Demonetisation: The Causes and the effect

When facts and fiction get intertwined – the known unknowns and the unknown unknowns*

The sudden announcement by the Prime Minister on 8th November 2016, that 500 and 1000 currency notes were being discontinued, took the nation, and the world, by surprise. Certainly such a momentous decision would not have been taken on the spur of a moment. A very serious and well thought out strategy would have gone into it. 

Expectedly, the entire opposition and its aligned ecosystem sprang in a loud and noisy confrontation. But the PM, with his strong goodwill among the masses, remained undeterred and his popularity remained intact. 

However, as nearly all of the currency in official circulation returned back to RBI, even the PM’s supporters started questioning the outcome of the move which had caused a lot of pain to the masses.

But now, nine years after it was done, the demonetisation is back in discussion. A recently released movie, “Dhurandhar” has highlighted that, due to some loopholes in the system, ISI backed fake-note factories were churning out “near-perfect” rupees, funding terror and hurting the Indian economy. You may call it ‘economic jihad’ if you wish.

We can agree with the movie that the fake currency made its way to India through Dubai and Nepal, both considered as safe havens for the underworld and their outlawed activities.

However, the film, being a film, has made insinuations which I don’t agree with. It’s too far fetched to imagine that anyone, even the PM, can breach the multi-layered security and make the currency printing plates available to the fake currency printers in Pakistan. If the Pakistanis were able to do it, there might be some other source.

But some breach did happen. What was that? A report that appeared in The Indian Express on 14 January 2023 said, “The CBI has registered an FIR against former finance secretary Arvind Mayaram for alleged cheating, criminal conspiracy, and corruption. Mayaram, whose premises in Delhi and Jaipur were searched on Thursday, is accused of extending undue favours to the UK-based company De La Rue by giving a three-year extension to its “expired contract” for supply of exclusive colour shift security thread for Indian currency notes when he was finance secretary.”

What is the De La Rue case?

De La Rue is a British firm, now listed on the London Stock Exchange, which designs and prints currency notes and produces other features used in banknotes like security thread and security holograms for central banks across the world. It was contracted to supply the currency notes printing material to India.

It was in 2010 that De La Rue was embroiled in its first commercial controversy in India, and was subsequently denied security clearance by the Home Ministry for currency paper contracts.

Then finance minister Pranab Mukherjee had ordered an inquiry into the faulty currency paper supplies. Towards the end of 2010, he approved a proposal to suspend supplies from De La Rue. And thus the company was blacklisted.

However, when Chidambaram returned as Finance Minister (31 July 2012 – 26 May 2014), De La Rue was reinstated as the supplier even though, allegedly, no fresh contract was signed. And that forms the basis of the FIR against Arvind Mayaram who had placed the order as the Finance Secretary. We don’t have anything to conclude whether it was business expediency or any foul play was involved.

But in 2016 the name of De La Rue appeared in the Panama Papers with evidence that it had authorised a payment of a 15% commission via its subsidiary company, Portals, to its Indian agent for securing banknote contracts.

After the publication of the Panama Papers, the RBI had advised the Home Ministry to continue the blacklisting of De La Rue.

Connecting the dots

Now, let us look at the events that took place in 2016:

- De La Rue’s foul play got exposed in the Panama Papers.

- The infamous Karachi based Khanani brothers, Javed Khanani and Altaf Khanani, money launderers who were involved in moving money for terrorist groups and criminal gang groups, got exposed. They were also said to be involved in printing fake Indian currency with the backing of ISI, which was peddled into India through Dubai and Nepal.

- Altaf Khanani was arrested in September 2016 in Panama by the US Drug Enforcement Administration, and transported to jail in the United States. He pleaded guilty of money laundering only. After serving three years in prison he was released in July 2020

- Javed Khanani, his brother committed suicide.

- Their front company, Khanani & Kalia International (KKI) was a foreign exchange company that operated until November 2017, when it was closed down by the Government of Pakistan for being involved in money laundering.

- While all this was happening, the Government of India moved to discontinue its currency notes of 500 and 1000.

Now, we can connect the dots and understand the full context of the 2016 demonetisation.

Several things have happened after that. India has moved very rapidly towards digital transactions which has significantly reduced the creation of black money in the domestic system. But, more importantly, the move broke the back of the notorious counterfeit peddling infrastructure of Pakistan and ISI which straightaway affected the funding of the Pakistan based terror groups. So, even if the genuine currency, even the black money, made its way back to RBI, we should feel happy that it was a very successful move from the point of view of national security.

That explains, to a great extent, the unrest among the ‘ecosystem’ with the movie Dhurandhar.