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Crowds Line Up at India’s Banks to Exchange Banned Rupee Notes

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Indians waited to exchange rupee notes at the State Bank of India in Mumbai on Thursday. Credit Rajanish Kakade/Associated Press

NEW DELHI — Thousands of security forces were deployed on Thursday to keep the peace at India’s banks, where crowds of people had formed jittery, snaking lines in the early morning, desperate to exchange now-useless currency notes.

In a surprise move on Tuesday, Prime Minister Narendra Modi withdrew 500 and 1,000 rupee bills from circulation in an effort to shrink the country’s vast cash economy, which is estimated to be as much as 30 percent of the gross domestic product and which many Indians use to avoid paying taxes and to pay bribes.

For the next two weeks, citizens will be able to exchange 4,000 rupees a day, or about $ 60. But they will have difficulty converting large cash holdings because they will have to declare them to the tax authorities. Money that cannot be exchanged will be, as officials put it, “extinguished.”

The plan, top secret until Mr. Modi’s announcement, was hailed by financial analysts as bold and potentially transformational for India. It is also a high-stakes experiment: Though other Indian leaders have withdrawn currency notes, none has reduced the country’s supply of cash so drastically or so abruptly. The two bills being withdrawn make up 85 percent of the cash in circulation.

Many people on the street this week said they were stunned and angry. Brawls broke out in lines outside banks, where many had to stand for hours, uncertain whether the stockpile of bills would run out.

“I am in a very foul mood, and for business, this government is not good at all,” said Ayush Singhal, 26, a trader in packing tape, whose shop was all but deserted after the currency was withdrawn. The Old Delhi wholesale market, one of the largest in Asia, operates almost entirely on a cash basis, Mr. Singhal said.

“We have to figure out some other way of conducting business,” he said, his face grave. “For now, I am at a loss for words.”

Poor migrants to the city said the sudden move had stranded them without enough money to eat.

Umeshwar Prasad Rao, a farmer, had traveled hundreds of miles to New Delhi so that his daughter could have an operation, carrying his life savings of 10,000 rupees in 500 rupee notes.

Because he did not have a government identification card, Mr. Rao could not exchange the money for usable notes. By midday on Thursday morning his family had consumed nothing but tea. Scores of families sprawled on the sidewalk around the hospital, with similar complaints.

“I am at my wits’ end,” Mr. Rao said. He was hoping to get food from a charity. “Otherwise, we will be fasting,” he said.

The people who help others unload “black money” were doing a booming business. Gold merchants saw the price for 10 ounces of gold nearly double, so eager were customers to dispose of their large bills. Nishant Verma, who runs a family jewelry shop, kept his doors open until 1 a.m. two nights in a row to accommodate what he called a “mad rush.”

But the busiest of all were money launderers — small-timers who converted stacks of 1,000 rupee bills to 100 rupee notes for a 500 rupee fee; and larger-scale cash-on-hand firms, which provide companies with cash for undeclared payments, or bribes, registering the sum as a loan or an advance.

Other businesses might backdate the receipts, suggesting that the invalid bills were exchanged before Mr. Modi’s announcement, said Ajay Shah, a professor at the National Institute of Public Finance and Policy. “There is infinite ingenuity out there,” he said.

Hospitals, which are exempted from the ban, may also turn a profit by exchanging large numbers of bills for a fee. Laborers also made money on Thursday by standing in lines at banks, saving the places of more wealthy people who preferred to use their time in other ways.

Mr. Modi had warned that the public might suffer “temporary hardships” during the period when the now-invalid bills are exchanged for new ones. But those likely to lose the most are real estate dealers and other professionals who demand cash transactions.

Yet experts said a period of disruption was a small price to pay to drain the informal economy, which many Indians use to avoid paying taxes and to spirit their assets out of the country. Global Financial Integrity, a Washington policy group, has estimated that India lost $ 344 billion in illicit outflows of money in the decade leading up to 2011.

As the week progressed, though, some economists began to express worry that the abrupt monetary shock would ripple through the economy, weakening consumer demand.

Ila Patnaik, an economist, warned in an editorial in the Indian Express newspaper that payments are now likely to be held up and purchases likely to be postponed, potentially damaging the economy in 2016 and 2017.

“As long as things are going fine, we tend to ignore money,” she wrote. “But when money is disrupted, this imposes a substantial disruption upon the working of the economy.”

Source: NYT > World

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