Role of Counterfeit in National Economy and National Security

What is counterfeit?

Counterfeit refers to the imitation or reproduction of something, typically goods, with the intent to deceive or defraud by passing the imitation off as genuine or authentic. Counterfeit products are often produced and sold with the aim of imitating the appearance, design, and functionality of legitimate goods, such as clothing, accessories, electronics, pharmaceuticals, and more.

Common types of counterfeit goods include fake luxury items, counterfeit currency, knock-off electronics, pirated software, and fraudulent medications. The counterfeiting process often involves the violation of intellectual property rights, such as trademarks, patents, and copyrights, as well as the use of substandard materials and production methods.

Counterfeiting is illegal and poses various risks, including economic losses for legitimate businesses, potential harm to consumers due to substandard or dangerous products, and negative impacts on national security when criminal organizations use counterfeit activities to fund illicit operations.

Governments, law enforcement agencies, and international organizations often work together to combat counterfeiting through legal measures, border controls, and public awareness campaigns. Efforts to address counterfeiting aim to protect consumers, uphold intellectual property rights, and maintain the integrity of markets and economies.

Counterfeiting can have significant negative impacts on a nation's economy and national security. Here are some key aspects to consider:

Role of Counterfeiting in the National Economy:

1. Economic Losses: Counterfeiting leads to substantial economic losses for both governments and businesses. It deprives legitimate businesses of revenue and taxes, affecting overall economic growth.
2. Unemployment: Legitimate businesses may suffer, leading to job losses and increased unemployment rates. Counterfeit goods often undermine the competitiveness of genuine products, impacting industries and their workforce.
3. Tax Evasion: Illicit trade, which includes counterfeiting, contributes to tax evasion. Governments lose tax revenue that could be used for public services such as healthcare, education, and infrastructure.
4. Market Distortion: Counterfeit goods distort market dynamics by offering cheaper alternatives, undermining fair competition. This can discourage innovation and investment in research and development.
5. Consumer Health and Safety: Counterfeit products, especially in industries like pharmaceuticals and electronics, pose serious risks to consumer health and safety. Substandard or fake products may lack quality controls, leading to health hazards.

?Role of Counterfeiting in National Security:?

1. Funding Criminal and Terrorist Activities: The profits generated from counterfeiting often fund criminal networks and, in some cases, terrorist organizations. This can have severe national security implications, contributing to organized crime and instability.
2. Intellectual Property Theft: Counterfeiting involves the unauthorized reproduction of intellectual property, including patents, trademarks, and copyrights. This theft of intellectual property undermines the innovation and competitiveness of a nation's industries.
3. Supply Chain Vulnerabilities: The infiltration of counterfeit goods into the supply chain poses risks to national security. In critical sectors such as defense, aerospace, and technology, the use of counterfeit components can compromise the reliability and effectiveness of systems.
4. Loss of Reputation: Nations with a reputation for producing counterfeit goods may face diplomatic and trade challenges. This loss of reputation can impact international relations and trade agreements.
5. Cybersecurity Threats: Counterfeit goods are increasingly sold through online platforms, contributing to the growth of cybercrime. The sale of fake products online may also involve the theft of personal and financial information, posing additional risks to individuals and businesses.

In summary, counterfeiting has multifaceted negative effects on both the economy and national security. Addressing this issue requires a comprehensive approach involving law enforcement, international cooperation, and efforts to raise public awareness about the risks associated with counterfeit goods.

Money, currency and the economy: Impact of Counterfeit Currency

To understand the import of the cataclysm that was visited upon the Indian economy, we need to take a step back.

What is money, what relationship does currency have with money, and what role does money play in a modern economy?

In economics, money has three interlinked, but not necessarily interdependent, functions. It is a medium of exchange (“I will give you a ride in my auto rickshaw if you pay me Rs 150), a store of value (“I have Rs 10,000 in my safe”), and a unit of account (“Infosys is worth $78 billion”).

In modern economies, only a small part of the money supply is in the form of currency notes or coins. Money is simply a measure of how much “credit” you have in a bank account. So, as on November 11, 2016, according to the Reserve Bank of India, M3 money was Rs 123.77 lakh crore. M3 money is a measure of money supply that includes currency money (Rs 17.74 lakh crore), demand deposits in banks (Rs 10.9 lakh crore of money that an account holder can demand immediately), and fixed deposits in banks (Rs 97.5 lakh crore).

Notes and coins are simply a convenient form of money that can be easily carried around and used as a universally accepted and trusted medium of exchange. A Rs 500 note is essentially an IOU issued by the RBI that everyone trusts and accepts in settlement of obligations.

The Status of Counterfeit Currency in India

Circulation of fake currency notes continues to pose challenge as the number of counterfeit notes of 2,000 denomination detected in the system was 13,604 pieces during 2021-22, up 54.6% from the preceding financial year. Circulation of Fake Indian Currency Notes (FICN) in the country continues to pose a challenge even after the 2016 demonetisation, whose one of the key objectives was to eradicate counterfeiting of notes. According to report of the National Crime Control Bureau (NCRB), FICN with the face value of ?245.33 crore has been seized by the law enforcement agencies across the country since 2016 - the year the Centre demonetised ?1,000 and ?500 notes.

"Compared to the previous year, there was an increase of 16.4 per cent, 16.5 per cent, 11.7 per cent, 101.9 per cent and 54.6 per cent in the counterfeit notes detected in the denominations of Rs 10, Rs 20, Rs 200, Rs 500 (new design) and Rs 2,000, respectively," said the RBI's annual report for 2021-22.? Reported by The Hindu on 2 January 2023. (https://www.thehindu.com/business/Economy/circulation-of-fake-currency-notes-continues-to-pose-challenge/article66330058.ece )

However, the counterfeit notes detected in the denominations of ?10, Rs100, and ?2000 declined by 11.6 per cent," stated RBI report. Although the total number of Fake Indian Currency Notes (FICNs) detected in the banking sector declined to 225769 pieces in 2022-23 from 230971 pieces in the previous fiscal year.30 May 2023. The number of fake notes of ?500 denomination detected has increased by 14.4% to 91,110 pieces in 2022-23 compared to the previous year, according to the Reserve Bank of India's annual report released today, May 30. The number of fake currency notes of ?2,000 denomination detected decreased to ?9,806 pieces during the same period, the report stated. This was as reported in Live Mint on 30 May 2023.? (https://www.livemint.com/money/personal-finance/there-are-more-rs-500-fake-notes-in-circulation-than-rs-2000-rbi-annual-report-shows-11685430652777.html )

Is counterfeit money a problem in India?

Counterfeit currency is a global problem that affects economies and individuals alike. The Reserve Bank of India has implemented various security features in the currency notes to deter counterfeiters, but the circulation of fake notes continues to be a problem, The Economic Times reported on 24 Mar 2023. Any attempt to circulate the counterfeit currency with the knowledge that it is fake, is punishable under IPC Section 489C, and can attract fine or imprisonment ranging from seven years to life imprisonment, or both.

According to a joint study by the National Investigation Agency and the Indian Statistical Institute, 0.022% of the currency in circulation was counterfeit before demonetisation. This is about Rs.400 crore.

One of the stated reasons for demonetisation was to get rid of high-denomination fake currency, mostly printed in Pakistan. The Indian Statistical Institute estimated that ?70 crore worth of fake currency was pumped into the economy every year.

The seizure of fake currency increased in the years following demonetisation:

?

• 2015: Rs 15.48 crore
• 2017: Rs 28.10 crore
• 2018: Rs 17.95 crore
• 2019: Rs 25.39 crore
• 2020: Rs 92.17 crore
• 2021: Rs 20.39 crore

?‘Magnitude of cash is directly linked to level of corruption’

In his televised address on November 8, 2016, PM Modi had conveyed that “the magnitude of cash in circulation is directly linked to the level of corruption. Inflation becomes worse through the deployment of cash earned in corrupt ways. The poor have to bear the brunt of this. It has a direct effect on the purchasing power of the poor and the middle class.”

He came to the main issue – the “festering sores” of “corruption, black money and terrorism” that were, he claimed, “holding us back in the race towards development”, with “enemies from across the border” running their operations with “fake currency notes”.

“To break the grip of black money and corruption,” he announced, “we have decided that the Rs 500 and Rs 1,000 currency notes presently in use will no longer be legal tender from midnight tonight.”

With less than four hours’ notice, 86 percent of the 17.74 lakh crore of currency in circulation, as on November 4, was rendered “worthless pieces of paper”, in Modi’s own words.

At the time, Shri Jagdish Bhagwati, professor of economics at Columbia University hailed it as a “courageous and substantive economic reform that had “the potential to generate large future benefits”.

A week later, on his Mann Ki Baat, the prime minister said, “Scrapping these notes has opened other avenues to make payments. Download apps of banks and e-payment options. Shopkeepers can keep card swiping facilities and everyone can ensure they pay safely using their credit and debit cards. If not a 100 percent cashless society, I request you to make India a ‘less-cash society’.”

Counterfeit currency can have negative effects on the economy. It can:

• Decrease the value of real money
• Distort inflation rates
• Destabilize markets
• Hamper trade
• Erode public trust in financial systems and gove