Kerala emerged as a major destination to channel hawala money because of the state’s connections with Dubai, which is the global hawala hub.

Kerala is one of the few states where demonetisation of Rs 500 and Rs 1,000 currency notes generated so much heat. The state witnessed a rare phenomenon of the entire state Cabinet sitting on a day-long dharna with the mutually acrimonious ruling party and the Opposition joining hands against the Union Government over the issue.

Economic experts are wondering why the demonetisation move aimed at flushing out black money has met with so much protest in Kerala, which incidentally is the country’s first total banking and completely digitised state. They feel it could be because of pressure from the black money lobbies.

Firstpost talked to a cross-section of experts to get a dispassionate view of the situation. This is the first in a four-part report.

The five-year average growth rate of Kerala’s total revenue came down from 17.2 percent in 2006-11 to 14.20 in 2011-16. The share of primary and industry sectors to the state’s Gross Domestic Product (GSDP) declined from 39.2 and 26.3 percent respectively in 1980-81 to 12.5 and 25.11 percent respectively in 2014-15.

The agriculture and allied sector, which is key to the state’s economy, continued to record negative growth during the last five years. It was (-) 4.67 % in 2014-15 and (-) 2.13 percent in 2013-14. In spite of this, the state’s overall growth rate has been above the national average during the period except in 2014-15, when it was 6.49 percent.

This has been the pattern of the state’s growth in the last two decades. The growth rate of the state economy was above national average consistently in the last two decades in spite of negative growth in the primary sector, stagnation in the industrial sector and cyclical global economic recessions.

Similarly, the state has also been consistently maintaining the per capita income above national average. The per capita income of Kerala was Rs 127,166 during 2014-15 as against the all-India average of Rs 93,293.

The steady growth in the economy and per capita income without matching growth in the productive sectors of the economy is a paradox for many. Economists attribute this to foreign remittances that the state receives from nearly 2.75 million migrants, especially those from West Asia.

Deposits of non-residents (NRs) in banks in the state had crossed Rs 1 lakh crore in 2014-15. According to the state-level bankers committee, it climbed from Rs 66,190 crore in March 2013 to Rs 93,883 crore by 31 March, 2014, and further to Rs 109,603 crore in the last fiscal.

However, a section of economists argue that these remittances alone were not sufficient to help the economy register such a high growth. Mary George, former head of the department of economics, University of Kerala, is of the opinion that the state was maintaining high growth with the help of black money pumped into the state through various channels.

She considers hawala money as one of the main sources of black money circulating in Kerala. Hawala was the main channel of transfer of money when Keralites started migrating to West Asia in large numbers since early 1970s. This parallel system is the favourite mode of money transfer from the Middle East to India for a large number of Non-Resident Keralites (NRKs) even now, according to the economist.

Hawala does not involve physical movement of money. A person, who wishes to transfer money, needs to hand over the same to the agent at his end, who collects the money and informs his counterpart at the receiving end. The latter delivers the cash to the intended recipient at his door step after collecting the commission.

The money received at a location is compensated with a matching transfer of money in the opposite direction. The receipts are also some times compensated by way of exports of goods, under-invoicing or over invoicing exports or imports and other means.

Kerala emerged as a major destination to channel hawala money because of the state’s connections with Dubai, which is the global hawala hub. The hawala operators from other countries like Oman, Kuwait, Qatar and Saudi Arabia route the hawala money to India and other destinations through Dubai.

Similarly, the hawala money received in Kerala goes to other states in the country. There are said to be about 400 hawala operators in the state to receive and distribute the hawala money. They are mostly based in the northern districts of Malappuram, Kozhikode, Palakkad and Kannur.

There is no reliable account of hawala money arriving in the state. While former state director general of police Jacob Punnose revealed a few years ago that Kerala was getting hawala money worth Rs 10,000 crores a year, oneindia.com quoted a Union Home Ministry report putting the annual hawala receipts at Rs 23,000 crores.

Former Research and Analysis Wing (RAW) director Hormis Tharakan said these were mere estimates and they could not be relied upon to make informed comments on the issue. He said there was no mechanism available to track the hawala money arriving in the country.

Mary George believes that the money received in Kerala through hawala channels could be much more since businessmen, smugglers and even extremist forces have started using the channel to transfer money. Migration experts do not contest this.

S Irudaya Rajan, head of the Research Unit on International Migration at the Centre for Development Studies, Thiruvananthapuram, said that the money and goods coming to Kerala through unofficial channels were equivalent to the money received through legal channels.

“The remittances received through legal channels account for 36 percent of the state’s revenue. Though we have not done any specific studies on hawala operations, based on the data from our other studies, we estimate that transfers in the form of cash, gold and other goods through illegal channels will be the same as that of the remittances received through legal channels,” he added.

K V Shamsudheen, chairman of Sharjah-based Pravasi Bandhu Welfare Trust, said that the migrants were using the hawala channel even now because of high discount offered by the dealers. Hawala money is only one form of black money circulating in Kerala.

Apart from this, counterfeit currency pumped into the state from abroad and black money generated within the state by way of bribes received by corrupt officials and politicians and the sale of property are also believed to be substantial.

The state is prone to the menace as a large number of people from the north eastern states, who have easy access to fake Indian currency notes (FICN), come to the state for work. A senior police officer at Kozhikode said that fake currency was also coming to the state in large size through hawala.

Enforcement agencies have reported a 360 percent increase in the flow of FICN to the state in 2015 compared to 2014. Though the total seized value of counterfeit money is worth only Rs 34.55 lakhs in 2015 compared to Rs 7.51 lakhs in 2014, police estimates that the seized amount is just below 10 percent of the actual volume being circulated in the state.

The NIA, which is investigating about eight FICN cases in Kerala, has tracked the role of Pakistan's ISI in production and distribution of fake notes via Dubai, Bangladesh and Sri Lanka. Ports are still the hot destinations for the rackets to smuggle in FICNs. The new strategy is to smuggle in printed sheets of counterfeit and cut them to size in various hideouts in the state, according to an intelligence officer.

The NIA suspects that rackets, including those led by underworld gangsters of Indian origin, pump fake currency into India with assistance of the ISI. The agency had unearthed the links of the ISI and D-Company in a case they have investigated in Kerala. They also found the involvement of Dawood’s brother Anees Ibrahim and his close aide Aftab Batki in some cases.

Economists believe that the hawala money and counterfeit currency notes pumped into the state will certainly be playing a big role in the economic growth of Kerala and the high standards of life of the people in the state, which has achieved developed world levels of social development.

A National Sample Survey Organisation’s household consumer expenditure survey from July 2011 to June 2012 showed Kerala topped among large states in household per capita expenditure in rural areas and came second in urban areas. Haryana topped in urban expenditure.

Economists see the trace of black money in the mismatch between the declining tax revenue and the growing consumer expenditure.

Part Two: Curbs on cooperative banks are hurting Non-Resident Keralites

Part Three: Terror outfits use contraband money to indoctrinate youths