Prime Minister Narendra Modi announced on Tuesday the abolition of all 1000 and 500 rupees bank notes from midnight Tuesday, a dramatic move aimed at stamping out corruption and draining illicit cash from the economy.
In a surprise late-evening televised address to the nation, Modi said the notes in circulation can be exchanged at banks till December 30. Some concessions will be allowed for use of these notes at hospitals and crematoriums, and to buy air, rail and bus tickets till November 11.
There will be some restriction on withdrawal of cash from banks and ATMs.
The move could help bring billions of dollars-worth of unaccounted for cash back into the economy, and choke the flow of fake high-value banknotes militant groups use to fund their attacks against India.
The decision is also an attempt by Modi to fulfill his election promise of curbing tax evasion and recovering illegally stashed incomes overseas. It gives his Bharatiya Janata Party a talking point ahead of elections in five states next year.
But the move entails possible downside risks. Given that about 40% of India’s economy is driven by small- and medium-sized enterprises that largely run on cash transactions, the decision could have a knock-on effect on economic growth.
The short notice too sparked concern among people, and large queues were reported outside ATMs across India, as people rushed to withdraw smaller bank notes. The move could also inconvenience poor people and families planning weddings, the season for which starts in days.
It wasn’t immediately clear how businesses and private banks with large stocks of high-value notes will deal with the transition. The banned denominations account for more than 80% of all currency in circulation by value.
“Banks will be closed tomorrow. It will cause some hardship to you….Let us ignore these hardship… In a country’s history there come some moments when every person feels he too should be a part of it,” the prime minister said in a 4-minute speech.
“We have an opportunity when every citizen can join this mega mission,” he added, calling the move an “Imandari ka Utsav”, or celebration of honesty.
There will be no restrictions on online banking or transactions using debit and credit cards or other instruments such as cheques and demand drafts. The Reserve Bank of India (RBI) will issue a new Rs 2000 and Rs 500 notes later.
Modi also dwelled on the scourge of fake bank notes, saying militants operating against India were using counterfeit of the 500 rupee note, worth about $7.50 at current exchange rates.
“Terrorism is a frightening thing ... But have you ever thought about how these terrorists get their money? Enemies from across the border have run their operations using fake currency notes,” he said, referring to a euphemism many Indian leaders use to describe Pakistan.
This is the first time since 1978 that India has “de-monetised” its larger bank notes. Prime Minister Morarji Desai too had banned all notes above Rs 100 to fight corruption, which Modi on Tuesday described as “a disease” that impedes the fight against poverty.
India has struggled to curb corruption and slush funds in the economy, or “black money”, especially in the real estate sector. The country was ranked 76th among 168 countries in Transparency International’s 2015 index on corruption, which is estimated to cost the country 1-2% of gross domestic product every year.
Modi said there was a proposal for new notes of 5000 and 10,000 denominations, but it was not accepted by the RBI.
Tuesday’s announcement comes just over a month after the government raised nearly $10 billion through a tax amnesty for Indians to declare hidden income and assets.
Some officials and experts said Tuesday’s move was the biggest in decades aimed at fighting graft.
BJP president Amit Shah tweeted, “This decision of PM @narendramodi is a surgical strike on menace of corruption and black money.”
The Congress maintained it will support government in its effort to curb “black money” but expressed concern at the hardships it could cause farmers and families in the wedding season.
Party chief spokesman Randeep Singh Surjewala also questioned the logic of introducing 2000-rupee notes in curbing corruption.
President Pranab Mukherjee also welcomed “the bold step” and called upon people not to panic.