India flooded with fake banknotes

India is being flooded with billions of dollars' worth of fake rupee banknotes, and it's the country's cash-strapped citizens that are being hit the hardest once the fake banknotes find their way into people's pockets.

It is India's neighboring countries which are being blamed for spreading the counterfeit cash to undermine the economy.

All that glitters is not necessarily gold. Some Indian rupee notes are forgeries. In the state of Bihar, which borders Nepal, the police regularly arrests couriers who are hired to transport fake currency.

“I was paid 4% commission. In the past four months, I've carried 400,000 rupees [over $8,500US] worth of fake notes. These were handed to me and I then delivered them wherever I was told,” said one of the couriers.

Deputy superintendent of the local police department, Dilnawaz Ahmed, revealed the story.

“We got a tip-off that there were people dealing with counterfeit notes. We apprehended these two suspects carrying fake notes worth 65,000 rupees. They say the money came from Birganj in Nepal, and if you look at these notes they look so real,” police official points out. “It has the Mahatma Gandhi image, RBI symbol and the watermark – all identical to original currency notes. Only an expert can identify these as fake, but the man on the street cannot.”

It's hard to tell exactly how many fake rupees are swirling the streets, but it's thought it could be in the region of $35 billion US worth. Both the government and the banks play down the problem, arguing it's just nine fake notes per million.

Fake currency can destabilize an economy, and can be used to finance terrorism. Indian security agencies point to Pakistan for printing counterfeit Indian notes and circulating them through their common neighbor, Nepal.

Neel Mani, additional director-general of police is more specific in his blame.

“We have a long porous border with Nepal,” he said, ”and the countries which are hostile to India want to destabilize the Indian economy, and they try to pump fake currency.”

The Indian government has responded by experimenting with polymer – or plastic – currency notes. These are considered more difficult to counterfeit as they can have transparent areas on them. The Reserve Bank of India is ordering a million such notes on a trial basis.

“Those who want to break the law will always find ways and means to do it,” warns Hindustan Times business editor Gautam Chickermane. “And today with digital technology, I believe things have become easier for counterfeiters and hence there is a constant shifting of notes, countries are constantly modifying their notes. But it's a very lucrative business: a 1,000 rupee note takes about 400 rupees to print, so there is a 60% net margin.”

Shopkeepers and restaurants are installing money-sorting machines to weed out fakes. But it's the innocent public who're the ones to lose out. Comparing two 500 rupee notes, each is worth about ten dollars. One is genuine and the other counterfeit. Most people cannot spot the difference. In an economy like India's, where cash transactions are very popular, once you start doubting the authenticity of every note, this could well add up to a crisis for the economy itself.