WIONNew Delhi, Delhi, IndiaNov 09, 2016, 09.20 AM (IST)
India's government today tried to quell the panic caused by the momentous decision to withdraw 500 and 1,000 rupee notes from circulation by assuring that replacement 500 and 2000 rupee bills would be available from Thursday.
India's finance minister Arun Jaitley assured that people who withdrew money from banks need not worry and only tax evaders and those with illegal money would lose from the move.
"Housewives with small cash savings and farmers have no need to worry. People who withdraw money from the banks have nothing to worry about... All they have to do is exchange it or deposit it in the bank," Arun Jaitley said.
"But if you have illegal money, then you have to give its source. If you have criminal money, then you are in serious trouble."
Customers will be able to exchange their old bills for new notes or deposit them in their accounts but face major scrutiny by tax authorities if they cannot account for a sudden increase in their balance, AFP reported. The government has also directed all banks to operate full day on Saturday and Sunday, November 12-13.
Cash machines run dry
All banks and cash machines were ordered to close on Wednesday after PM Modi's announcement that 500 and 1000 rupee notes currently in circulation would no longer be legal tender.
Major queues built up outside cash machines ahead of the midnight deadline as customers tried to withdraw 100 rupee bills. Many machines ran out of cash before midnight and customers had to turn away disappointed.
"I waited for 20 minutes in a queue at the ATM outside my office," Delhi resident Puneet Raheja told AFP. "The person in front of me made a total of 18 transactions on multiple ATM cards, withdrawing cash in only 100 rupee notes."
There was also a rush by motorists to gas stations, which will continue to accept the old bills until the end of the week as will transport operators and hospitals.
Impact on markets
While the move was praised by business leaders, markets fell six per cent in early trade before making a slight recovery. Stocks were around three per cent lower at lunchtime than at the opening, AFP reported.
The slide was also partially attributed to uncertainty sparked by Donald Trump winning the US presidency.
Analysts are confident that while there may be short-term hardship, the scheme will eventually ease out black money in the economy.
Girish Vanvari, a partner at KPMG in India, acknowledged there would be "hardship in the transitory phase" but nevertheless said the overall impact would be beneficial.
"This will eventually ease out black money and corruption in the economy. This will also lead to a surge in tax collections as paying taxes will be the only way to legitimise" the 500 or 1,000 notes, he said.
Sujan Hajra, an economist at the Mumbai-based brokerage firm Anand Rathi securities, told AFP there would be an instant negative impact on consumer spending that would affect consumption.
"The government's demonetisation scheme will affect consumption across India as people won't have enough cash to conduct major transactions for the next few days," Hajra said.
The 500 and 1,000 notes, which are worth around $7.50 and $15, are the largest bills in use in India which is still a massively cash-intensive economy.
Only 2.89 per cent of Indians pay any income tax at all, India's previous finance minister told parliament in 2013.
Many small businesses only take cash to evade tax or mark-up prices to cushion the blow. The wealthy citizens channel money to tax havens and convert it into jewellery and antiques to avoid tax. Many property deals are also done in cash.
Since coming to power in 2014, Modi has unveiled a series of anti-corruption measures, including 10-year jail terms for tax evaders. A tax amnesty for Indians who report undeclared income and assets also enabled the government to recover nearly $10 billion.