Rupee’s management needs urgent action
Jan 24 2014
Pull out of pre-2005 currency notes will help curb black money
The needle of suspicion was pointed to criminal gangs in Britain, North Korea and Iran as sources of the fake notes, code-named ‘superbills’ and ‘supernotes.’ At one point, US sleuths even suspected the Russian army and China’s People’s Liberation Army to be behind it, though nothing was concretely established.
It’s not to say that fake dollar bills did not exist or circulate across the globe after the two operations. But there was definitely a drastic drop in the circulation of counterfeit notes.
Various countries at various times have had to grapple with the problem of fake currency notes. Fake currency has an almost incestuous relationship with black money and various forms of the mafia in drug trafficking, bullion, diamonds and real estate businesses.
The euro has also been counterfeited and trafficked across the 28-nation euro zone. If one were to go by reports, southern Italy was for long a thriving hub for technology driven, refined counterfeiting industry churning out high-denomination currency notes. It has been a tricky problem for the European Central Bank to deal with. The problems were compounded by euro note fakes circulating in Bulgaria, Colombia, Russia, Iran and Iraq, countries with large cash economies.
Though not on that scale, fake rupee notes also pose a big problem, originating in illegal trades in south-east Asia in the bullion, diamond and real estate businesses. Much of it is inspired and controlled by Pakistan. It has successfully placed operatives in Thailand, Nepal and Bangladesh to push fake rupee notes into India.
As per data with the finance ministry, gullible passengers flying in from the capitals of the three countries are often used to bring in fake notes. In 2010-11, as many as 423,539 cases of counterfeit notes with nominal value of Rs 35 crore were detected. In later years, the number of cases has only quadrupled. The US state department has also underlined the ominous role played by Pakistan in the cross-border fake currency racket in the sub-continent.
The thriving fake currency market is one factor that has obliged RBI to withdraw and replace all notes printed before 2005. This is not demonitisation but is bound to deal a body blow to people in the counterfeit trade and black money hoarders.
In post-independent India, only on one occasion did RBI withdraw Rs 1,000, Rs 5,000 and Rs 10,000 notes. That was in 1978.
As per RBI data, 4.3 billion pieces of Rs 1,000 denomination notes worth about Rs 429,000 crore are in circulation. This accounts for 39.4 per cent of total notes in circulation. In the Rs 500 denomination, 10.7 billion pieces worth Rs 5,36,000 crore were in the market, while Rs 100 notes totaling 14.22 billion pieces worth Rs 1,45,000 crore are in circulation. The notes in the three major denominations account for over 83 per cent of all notes in circulation.
Data also point to the fact that India is only second to the US in cash economy. The rupee’s management needs an immediate and precise surgical operation as was done in the US and the European Union. A large-scale campaign is the only way to bring out huge unaccounted cash and stop money laundering. Given that over 22 per cent of our people live the below poverty line on Rs 30 per day per head, large denomination currency continues to be in hands of the wealthy minority. This skewed distribution of cash strengthens the demand for phasing out notes of denomination higher than Rs 100.
The withdrawal of paper currency printed before 2005 will help hasten the plan to introduce polymer notes at least in some denominations. RBI has negotiated with several international monetary agencies, including Australia and Switzerland, which have some experience with polymer notes.
RBI has done some pilot studies and if one were to go by it last governor D Subba Rao, polymer notes were to be introduced in phases across denominations. As per a written statement in Parliament by the minister of state for finance, Namo Narayan Meena, Rs 10 notes for a total of Rs 100 crore will quietly make their way into the Indian money market.
Bank of England has firm plans to introduce polymer notes of different denominations as much to eliminate fakes and replace old notes as to usher in new technology by 2015. At least half a dozen countries have already replaced their currency with polymer notes, pointing to changing trend in the world of currency.