On November 8, 2016, India’s Prime Minister Narendra Modi announced the demonetization of the country’s two highest denomination bills, the Rs 1,000 and the Rs 500 notes, equivalent to $15 and $7.5 respectively. The notes, which accounted for almost 86 percent of the total value of all banknotes in circulation in the country, were declared illegal tender with immediate effect. Demonetization of these notes, Modi said, would help the government fight “black money,” corruption and terrorism.  It would help tackle terrorism by rendering useless counterfeit currency notes, which “enemies from across the border” (read Pakistan) use to run their anti-India terrorist operations. “This has been going on for years,” Modi said, pointing to the many instances of terrorists caught with a large number of fake 500 and 1,000 rupee notes (Economic Times, November 9, 2016).
In the two months since the demonetization of India’s high denomination notes, Modi and his ministers have made grand claims on its impact on terror funding. Within days of the announcement, Defense Minister Manohar Parrikar said that it had undermined the “core of terror funding” in the country (Indian Express, November 13, 2016). On December 27, Modi declared “the world of terrorism” had been “destroyed due to demonetization” (The Hindu, December 27, 2016). An examination of the financing of terrorist groups active in India, however, reveals a more complex picture. Terrorist groups have been hit – some harder than others – but whether demonetization will weaken terrorist outfits’ finances in the long term is doubtful.
How Terrorist Groups Are Funded
Currency notes, genuine and counterfeit, constitute an important part of the assets held by terrorist groups active in India. The bulk of fake Indian currency notes (FICN) are printed abroad, mainly in Pakistan. India alleges that printing of FICN enjoys Pakistani state support; the paper used is the same as that used for Pakistani currency, and the printing of notes is undertaken using Pakistani government presses (India Today, November 6, 2013). These notes are then pumped into India through criminal networks and terrorist outfits like the Lashkar-e-Taiba, Jaish-e-Mohammed (JeM), Hizbul Mujahideen (HM) and Indian Mujahideen.
Besides the militants, traders and travelers between the two countries are conduits for fake notes. Counterfeit currency is also sent via couriers through India’s porous borders with Nepal and Bangladesh, or over air and sea routes via West Asian and Southeast Asian countries (India Today, November 10, 2016). Among illegal channels for the transfer of funds, the Hawala route, a form of money transfer, is the most popular and plays a key role in sustaining terrorism and financing terror attacks (Outlook, November 24, 2011). 
Militants also use legal channels to route their funds. JeM, for instance, favors sending money via bank accounts of Kashmiris based in Arab countries to their relatives in Kashmir, who then hand over the amount to JeM operatives in Kashmir (India Today, January 18, 2016). The HM is said to have routed Rs 800 million ($12 million) through a Pakistan-based front organization to India mainly using conventional banking channels (Economic Times, August 26, 2016). It is also reported to be using the cross-Line of Control barter trade to fund its operations in Indian Kashmir. Goods from Pakistan Occupied Kashmir are under-invoiced and the excess money generated is collected by its fighters in India (Economic Times, August 27, 2016). Several Saudi “charity” organizations also use bank transfers to send funds to madrassas in India that are radicalizing young Muslims (NDTV, September 25, 2016).
In addition, terrorist groups raise their own funds. Front organizations for LeT and JeM collect donations from the Pakistani public for use in their anti-India jihad (Indian Express, July 5, 2016). Terrorist groups also raise funds by collecting protection money from local businesses and contractors, as well as “taxing” profits from illicit businesses such as narcotics smuggling and illegal mining (Institute for Defence Studies and Analyses [IDSA], December 27, 2013).
Limited Financial Impact
Although terror groups do hold some of their assets in the form of investment in real estate, gold or stock shares, most is held as currency notes. Demonetization would, then, have converted any stashed counterfeit notes into scraps of valueless paper. However, militants would likely have already deposited as much of their illegally amassed wealth – the “black money” – as possible into bank accounts. In the Maoist strongholds in Chhattisgarh, Odisha, Bihar and Jharkhand, fighters appear to be forcing local villagers to deposit the rebels’ black money into their own bank accounts, with officials reporting an unusual rise in the balances of the accounts of poor villagers (NDTV, November 30, 2016).
Despite such efforts to preserve some of the value of black money, demonetization has had an immediate impact on terrorists’ funding. Hawala traders, who after demonetization were left holding large volumes of cash rendered suddenly valueless, have been hit. Several hawala businesses have been forced to close, crippling an important channel for terrorist funding (Mail Today, December 25, 2016).
However, the impact of demonetization on terrorists’ finances is at best temporary. Indian officials claim the security features of the new Rs 2,000 and the Rs 500 notes that have replaced the demonetized notes are almost impossible to replicate, but it seems only a matter of time before counterfeiters copy the new notes (Times of India, November 10, 2016). By some accounts, fake notes printed in India are already in circulation. Furthermore, as Pakistan government presses are used to print FICN, replicating the new notes will not be all that difficult (Deccan Herald, December 27, 2016; The Wire, November 11, 2016). That could mean the coffers of terrorist groups will be replenished with new fake high-denomination bills within a matter of months.
As for those sending money via the hawala channels, agents are already finding new ways to launder black money (New Indian Express, November 19, 2016). Transfer of funds to terrorist groups can therefore be expected to normalize in a few months as cash in circulation increases, making demonetization only a temporary impediment to terrorist finances (Hindustan Times, November 10, 2016).
Recovering From the Blow
Just how demonetization will hit different terrorist outfits will depend on their cash reserves, the liquidity of the businesses in which they have invested and the ease with which they are able to reconvert assets into cash. The Maoists and insurgent groups in India’s Northeast – which keep the bulk of their assets in cash – have been hardest hit, and it will take them longest to recover. Their existing stashes of cash have been rendered redundant. Likewise, their ability to raise money through extortion from locals has been weakened, as those from whom they raise such funds are unable to pay immediately. So too they will be unable to sell real estate and gold (IDSA, November 18, 2016 and Sunday Guardian, December 4, 2016).
In contrast, terrorist groups active in Jammu and Kashmir, and Islamist outfits operating elsewhere in India, will be able to recover much faster, as they have access to sources of financing, including funds from the Pakistani state and rich donors in West Asia who have not been impacted by demonetization (IDSA, November 18, 2016). Additionally, as well as the Hawala system, these groups draw their finances from remittances sent by the Indian diaspora in West Asia, payments that are routed via legal banking channels and so will not be affected.
Demonetization will not provide a long-term solution to India’s problems with foreign-funded terrorists nor, contrary to the government’s claims, will it break the back of terrorist finances. Any setback it inflicts will be temporary at best, with Pakistan-backed groups likely to quickly recover.
 Black money refers to the illicit proceeds of tax evasion, criminal activity and corruption, which are often held in the form of high denomination bills, as well as in real estate and gold.
 Hawala is a money transfer system popular in Arab countries and South Asia, in which money is paid to an agent who instructs an associate in the relevant country to pay the sum to the final recipient.