Demonetization in India: Tackling the Other Demon

In a late evening address to the nation Prime Minister Modi announced the government’s decision to discontinue Rs 500 and Rs 1000 notes with the objective to “fight against corruption, black money, fake notes and terrorism … for purifying our country.” While some argue that the move has taken a toll on the common man in terms of material and human life, others hail it as a ‘masterstroke’. The economic logic behind the decision and its consequences for black economy has been subjected to intense scrutiny. Conspicuous by its absence is the analysis of its effect on terror funding in India, especially in the restive Kashmir valley.

A week after PM Modi announced demonetization of high value currency notes, Defense Minister Parrikar celebrated the ‘daring’ move for ending terror-funding in Kashmir[i]. It is believed that apart from denting terror funding, this move will also help clamp down on narcotics. The Kashmir valley has been gripped by violence since the past four months, triggered by the killing of Hizbul Majhideen militant Burhan Wani on 8^th of July. The unrest has left more than 80 people dead, thousands injured and many more booked under Public Safety Act (PSA) for taking part in the protests. 5000 security personnel have also been injured with many ceasefire violations being reported along the International Border. Over 30 schools were burnt by unknown persons, drawing criticism from all quarters in Kashmir. It is believed that the unrest in the valley will come to a standstill as the machinery funding militancy, with the going rate of Rs 500 for stone-pelting and Rs 1000 for other things  running dry. However, the effect of demonetization in the valley has been muted. In a role reversal, while the rest of India is in crisis mode, Kashmir is at relative calm and has been spared the rush to banks and ATMs[ii].

Implications for Terror Funding   

According to Raghu Raman, the founding CEO of NATGRID, terror funding can be divided into three categories- ‘tactical terror financing’ for specific operations, ‘operational terror financing’ for running an entire campaign and ‘economic warfare’ whereby Pakistan floods Indian market with counterfeit currency. None of these will be affected by demonetization enough to deal a serious blow to terror funding[iii].

‘Tactical terror financing’ is the money needed for carrying out specific attacks. Demonetization is unlikely to affect this segment of terror funding as the money required for such operations is insignificant and can be funded by kosher resources.

‘Operational terror financing’ pertains to ISI’s low-intensity campaign against India, famously known as ‘thousand cuts’ strategy. It falls within the purview of state-sponsored terrorism that has been the mainstay of Pakistan’s foreign policy towards its larger neighbor India. Daniel Byman describes Pakistan as the ‘world’s most active sponsor of terrorist groups’ [iv]. It has been called the ‘most deadly state in the world’ in large part due to its use of extremist forces to service its foreign policy objectives. As Seth Jones points out, Pakistan’s strategy for years has been to balance India and keep a foothold in Afghanistan by supporting insurgent and terrorist groups [v]. For this all it needs to do is arm a few hundred terrorists with explosives, cheap assault rifles and communication equipment. For example, the 18^th September attack in Uri was carried by four terrorists using AK-47 rifles, grenade launchers, and grenades. It fact, the weaker adversary uses the low cost option for the disproportionate effect it procures. Here again, given the negligible cost involved, demonetization will have a limited impact.

Perhaps the strongest argument in favour of demonetization is its supposed impact on counterfeit currency infused into India to undermine its economy and fund terrorism. As per a study done by the Indian Statistical Institute, Kolkata, Rs.70 crore in fake notes are injected into the Indian economy every year. Official data reveals that 250 of every 1 million notes are counterfeit. Pakistan has been producing Fake Indian Currency Notes (FICN) using an elaborate system comprising banks and couriers. Through its government press in Punjab and Balochistan province it is able to print money to fund its terror activities in Kashmir and the rest of India. Time and again, the National Investigation Agency (NIA) has busted FICN rackets with clear evidence of Pakistan’s role. While the production takes place in Pakistan, it enters India through our porous border with Bangladesh and Nepal, and also through Dubai, Thailand and China. It is believed that the bold move by the government is akin to a ‘surgical strike’ against fake currency network as now the notes are not even worth the paper they are printed on[vi].

Despite the optimism of some, demonetization will not eliminate the problem, rather it will provide a temporary relief till the ISI is able to reproduced the newly introduced notes. Our security establishment is unclear on how the flow of counterfeit currency will be affected by the move to discontinue Rs 500 and Rs 1000 notes[vii]. At best they hope that unlike earlier the security features incorporated in the new currency will not be compromised by Pakistan and other elements involved. It is difficult to call it anything more than wishful thinking. Since critical elements like raw currency, ink and silver thread that go into the printing of currency notes are same for India and Pakistan, it won’t be long before we find fake Rs 2000 and Rs 500 notes entering our markets. If they could do it then, they can do it again. As the economist Arun Kumar points out, the process will continue because you have caught the chor, not ended the chori[viii]. Further, given the scale of black economy, which is almost 62 percent of GDP, the issue is systemic and not anecdotal. To change the system we need strong measures on the part of both the ruler and the ruled. The government needs to break the nexus between corrupt officials, greedy businessmen and a pliant bureaucracy. The citizens need to keep the pressure through social movements, and demand accountability via RTI. The government will have to protect citizen activism by strengthening the whistleblower bill.

On the flip side, the push towards a ‘cashless’ or ‘less cash’ economy comes with its own set of vulnerabilities. Reliance on digital and plastic money requires a secure cyber space for which India needs to prepare itself. In October, , SBI, HDFC, ICICI, Yes Bank and Axis Bank were some of the many banks hit by a major ATM hack that compromised 3.2 million debit cards[ix]. Cyber experts in India believe that we need to develop protection and safeguards to protect ourselves from cyber attacks, a capability in which we lack terribly[x].