NEW DELHI -- In a sudden move against India's vast black economy, Prime Minister Narendra Modi's government demonetized old 500 and 1,000 rupee banknotes -- which account for about 86% of the cash in circulation -- at midnight on Tuesday to flush out unaccountable wealth held in cash.
Along with a show of identity, the old banknotes can be deposited in accounts from Nov. 10 to Dec. 30 or changed into lower denominations in restricted amounts.
On Thursday, the government introduced new 500 and 2,000 rupee notes, worth about $7.50 and $30, and new 1,000 rupee notes will follow. The replacement notes will be introduced incrementally, and should be circulating fully in in four to six weeks.
Banks were shut on Wednesday, and reopened on Thursday to long queues of people wanting to change money. Most automated teller machines remained shut on Wednesday, waiting to be filled with the new banknotes.
Online shoppers meanwhile complained when delivery companies declined their cash payments, and traditional retailers across India were often left idle.
"I am happy that I reached my State Bank of India branch early in the morning and could withdraw new currency from my account," said Shiv Singh, a New Delhi resident who like everybody else was limited initially to 10,000 rupees a day and maximum weekly withdrawals of 20,000 rupees.
Others were less fortunate. When Sushila Kukreti in neighboring Uttar Pradesh state saw over 100 people ahead of her in the queue at the bank, she went home.
"I have run out of smaller banknotes, and it has become very difficult to buy household essentials," she said. "I'll visit my bank again tomorrow and try to either withdraw cash or exchange the old notes with new ones."
The taxman cometh
Authorities warned that cash deposits exceeding 250,000 rupees that do not match the declared income of the account holder may be treated as tax evasion and be liable to a penalty of 200%.
Revenue Secretary Hasmukh Adhia said all deposits beyond the threshold 250,000 rupees will be reported and matched against tax returns. "Suitable action may follow," he said.
Modi announced the demonetization personally at 8pm on Tuesday, four hours ahead of the official cutoff. There was an immediate rush to buy gold, and reports of some jewelers charging up to 40,000 rupees for 10 grams of gold against the market rate of 30,000 rupees.
"Some stores which hadn't yet closed for the day did good business," G. V. Sreedhar, chairman of the All India Gems & Jewellery Trade Federation told the Nikkei Asian Review. He said claims that customers were being charged more were "false."
"We appreciate the government's move," he said. "We are with the government and fully support its decision." Sreedhar nevertheless warned of some inconvenience while the new notes begin to circulate.
Customers making jewelry purchases over 200,000 rupees must provide a permanent account number (PAN). PAN cards are issued by the tax department in order to track monetary transactions and detect laundering.
"We are issuing instructions to the field authorities to check with all the jewelers to ensure that this requirement is not compromised," Adhia said. "Action will be taken against those jewelers who fail to take PAN numbers."
Online shopping woes
Cash on delivery remains the payment mode for 70% of online purchases. Even so, Amazon's Indian arm announced it would not accept the old large denominations.
"You can pay by any electronic means and by using currency not impacted by the [announcement]," Amazon said. "We apologize for the inconvenience caused."
Subhash Sharma, a New Delhi resident who ordered iPhone accessories from Amazon with cash on delivery is still waiting. The company said he could pay with a credit card or smaller banknotes.
National e-tailers Flipkart and Snapdeal, which together with Amazon control 80% of India's online shopping space, also encourage more modern transactions. "We strongly recommend you take this an opportunity to experience the convenience and simplicity of cashless payments," Flipkart said.
Traditional retailers saw their business fall off with the sudden shortage of smaller notes, according to the Confederation of All India Traders.
Logistics virtually came to a standstill as truck drivers carry high denominations to pay tolls and fuel. State-run petrol stations were allowed to accept old notes until midnight on Nov. 11, but the queues were huge.
Nitin Gadkari, the minister for road transport, said tolls on national highways would also be waived until Friday to ease problems.
According to The Hindustan Times, a 40-year-old washerwoman died of shock when she learned of the crackdown and thought she had lost her 2,000 rupees in savings. The newspaper also carried the story of an eight-year-old girl who died because urgent medical attention was delayed. On the way to hospital with the sick child, her father was unable to buy fuel when a petrol station declined his 1,000-rupee note.