Millions scramble after India scraps its largest banknotes

Move expected to bring billions of dollars into economy and tax base long hobbled by corruption, money laundering

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Indians awakened to confusion on Wednesday as banks and ATMs remained closed after the government withdrew the highest-denomination currency notes overnight to halt money laundering in a country where many in the poor and middle-class still rely mainly on cash.

Roadside vegetable sellers, kiosks selling biscuits and tea, small mom-and-pop stores selling groceries, 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 ATMs were likely to stay closed 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 ATMs open Nov. 11 there will be an initial cap of 2,000 rupees ($30) on withdrawal per card, which will gradually be increased to 4,000 ($60) rupees within a week.

New banknotes

The government will issue new banknotes of 500 and 2,000 rupee denominations soon, 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, gas stations, crematoria and for other businesses and services deemed essential.

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.

Modi said authorities have discovered 1.25 trillion rupees, or about $18.8 billion, in illegal cash over the last two and a half years. Counterfeiting was also a major concern, he said.

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.