IIPM Faculty Prasoon S Majumdar on High Denomination Currencies Are Fuelling Corruption

New Delhi, India -- (SBWire) -- 02/05/2012 --Almost every socio-economic parameter of our country poses a classical comparative dichotomy. Where more than 70 per cent of country’s population struggles to earn $2 a day, we have more than 3,500 million pieces of 500 rupees notes and more than 1,000 million of 1000 rupees currencies floating in the economy as of now! A report by the Reserve Bank of India stated that out of the total currency in circulation in March 2010, 500 and 1,000 notes constituted 76.5 per cent (increased from 69.5 per cent in a year’s time). And it is not just about the number of higher denomination notes floating in the market but more about the very transaction of the same. Undoubtedly, these notes are more used for high-value cash transaction and not by millions of poor Indians who barely get to manage their daily needs.

The high currency notes (like 500 or 1,000 rupees notes) are one of the catalysts of corruption! Most of the black money transactions and money laundering is carried out by high denomination notes. These notes form the backbone of the parallel economy as they have relatively lower carrying cost. In simple words, carrying Rs.10 crore in 100 or 50 rupees denominations would call for more cost and trouble compared to carrying the same amount in 1000 or 500 rupees denominations. Moreover, with high value transaction being more carried out through plastic money (credit and debit cards) and wire transfer, the usage of high denomination currency is confined to large cash transaction that is most of the time done to avoid taxes and bypass legal mediums. Everything from paying premium for services, buying benami property or transferring cash through illicit modes involves money where currency notes are of higher denominations. It would be silly to even think of stashing black money in lower denomination notes. For instance, a money launderer or a per involved in hawala racket has to carry a 50 kilogram bag to carry one million pounds; whereas if he carries the same amount in 500 Euro notes the bag won’t weigh more than two kilogram!

It is also being argued that withdrawal of high currency notes can act as a barrier to the black money transaction! Developed nations like the US and the UK that once used to print currency notes up to 10,000 now have the highest denomination of just 100. The last time they printed these abysmally high currency notes was way back in 1945 in the US. In Britain, the highest value of currency currently in market is of 50 pound. The UK took this very step to curb counterfeiting of currency and other illegal activities such as drug trafficking and money laundering.

However, even this does not seem to convince our policy makers, for all the obvious and unsaid reasons. In fact, India is making records in the reverse direction. The minting of 500 rupee notes has augmented 17 times over the last decade! In rural belt, 500 rupee notes are rarity and 1000 rupee notes are an impossibility. Even today, these regions transact through lower denomination currency and even in coins of small denominations – which incidentally are in short supply.

Higher denominations attract higher amount of fake currencies which are being pumped into the economy. The financial channels of India have recorded a massive 400 per cent increase in counterfeit transactions, according to a report by Financial Intelligence Unit (FIU) under the Union Finance Ministry compiled for 2010-11. FIU further revealed that majority of these fake currencies is in 500 rupee denominations consisting of 60.74 per cent of the total amount. The number of fake 1,000 rupee notes is also rising rapidly. In June 2011, Directorate of Revenue Intelligence seized fake currency (with a face value) of Rs.1.54 crore in which the counterfeit currency was in the denomination of Rs.500. As per a white paper prepared Research and Analysis Wing and the Central Bureau of Investigation, very shockingly, one in every four 1000 rupees notes is fake.

Higher currency make it easier for money laundering as the generated cash is slipped out of the country through hawala and then it is brought back through FIIs and various tax havens. It makes no sense for a country like India that has a flab of poor at bottom and a few riches at top, to have higher denomination notes. It is important for the policy makers to realise that hawala transactions lead to economic instability. And in trouble, the poor suffers more than the rich. Thus, as corrective measures, not only India should pull all high denomination notes but also should promote electronic transaction for high-volume transactions. Until then, this ‘Big C’ of our money market will keep strengthening the other three C’s of our nation – corruption, counterfeits and crime!