Counterfeit Currency and Terror Funding

This article is the second section of a larger series that weighs up the reasons given for the demonetisation of 86% of Indian currency, and also seeks to uncover the true compulsions behind the monumental action.

The entire study can be viewed as one article. Link below.


Here’s a snapshot of the numbers — how much actual cash there was, the denominations it was in & how much has returned to us & to the banks.

Source: India Today magazine, RBI data, Business Standard. Note: RBI has not given out data on ‘cash recovered’ since Dec. 10th ’16.

Throughout this article, we’ll be dealing with all kinds of large number in lakhs, crores, million & trillions & everything in between. To help with quick conversion, here’s a ready reckoner for reference.

Source: Livemint, Wikipedia, Credit Suisse Global Wealth Report

What about terror funding — has Demonetisation landed ‘one hard slap’ on these terrorists, or what!

To be certain, counterfeiters in Pakistan or wherever else are putting in orders for new machines as we speak. Demonetisation has undoubtedly been quite the headache for them.

But, after taking a good look at the new monopoly-money type 2000 & 500 Rupee notes — which bleed ink, are often printed without the Gandhi image, and most importantly have no additional security features — it would be safe to assume that with a little re-configuration of their minting templates those Pakistani factories will be back to business as usual.

Hate to break the bad news, but cross-border terrorism is alas not financed using petty gains made from counterfeiting. It is bankrolled by the Pakistani government, using a good chunk of the almost One Billion USD it receives from the American establishment every year.

As a measure against terrorism, drug-trafficking, and other criminal goings-on, the impact demonetisation is analogous to a tyre puncture — stop the vehicle, take out the spare, if that’s not working, take the tyre to closest puncher shop (never too far), get it fixed, shell out a few hundred, and get back on the road.

So, how big a threat is counterfeit currency to the Indian economy? How many Fake notes were being pumped in yearly?

These the RBI Figures below present us with really really tiny number — somewhere around 0.000025% or 1 in every 40,000 notes were fake.

Source: RBI ANNUAL REPORT 2015–16

There are two ways through which fake currency is weeded out of the system — one is detecting Fake Indian Currency Notes (FICN) by banks when deposits are made; the other is through police-led seizures.

From the stats below, we find that approximately, 70 Cr. of FICN are detected each year. Although, it is unclear whether the amount presented in the left-most table represents a sum of FICN detected by the two methods or just from seizures.

Then there’s this joint study — commissioned by the ministry of home affairs and conducted by the Indian Statistical Institute in 2016 under the supervision of the National Investigation Agency (NIA) — which states that the face value of FICN in circulation (at any given time) was found to be around Rs 400 crore — a value that they claim has remained constant of the last 4 years. Now, that figure isn’t really backed up with figures, but nonetheless it now takes the FICN figure to — 1 in every 4000 notes.

But the point here is not whether Fake notes constitute 0.00025% or 0.0025% or even 0.25%. Demonetisation of old notes and the re-printing of new low-quality ones, does precious little to stop the continuation of this currency racket.

Besides, the cost of re-printing & distributing 22.4 Billion HDN is a whopping Rs. 16,000 Crores — a number that makes the costs of the counterfeit currency threat seem like loose change.

The only actions that make a difference in combatting FICN are

  1. Greater vigilance and stringent border-policing at known junctions.
  2. Implement regular checks and ensure all banks weed out FICN — it seems, currently only three banks — Axis, HDFC and ICICI, report about 80% of fake currency detected.
  3. Introduction of Polymer notes — cleaner and last up to 5 times as long as paper notes. Most importantly, they are virtually impossible to duplicate. This opportunity could have been used to make the switch to a technology which is fast-becoming the norm in most developed countries. India could also have become a producing hub and exporter of these polymer notes.
  4. Complete self-sufficiency in printing currency. This includes paper, ink, machines and any other raw materials — if the RBI continues to import paper and security ink from the same foreign companies as Pakistan does, then the new notes will remain as vulnerable to counterfeiting as the older ones.