In a televised announcement on Tuesday night, Modi had urged Indians not to rush to banks, as they would have until the end of 2016 to deposit cash in their accounts. But with the high-value notes withdrawn from Wednesday in an effort to combat corruption, black-market trade and tax evasion, many were left without cash for day-to-day expenses.
Banks were closed on Wednesday, and reopened on Thursday morning with a cap on cash withdrawals. ATMs remained closed, so currency was only available from the banks. Newspapers around the country reported long queues at branches, as people scrambled to exchange their high-value banknotes for 100-rupee bills.
Indian Prime Minister Narendra Modi.
At the Churchgate branch of the Bank of India, dozens of people queued in the midday heat, filling out deposit forms as a security guard barked instructions. “Life is completely paralysed,” said Maganbhai Solanki, who had been waiting in line for four hours.
“On the news, they said banks would open at 8am today. I got here at 8.01,” he said. “Now, it’s noon, but I’m still here. Around 50 people in the queue ahead of me got tired of waiting and left but I have no choice. There’s no money in the house. We only have 500- and 1,000-rupee notes which are worth nothing. We didn’t even have enough to pay the milkman this morning.”
“I can’t even buy a cup of tea,” said Guru Birajdar, a lawyer. “I didn’t go to work today because I had no cash. All my money is in 500s and 1,000s so I had to come straight to the bank this morning. I had two 100-rupee notes in my wallet on Tuesday night, but I used that up yesterday.”
Shops, train stations, and taxis stopped accepting 500- and 1,000-rupee notes on Wednesday, interrupting normal trade. Even hospitals, which are exempt from the immediate demonetisation, have reportedly turned down payments in high-value banknotes.
Some complained that Modi’s surprise announcement had completely disrupted normal life. “Nobody is willing to give you change,” said Solanki. “They should have planned this properly instead of springing it upon us.”
The queue outside the Bank of India in Churchgate, Mumbai.
In rural areas especially, where around two-thirds of India’s 1.25 billion population live and access to banks is difficult, Modi’s announcement caused chaos. Reshma Murthy, who works as a maid in the city, said she had come to deposit 4,000 rupees for her family in her village. “They called me and said they had no cash at all. This was a bad decision. They should have given us more time. It happened too fast,” she said.
Others argued the post-Diwali season, during which people had received cash bonuses, was ideal timing for the announcement. “The local municipal elections are starting soon, and it will make life very difficult for politicians who take a lot of cash bribes around this time,” Birajdar said. “For us, it is an inconvenience, but it was a good decision by the government.”
Analysts said the surprise move could hurt the Indian economy in the near-term but would ultimately prove positive, by cutting corruption and giving a badly needed boost to stretched government finances.
There are also hopes the clampdown will curb inflation, notably cutting property prices – an area of the economy where many transactions are in cash. That in turn would give India’s central bank more leeway to cut interest rates.
“This initiative will likely hurt growth in the very short term, but will yield significant benefits in the medium to long term as corruption is cut and the ease of doing business improves, as more of the economy moves into the formal sector,” said Jonathan Schiessl, chief investment officer at Ashburton Investments.
A security guard hands out request slips for the exchange of bank notes at a branch of the State Bank of India in Old Delhi.
The move also sent positive signals about the government’s determination to clamp down on black money, said Mihir Kapadia, founder of wealth management company Sun Global Investments, which is based in London, Dubai and Mumbai.
“Corruption, tax evasion and black money have been major problems for the Indian economy for many decades. Black money is a major factor in propping up property prices and inflating valuations,” he said.
“This is a bold, dramatic, unprecedented move … It shows Mr Modi’s determination to tackle corruption and vested interests and make very fundamental reforms. This is very positive for the economy and makes us convinced that reforms will be pushed very deeply,” he said.
By its nature, India’s shadow economy is hard to quantify. But a 2010 World Bank-sponsored study (pdf) estimated it was equivalent to around a quarter of the country’s GDP.
Citing those figures, analysts at the bank Société Générale said the notes decision would prove supportive for stock markets in India. “This demonetisation step reinforces Modi’s reformist and anti-corruption credentials and raises the prospect of higher long term growth potential,” they wrote in a note to clients.