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Wednesday 21 March 2018

India scraps largest bank notes overnight

An employee of a fuel pump argues with a customer for change of 1000 rupee Indian currency note in Ahmadabad, India. (AP)
An employee of a fuel pump argues with a customer for change of 1000 rupee Indian currency note in Ahmadabad, India. (AP)

Indians have woken up to confusion as banks and cash machines remained closed after the government withdrew the highest-denomination currency notes overnight to halt money laundering.

Roadside vegetable sellers, kiosks selling biscuits and tea and small grocery stores all saw a sharp drop in customers on Wednesday, the day after Prime Minister Narendra Modi's surprise televised announcement.

As of midnight on Tuesday, all 500 and 1,000 rupee notes had no cash value. People holding the discontinued notes can deposit them in banks and post office savings accounts before the end of the year. But anyone making large bank deposits might invite the unwelcome attention of Indian tax authorities.

Finance minister Arun Jaitley told state-run news channel Doordarshan that if the money deposited in banks was illegal then the depositors would find themselves in "trouble".

Banks and cash machines were likely to stay closed on Thursday, too, to help prepare for the swarms of people who will rush to deposit their 500 and 1000 rupee bills and withdraw money to spend once they reopen.

When cash machines open on November 11 there will be an initial cap of 2,000 rupees (£24) on withdrawal per card, which will gradually be increased to 4,000 rupees (£48) within a week.

The government will issue new banknotes of 500 and 2,000 rupee denominations soon, Mr Jaitley said, adding that the new currency should be available in banks within three or four weeks.

For a few days, the old bills can be used at hospitals, petrol stations, crematoria and for other businesses and services deemed essential.

But many, like student Ankit Saini, woke up on Wednesday morning with money in their wallet. Just in the wrong denomination.

"I have three 500 rupee notes and only about 40 rupees in small change. I can either buy lunch or a bus ticket home," he said as he chose food over transport at a roadside food stall in central Delhi. "But what will I do tomorrow?"

"Maybe what Modi has done is good for the country in the long run, but what about ordinary people like us today?" asked Om Prakash Singh, an office manager. "I have 200 rupees to get through the next two days and even after that who knows how long the lines at the bank will be."

The move is expected to bring billions of dollars into an economy and tax base long hobbled by corruption and money laundering.

Businesses routinely use cash to avoid paying taxes. Raids on corrupt politicians and businesses regularly uncover millions of dollars' worth of rupees in dozens of boxes of cash.

Mr Modi said authorities have discovered 1.25 trillion rupees, or about £15.4 billion, in illegal cash over the last two and a half years. Counterfeiting was also a major concern, he said, and, in an indirect reference to rival Pakistan, accused a neighbouring country of circulating fake Indian currency to damage the Indian economy.

"We as a nation remain a cash-based economy, hence the circulation of fake rupees continues to be a menace," India's central bank said in a statement late on Tuesday night.

In the past, other governments such as Burma have taken notes out of circulation to undermine challenges to their power and regain stronger control over the economy.

Much of India's illicit money stores are believed to be used for land purchases, or secreted away in overseas accounts. The scrapping of bank notes could send real estate prices crashing, an expectation reflected in slumping stock prices of major real estate companies on the Bombay Stock Exchange by early afternoon.

Shares of real estate giants DLF, Housing Development & Infrastructure and India Bulls Real Estate had all dropped more than 20% from their closing Tuesday.

But the move will also hurt the poor, many of whom do not have bank accounts and keep their savings in cash.

"We are not the ones with the black money and if we don't earn for two days we don't eat," said Bachchu Lal, as he stood next to his hand pushed wooden cart. He had only one customer in the first few hours of Wednesday morning, usually a busy time.


Press Association

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