India's government tried to quell the panic Wednesday caused by a bombshell decision to withdraw 500 and 1,000 rupee notes from circulation after cash machines ran dry and shares slid.

A day after Indian Prime Minister Narendra Modi announced the notes would no longer be legal tender in a blitz against “black money”, his finance minister said replacement 500 and 2,000 rupee bills would be available from Thursday and only tax dodgers stood to lose out from the move.

All banks and cash machines were ordered to close on Wednesday in preparation for the turnaround, triggering a late night rush by customers to withdraw smaller notes from ATMs.

Customers will be able to exchange their old bills for new notes or deposit them in their accounts but face major scrutiny by tax authorities if they cannot account for a sudden swell in their balance.

“Housewives with small cash savings and farmers have no need to worry. People who withdraw money from the banks have nothing to worry about... All they have to do is exchange it or deposit it in the bank,” Finance Minister Arun Jaitley told public television.

“But if you have illegal money, then you have to give its source. If you have criminal money, then you are in serious trouble.”

While the move was praised by business leaders and commentators, Indian stocks fell 6 per cent in early trade before staging a slight recovery and were around three percent lower at lunchtime than at the opening.

The slide was also partially attributed to uncertainty sparked as Donald Trump claimed the US presidency in a stunning upset.

Sujan Hajra, an economist at the Mumbai-based brokerage firm Anand Rathi securities, said there would be an instant negative impact on consumer spending that would affect the whole economy.

“The government's demonetisation scheme will affect consumption across India as people won't have enough cash to conduct major transactions for the next few days,” Hajra told AFP.

Major queues built up outside cash machines ahead of the midnight deadline as customers tried to withdraw 100 rupee bills.

There was also a rush by motorists to gas stations, which will continue to accept the old bills until the end of the week as will transport operators and hospitals.

Multiple withdrawals

The 500 and 1,000 notes, which are worth around $7.50 and $15, are the largest bills in use in India which is still a massively cash intensive economy.

“I waited for 20 minutes in a queue at the ATM outside my office,” Delhi resident Puneet Raheja told AFP.

“The person in front of me made a total of 18 transactions on multiple ATM cards, withdrawing cash in only 100 rupee notes.” Many machines ran out of cash before midnight while other customers had to trudge away disappointed after failing to access their funds in time.

Delhi resident Surjeet Singh, who was heading to a family wedding in Punjab, begged friends to give him 100 rupee bills before he left.

“It's a wedding in a small town and plastic doesn't work everywhere,” he said.

While the use of debit and credit cards has increased in the last decade, many small businesses only take cash to evade tax or mark-up prices to cushion the blow.

Only 2.89pc of Indians pay any income tax at all, India's previous finance minister told parliament in 2013.

Many of India's wealthiest citizens channel money to tax havens and convert it into jewellery and antiques to avoid tax. Many property deals are also done in cash.

Girish Vanvari, a partner at KPMG in India, acknowledged there would be “hardship in the transitory phase” but nevertheless said the overall impact would be beneficial.

“This will eventually ease out black money and corruption in the economy. This will also lead to (a) surge in tax collections as paying taxes will be the only way to legitimise” the 500 or 1,000 notes, he said.

Since coming to power in 2014, Modi has unveiled a series of anti-corruption measures, including 10-year jail terms for tax evaders.

A tax amnesty for Indians to report undeclared income and assets also netted the government nearly $10 billion.