and arrests. Public perception and expectations notwithstanding, it isn’t exactly easy to crack down on hawala and black money operators; in this regard, the challenges faced and the contributions made by our law enforcement agencies are often under-appreciated.
To be sure, this move is not without its limitations. Existing FICN notes can be converted into new currency notes. However, the Rs. 4,000/- conversion limit and Rs. 10,000/- withdrawal limit impose a tremendous bottleneck on the cash flow available to FICN operators. Simply put, hawala operators do not operate in such meagre values.
Likewise, there are concerns that FICN will be laundered and introduced into the formal banking sector by way of transformation into gold, realty or introduction into financial markets. But it must be understood that FICN exists for a purpose – cash provides a degree of anonymity, liquidity and granularity (meaning smaller payments can be made in cash) that gold, land or financial instruments simply don’t provide. Conversion into these means increases the likelihood of detection. Furthermore, not only do law enforcement agencies keep a track of these avenues of conversion, they have increased vigilance in the light of the demonetisation declaration – for instance, on the 13th of November, the CBEC reported that officers of the Directorate General of Central Excise Intelligence (DGCEI) and the Income Tax departments had started conducted joint raids on jewellery outlets across Tamil Nadu. FICN operators will not be exactly thrilled by the idea of entering their values into the formal banking sector.
Concerns have been raised that the design of the new currency notes will be copied and imitated and that the flow of FICN will resume after a gestation period. These concerns are not without merit. Given the stakes involved, it is reasonable to expect that after a gestation period, attempts will be made to resume the flow of FICN. The only solution on this front is constant vigilance – technological advancements and innovations must be continually made to ensure that the design of currency notes cannot be copied.
The demonetisation decision is not without its limitations – there can never be a “perfect” policy decision. Those seeking to break the law will always try to find loopholes, and policy decisions are constrained by many real-time limitations. Demonetisation is a purely monetary tool, and therefore its efficacy is limited; counterfeit and black money is a many-headed Hydra, and there exists no one, single panacea that can completely eliminate it overnight. A wide range of solutions needs to be implemented to fight it.
Given the discomfort being caused to the populace – and as the Prime Minister himself has admitted, the nation is inconvenienced – whether the demonetisation decision caused an overall benefit can only be judged after adequate time, when the achievements of the decisions can be gauged against the problems it caused. But in terms of policy design, it is definitely a step in the right direction.
(Views expressed are personal)