by Meera Sanyal
Clearly, there were some basic fundamental misconceptions at play, which is also the reason prior demonetizations in India, and elsewhere in the world, have had no effect in reducing corruption.
The first is the widely held misbelief that corruption only involves cash. In fact, only a small percentage of corruption takes place in cash and, that too is very ‘local’. Really large-scale corruption takes place in the granting of favours (for example a corrupt crony organization could sponsor the education of bureaucrats’ children abroad, in lieu of a lucrative mining contract) or as offshore payments, and these by their very nature are untouched by demonetization. Moreover, even those who demand and accept bribes in cash at a local level will undoubtedly convert these into various black assets such as property or gold swiftly, which, once again, are not affected by a currency demonetization.
The second, even more fundamental, reason is that a demonetization does nothing to tackle the root causes of corruption. Professor Pulapre Balakrishnan of Ashoka University, Haryana and Senior Fellow-elect at the Indian Institute of Management, Kozhikode, explains this well:
This demonetization is not likely to impact the structure, level, and incidence of corruption in India. Often the proceeds of corrupt bureaucrats and politicians never arrive in India; they are handled offshore. They will now be only too happy to have `2,000 notes at their disposal.
If the Modi government is serious about ending corruption, it must lay out a plan for ending the generation of black money in the interaction of the citizen with the government machinery, including the income tax department itself. In order to target unaccounted income, it is necessary to re-engineer the manner in which the government and citizenry interact, with a public record and independent oversight of each interaction.
Secondly, as most black money is believed to be generated in the registration of properties, details of all property transactions, including names of the two parties and the value of the sale, must be entered on the concerned public authority’s website as soon as the deal is concluded. In today’s IT environment such transparency is easy to achieve. The possibility of public scrutiny, as opposed to that of the income tax department in private, would make a difference to the generation of black money. It should also provide some relief to citizens who are otherwise at the mercy of an unaccountable bureaucracy.
Thirdly, there is the issue of election funding. There is a strong argument for reforming current practices. First, the limits on spending should go, but so must the practice of allowing anonymous donations to political parties. In fact, political parties must be brought under the purview of the RTI Act. The argument that political parties are not public bodies simply does not hold water. Political parties are claimants to the government and, if they come to power, will control every aspect of the economic activity in the country. The citizen is fully entitled to know about their financial transactions. A demonetization allegedly aimed at ending the generation of unaccounted income that has nothing to say about the funding of political parties is not credible.9
Though we had such clear-sighted opinions available to all, in public debates after demonetization, BJP spokespersons would often derisively suggest that anyone opposing the measure was in favour of black money and corruption.10
I quickly discovered the most effective way to silence them was to ask: ‘If the government was serious about tackling corruption as also about a digital India, why did the BJP not set an example by publicly declaring that they would henceforth not accept any political donations in cash but only through transparent digital payments?’
Unfortunately, the BJP has not done this. In the 2017 and 2018 Budgets, election funding has become even more opaque. Companies are no longer required to disclose details of political funding in their annual accounts. A new non-transparent method of election funding through Electoral Bonds has also been introduced, raising concerns about an escalation to an entirely new level of crony corruption. The 2018 Budget also made it retrospectively legal for political parties to accept funding from foreign corporations – giving every political party who had thus far violated the law for the past 42 years, since 1976, freedom from any prosecution or penalty!
Fighting Terrorism and Counterfeit Notes
For several years, there have been concerns regarding the large number of fairly sophisticated counterfeit notes in circulation in India, often referred to as Fake Indian Currency Notes (FICN). Given their sophisticated quality, it is widely believed that these could only have been produced in the printing presses of a hostile nation state.
It is also widely believed that such counterfeit notes have been used to finance illicit activities such as smuggling, narcotics, cross-border arms running, human trafficking and terrorism.11
In August 2016, the Minister of State for Finance stated in the Parliament:12 ‘A study on Fake Indian Currency Notes (FICN) issues, including estimation of FICN in circulation, has been undertaken by Indian Statistical Institute (ISI), Kolkata under the overall supervision of National Investigation Agency (NIA). As per the study, the face value of FICN in circulation was found to be about `400 crore. It was found the value remained constant for the last four years.’
The study, which was undertaken in 2015, further estimated that fake currency worth `70 crore entered circulation every year, with agencies only being able to intercept one-third of this amount. As per the NIA probe, Pakistan was the major supplier of FICN in India. The study concluded, ‘The existing systems of seizure and detection are enough to flush out the quantum of FICN being infused.’
A special FICN Coordination (FCORD) Group was formed in the Ministry of Home Affairs to deal with the problem of counterfeit currency in an integrated manner, and to share intelligence and information amongst the different security agencies of State/Centre to counter the menace of circulation of fake currency notes in the country. The NIA was empowered by the NIA Act to investigate and prosecute offences relating to FICN. The government also constituted a Terror Funding and Fake Currency Cell (TFFC) in the NIA to focus investigation on Terror Funding and Fake Currency cases. From a legal perspective, the Unlawful Activities (Prevention) Act, 1967 was amended so that the production, smuggling or circulation of High Quality Fake Indian Paper Currency, coin or any other material was declared as ‘terrorist act’.13
Over the years, the RBI has also taken several measures to tackle FICNs,14 most notably the decision taken in 2014, to demonetize and withdraw from circulation all `100, `500 and `1,000 notes issued prior to 2005, as they had fewer security features and were easier to forge. As a result, 164 crore pre-2005 currency notes of various denominations, bearing a face value of around `21,750 crore, were withdrawn and subsequently shredded by the RBI.
It is clear, therefore, that the problem of counterfeit notes was considered to be serious, and that successive governments had taken several measures to address it. Nevertheless, the problem had persisted.
So, the question is, was demonetization effective in tackling the problem of counterfeit notes and terrorism?
On 18 November 2016, the Minister of State for Home Affairs, Kiren Rijiju, proclaimed: ‘Smuggling of FICN from three international borders – Pakistan, Bangladesh and Nepal – has completely stopped after the announcement of demonetization.’
On 27 December 2016, the Prime Minister, addressing a BJP rally in Dehradun, stated that demonetization had neutralized the money held by Maoists, terrorists and human traffickers, thereby cutting off their business. ‘With just one move on November 8, the worlds of terrorism, drug mafia, human trafficking and fake note smuggling were destroyed.’ In an interview two days later, he said, ‘Cash held by terrorists, Maoists and other extremists has also been neutralised. There has been a crippling impact on dangerous and highly damaging illegal activities, such as human trafficking and narcotics.’
However, does data support these claims?
Given that demonetization took all `500 and `1,000 notes out of circulation and they are the most counterfei
ted notes, one would have expected that the counterfeit notes detected, as money poured into banks and currency chests, would be in the region of `300–400 crore as estimated by the NIA/ISI study, or, at the very least, significantly higher than previous years.
The data below15 shows that this was not the case.
The total value of counterfeit notes detected within the banking system during the FY 2016–17 was only `43.47 crore, of which the FICNs amongst the demonetized `500 and `1,000 notes were `41.51 crore. Of this `41.51 crore, it is interesting to note that the FICNs detected after demonetization, namely between 8 November 2016 and 31 March 2017, were only `19.53 crores.16
The actual number of fake notes detected, post-demonetization is shown in the table below:
Table 8: Fake Indian Currency Notes (FICN) Detected in the Banking System
Number of Notes
FICN Detected2014–152015–162016–172017–18
Total No. of FICN Detected 5,94,446 6,32,926 7,62,072 5,22,783
No. of Old 500 and 1,000 FICN 4,05,113 4,04,794 5,73,891 2,31,529
No. of New 500 and 2,000 FICN NA NA 837 27,281
Source: RBI Annual Reports 2016–17 & 2017–18
From RBI data, it is clear that only 8,05,420 `1,000 notes and `500 notes (5,73,891 in 2016–17 and 2,31,539 in 2017–18) were detected to be counterfeit out of a total of 2,402.3 crore notes demonetized. This too, after a prolonged and painstaking counting exercise by the RBI over a period of 20 months in which all notes were assessed for genuineness. This is a completely insignificant number – effectively 0 per cent, calling into question this goal itself and certainly indicating its complete failure.
Equally interesting is that the new `500 and `2,000 notes were already being counterfeited within three months of demonetization.
The above data represents only fake notes detected by the banking system. FICNs are also seized by the police and law enforcement agencies. Data shows that the number of fake notes detected after demonetization, outside of the banking system, were also significantly lower than before:
Table 9: Fake Indian Currency Notes (FICN) Detected by Law Enforcement Agencies
No of FICN Notes Seized Value of FICNs Seized (`)
FY 2015–16 8,80,000 43.8 crore
March–September 2016 NA 27.8 crore
9 November 2016–14 July 2017 1,57,797 11.23 crore
Source: National Crime Records Bureau
If we aggregate the value of fake notes detected post demonetization, both by the banking system and by law enforcement agencies (accounting for marginal differences in dates), we obtain a value of ` 30.77 crore (i.e., 19.53 + 11.24), a small fraction of the total estimate of `400 crore of counterfeit money.
As stated earlier, the cost of printing the new notes was `7,965 crore in 2016–17 and an additional `4,912 crore in 2017–18, leading to the conclusion that not only did demonetization fail in the objective of destroying counterfeit notes, but it did so at a very high cost.17
So once again, the question we must ask is, could demonetization have succeeded in tackling the problem of counterfeit notes and FICNs had it been better planned and implemented?
Unlike in the case of black money and corruption where demonetization is an ineffective policy measure, in principle, demonetization can help tackle counterfeit currency, if it is planned well, and implemented efficiently.
As described in an earlier chapter, an example of a successful demonetization to tackle counterfeit notes was the one carried out by Australia, which converted its entire currency from paper to polymer between 1992 and 1996. After a trial issue of a polymer commemorative note to celebrate Australia’s Bicentenary in January 1988, the Reserve Bank of Australia issued a complete series of polymer banknotes from 1992 onwards.
The new Australian currency notes were the world’s first ‘durable’ banknotes and conferred the twin advantages of lower on-going printing costs as well as rendering the Australian dollar more counterfeit-resistant, due to the polymer base on which they were printed. This was a well-planned exercise carried out over a lengthy period of time, and achieved its objectives with no negative consequences on the economy.
Given that the Indian Government underwrote the huge cost of printing new notes as they remonetized the economy, it is puzzling why they did not consider moving to polymer-based notes or notes with significantly enhanced security features which would have been more difficult to counterfeit.
The one objective that could easily have been achieved through demonetization remained unfulfilled. Instead, the printing mistakes and running colour of the new `500 and `2,000 notes that were hurriedly introduced lent credence to the view that, even in tackling the problem of counterfeiting, India’s 2016 demonetization was a badly-planned exercise in futility.
But what about the claim that demonetization had severely curtailed terrorism and Naxalite activities? Once again, data does not seem to support this claim. The number of fatalities as a result of terrorist violence in Jammu and Kashmir, and in Maoist/Naxalite attacks, is shown below:
Table 10: Deaths Due to Terrorism and Naxalism
Year Deaths in Jammu and Kashmir Deaths due to Maoist/Naxal Insurgency
2012 117 367
2013 181 421
2014 193 314
2015 174 251
2016 267 433
2017 358 332
Source: South Asia Terrorism Portal: Institute for Conflict Management.
Note: Data on fatalities include death of civilians, security personnel and terrorist insurgents.
As is evident, fatalities in Jammu and Kashmir showed an increase in 2016 and 2017 while fatalities in Maoist/Naxal areas showed no significant decrease.
While it is true that terrorists may be relying on counterfeit currency to fund their operations, to expect demonetization to be the silver bullet that could end terrorism was wishful thinking at the best.
Captain Raghu Raman, former Army Officer and founding CEO of the National Intelligence Grid (NATGRID), explained why demonetization would not and could not affect terrorism in India:18
Terror financing falls into three categories. ‘Tactical terror financing’ is the money needed to mount specific operations. This aspect would remain unaffected by the demonetization of `500 and `1,000 notes, for the simple reason that terror operations are incredibly cheap and can be funded by kosher resources. For instance, the entire cost of 9/11 attacks was estimated to be $300,000–400,000… Similarly, an attack like 26/11 in Mumbai can be launched for less than `40 lakh (including the bounty that was supposedly paid to the families of the ten terrorists).
‘Operational terror financing’ includes funds required for running a low-intensity campaign like the ISI-sponsored ‘thousand cuts’ strategy in Kashmir. More than tactical financing, it is operational financing that is well within the capability of state-sponsored terrorism. Equipping a few hundred terrorists with assault rifles, explosives, communication tools and blood money is well under a few score crores. In the case of inland terror groups like the Naxals, much of the funding is obtained through extortion from the local populace.
Damaging our economy by flooding counterfeit currency is the third strategic prong of Pakistan’s plan, and, strictly speaking, while this is not a part of ‘terror financing’, (the correct nomenclature would be ‘economic warfare’) demonetization will disrupt it only for a brief period until the ISI replicates the new format of high denomination notes. Granted that the newer currency will be harder to replicate, but if Indian mints can make them, so can Pakistani.
Moving to a Digital and Less Cash India
There are several benefits of using less cash. The most worthwhile advantages are those that benefit consumers, especially the very poor.
I began to understand this when dealing with street children, whom our bank’s foundation supported. In a candid conversation, I asked a bright 11-year-old urchin why he did not save some of the alms he collected each day for a rainy day. He laughed at my naïveté. �
��Where will I keep the money?’ he asked. ‘If I have any money at the end of the day, it will get stolen, and I will get beaten up in addition. Much better to spend it all on a good meal.’
Women beneficiaries of our microfinance programme in villages across the country shared similar feedback. The micro businesses that they set up generated small surpluses over and above the amounts needed for the weekly repayment of their loans. But it was impossible to save this. Cash in hand was quickly spent – at worst confiscated by an abusive or drunk husband and at best used up for domestic exigencies. Going all the way to the nearest bank or post office branch to deposit a few rupees was not practical.
From a banker’s point of view, I was familiar with the costs and security implications of dealing with large amounts of cash at our branches. The problems were magnified manifold for banks with currency chests. And, of course, for the RBI both costs (including the costs of printing new currency, dealing with and replacing soiled notes, and detecting and destroying counterfeit notes) and security headaches were compounded.
So, the advantages of moving to a ‘less cash’19 economy for everyone – citizens, banks, security agencies, the RBI, and the government – were clear and evident. The question was, could India do so in a manner that would provide the poorest Indian a workable substitute to cash – digital access to her money, anytime, anywhere, at a zero or very low transaction cost.
The mobile revolution and digital payment networks such as M-Pesa,20 in other countries, laid out one possible model to adopt. However, the RBI was concerned that this would result in telecom companies functioning as de facto banks, outside the ambit of a regulatory framework. In August 2015, the RBI tried to resolve this problem by issuing licenses to 11 payment banks including India Post, some telecom and e-wallet companies, and various corporate industrial houses.
However, the real breakthrough came with the implementation of the Unified Payments Interface (UPI) on 11 April 2016. At the heart of a good and efficient cashless economy there has to be a trusted, safe and seamless mechanism for bank-to-bank transfers. The RTGS and NEFT systems had provided this for several years in India for larger payments, though at a cost. UPI made swift and seamless bank transfers available to every single retail bank customer in the country, free of cost and for payments as small as `1.