When India’s central bank admitted discovering 400,000 fake notes in its currency reserves, many here woke up to the scale of the country’s counterfeit money problems.
Worse still, the embarrassing admission related to a survey from the last financial year to March 2009 and authorities say the problem has since got worse.
Police and the central bank have observed a tripling in the value of notes detected or seized in raids in recent years and authorities are convinced the source of the deluge is a familiar foe across the border: Pakistan.
“We have had some success in tracking the routes and will continue to counter it, but behind this racket is an organised effort in Pakistan and PoK (Pakistan-administered Kashmir),” Home Minister P. Chidamabaram said recently.
“It’s not just a cottage industry.”
Hardly a day passes without news of arrests of currency smugglers, but police say they are only catching the small-fry racketeers while the big fish printers act with impunity over the border.
Many locals here complain of withdrawing fake notes from bank machines and ever-vigilant shopkeepers routinely check the water marks that are meant to protect the larger denomination 500 and 1,000-rupee notes.
A report this year by the Directorate of Revenue Intelligence (DRI), a state body that tracks money flows, said counterfeit currency was brought in by militants from abroad and then moved through criminal networks.
The DRI said that 130 million high-quality counterfeit notes were being smuggled into India every year and only a fraction were detected.
The security establishment is now clamouring for more scrutiny of India’s banking system and the central bank, the Reserve Bank of India (RBI), has instructed nationalised banks to install sorting machines to weed out fakes.
“If the circulation of counterfeit notes was not checked then the economy could be running with over 25 percent fake notes making the rounds across the country,” said analyst Ajai Sahni, executive director of the Institute for Conflict Managment.
The RBI is also running awareness campaigns, even educating schoolchildren to detect fake notes, and plans to introduce a billion special plastic-coated notes that are tougher to counterfeit.
Federal police say intelligence gleaned from arrested suspects suggests the existence of sophisticated printing presses in Pakistan under the control of the Inter Services Intelligence agency.
“The ISI prints them in Pakistan, supplies them to agents in Nepal and Bangladesh, who identify Indians willing to take the risk of circulating fake notes,” said Sahni.
The quality of the fakes varies from amateurish to extremely sophisticated.
“You cannot expect a local bank clerk to detect sophisticated fakes,” an intelligence officer told AFP, asking not to be named.
Police and other agencies seized six million dollars in fake notes in 2008, nearly triple the amount seized in 2007 and a majority of the counterfeit notes were the 500-rupee bill (10 dollars), police figures show.
The RBI said in its last report that the value of counterfeit notes detected in the banking channels was over three million dollars in 2008-09, triple the amount detected in 2007-08.
Some fear that if fake currency continues to increase at this rate, it will damage the economy.
Economists suggest consumers’ trust in the rupee could be undermined, while officials at the central bank complain that fake currency complicates their deliberations about interest rates.
“The rising trend of fake notes in the market poses a threat to the economy. Policies, inflation are based on monetary calculations — all of which can go wrong due to fakes,” said a policymaker at the RBI who declined to be named.
K.P. Singh, a police officer in the central state of Madhya Pradesh who netted a huge haul in September of 4,000 high-denomination notes was pessimistic about the possibility of stemming the flow.
“We are arresting the dealers and petty smugglers operating in India but the kingpins are based in Pakistan,” he told AFP.
“It is in Pakistan the problem begins and can only be ended there.”