Does Counterfeit Currency Data Conceal More than It Reveals?

The  presence of a high amount of counterfeit currencies in the economy was one of the reasons cited by the Central Government of India for doing away with the `500 and `1,000 currency notes on 8 November  2016. The rationale behind this move has been questioned by many scholars who believe that the quantity of counterfeit currency, prior to the policy announcement, was not at an alarming level for the government to take such a big step withdrawing them from circulation. People have suffered standing in the queues at banks and the difficulties faced in conducting transactions due to a shortage of currency are undoubtedly painful, regardless of the period for which it may last.

However, the main intention of writing this piece is not to debate what the impact(s) of demonetisation  will have on the economy, as the picture will become crystal clear in the coming months, but the intent is to point out the purposively misplaced use of data related to the quantity of fake currency in circulation, not just by politicians, but also by some academicians in various journals of repute.

More specifically, the article “Demonetisation: 1978, the Present and the Aftermath” (EPW, 26 November 2016) attempts to provide a novel account of the prospective impact of demonetisation and questions the large  amount of fake currency in the economy, cited by the Government of India, used to justify the demonetisation move. While doing so, the authors made an error by not differentiating between the following: 

1. Volume and value of counterfeit currency.
2. Volume/value of counterfeit currency in circulation and volume/value of counterfeit currency seized in a particular year.

The volume and value of counterfeit currency, in our economy, cannot be estimated due to the measure of illegality attached with the same. For instance, the total number of counterfeit currencies seized in 2015–16 was 6.3 lakh, and its corresponding value was `29 crore. When the authors of the above-mentioned Economic & Political Weekly article wrote that counterfeit notes have generally constituted less than or around 0.002% of notes in circulation, they were discussing about all forms of fake currencies in the economy, seized by banking authorities.

What the authors have called the ratio of counterfeit notes to notes in circulation is actually the ratio of the value of seized counterfeit notes with the value of notes in circulation (Table 1). Even if it is assumed that the authors were only talking about  the seized counterfeit currencies instead of all the counterfeit currencies in circulation, its ratio with the currency in circulation is 0.0007, not 0.002 (see Table 1).  

The Reserve Bank of India (RBI) report 2015–16 cited by the authors, says that during the fiscal year of 2015–16, 6,32,926 pieces of counterfeit notes were detected in the banking system, out of which approximately 95% were detected in commercial banks while the remaining 5% were detected from within the RBI (see Table VIII.7: Number of Counterfeit Notes Detected during April to March, RBI Annual Report 2015–16). 

The data on counterfeit currency are not only incomplete but are highly underestimated as well. The data shown in Table 1 counts only counterfeit currency seized by the banking system. It excludes currencies (counterfeit) seized by police and other law enforcement agencies as well. Moreover, counterfeit notes that are still in circulation and that have not yet been caught by the banking system were not considered into calculation, which in itself is impossible to estimate. The probability of counterfeit currency in the banking system going unreported is very high due to the cumbersome and tedious process of registering an FIR (First Information Report).  Even for cases graver than this by  reporting a case to government agencies, banking officials are essentially inviting self-harassment.

Whenever people are duped with counterfeit currency, they generally refrain from reporting the same to banks, as banks do not credit the accounts of those customers, who bring such notes to the bank. This is why the general tendency among people is to pass the counterfeit currency further along, and the process goes on, until the note(s) reaches a person unable to pass it further.

Even then, all the counterfeit currency that reaches the banking system is not always destroyed internally by the banking officials. Sometimes, these officials intentionally or unintentionally try to pass the counterfeit notes to customers. Many newspaper reports confirm the dispensation of counterfeit notes from ATMs and bank-counter withdrawals.

Moreover, the use of the ratio of the total number of seized counterfeit notes by banks (Fake Indian Currency Note (FICN)) with the total number of notes in circulation (NIC) is in itself a vague and improper indicator of measuring the total extent of fake currency in an economy. NIC is a stock and is measured at some point of time. For instance, in all the data mentioned in Table 1, the total number of notes in circulation and their value were calculated at the end of March 2016. The total number of counterfeit currencies in circulation is also a stock concept, but due to the unavailability of timely data, many scholars use the figure for the total amount of counterfeit currency seized in a particular year as its proxy, which is a flow concept measured over a period. The reference period for the same in Table 1 is April 2015 to March 2016. 

Using this ratio of FICN to NIC as an indicator of the extent of fake currency in the economy is based on an unrealistic assumption that all counterfeit currencies seized in a particular year will come back into circulation during the same year, an assumption that points towards ignorance.

Given these reasons, the information provided on fake currency by the banking system will not be a correct measure to conclude, that the amount of fake currency in circulation is not an alarming one. If we cannot exactly estimate the extent of fake currency in the economy, it would not be fair to criticise a policy decision merely on the basis of the recorded amounts of counterfeit currency seized; which generally depends on our corrupt law enforcement agencies and the reporting habits of people duped with fake currency. However, it cannot be denied that a policy decision as big as demonetisation, without prior preparation, was not advisable for a country like India, where most transactions and livelihoods are still dependent on cash.