Indian Prime Minister Narendra Modi ordered the withdrawal of 500 and 1,000 rupee notes from circulation on Tuesday in a shock announcement designed to tackle widespread corruption and tax evasion.
Modi said that while people could exchange their old notes for new bills at banks or post offices until the end of the year, or deposit them in their accounts, they would no longer be legal tender from midnight.
“To break the grip of corruption and black money, we have decided that the 500 and 1,000 rupee currency notes presently in use will no longer be legal tender from midnight that is 8 November, 2016,” he said in a televised address to the nation.
“This means that these notes will not be acceptable for transaction from midnight onwards.” After a one-day shutdown of all banks and ATMs, new 500 and 2,000 rupee denomination notes would be issued from Thursday by the Reserve Bank of India (RBI), the country's central bank.
The 500 and 1,000 notes, which are worth around $7.50 and $15 respectively, are the largest bills in use in India which is still a massively cash intensive economy.
Since coming to power in 2014, Modi has pledged to crack down on so-called black money -- vast piles of wealth kept hidden from the tax authorities -- with a series of new measures, including 10-year jail terms for evaders.
The latest announcement comes a little over a month after the government raised nearly $10 billion through a tax amnesty for Indians to report undeclared income and assets.
Finance Secretary Shaktikant Das said the decision was “a very bold and powerful and a very decisive step to fight the menace of black money and the use of fake Indian currency notes”.
He warned those with hidden stashes of cash that banks would be extra vigilant with CCTV cameras to record identities and all banking transactions.
While the use of debit and credit cards has increased in the last decade in India, many small family-owned businesses insist on taking cash to evade tax or else ask for mark-ups to cushion the blow.
Most business leaders welcomed Tuesday's announcement although there were some concerns about the impact on small traders.
“It is perhaps the most significant move ever taken to curtail the parallel economy,” said Chanda Kochchar, chief executive of ICICI Bank.
“This move will give a sharp boost to all formal channels of payment which in turn will help the formal economy to grow.” Some $439 billion left the country illicitly from 2003-2012, according to estimates from the Global Financial Integrity group in Washington.
Many of India's wealthiest citizens channel money to tax havens and convert it into jewellery and antiques to avoid tax.
Domestically, targets for investigation include temples and ashrams, where lavish donations can be a front for money laundering, and cricket betting. The property sector too is awash with black money.
Only 2.89 per cent of Indians pay any income tax at all, India's previous finance minister told parliament in 2013.
The prime minister said that the move was also designed to counter Pakistan-based extremist groups who carry out attacks on India, saying “enemies from across the border” were financing their activities by mass producing counterfeit Indian notes.
Finance secretary Das said there had been a disproportionate rise in the number of 500 and 1,000 rupee notes in circulation in the last five years.
He revealed that the new 500 rupee note would bear the image of Delhi's iconic Red Fort while the new pink 2,000 rupee note would feature India's “Mangalyaan” Mars orbiter.
RBI chief Urjit Patel told reporters the central bank was ready to get the new notes into circulation swiftly. “The RBI has been concerned with the growing menace of fake Indian currency notes which has been increasing in numbers,” he added.
While the old bills will no longer be legal tender in shops, hospitals and transport operators will continue to accept them for the next 72 hours.
They would also be accepted at gas stations run by public sector oil companies, and at milk booths and crematoriums.