A security guard hands out request slips for the exchange of old high denomination bank notes at a branch of the State Bank of india in Old Delhi, India, November 10, 2016. Photo: Reuters/Cathal McNaughton

Indian tax officials raided jewelers and money changers in major cities on Thursday night to stop them exchanging 500 and 1,000 rupee notes at discounted prices after they had been pulled from circulation by the government in a crackdown on “black money.”

The raids came at the end of a day that saw thousands of police being called in by banks to manage huge queues outside branches, as people tried to exchange bank notes abruptly ditched in a shock announcement by Prime Minister Narendra Modi on Tuesday.

The 500 and 1,000 rupee notes, worth a combined US$256 billion, were said to be fueling corruption, being forged and even paying for attacks by Islamist militants against India.

The government is also closely monitoring all cash deposits at banks over the next few weeks, with any above 250,000 rupees (US$3,756) liable to be taxed.

Since many individuals with hoards of cash are trying to turn “black money” into “white” by buying gold instead of depositing the notes in banks, jewelers not furnishing the buyers’ permanent account number could face action.

Economists and some businesses, especially those involved in cashless payments, have welcomed the “demonetization” as a vital step toward broadening the formal economy and improving tax compliance.

But it has disrupted the daily lives of hundreds of millions of Indians who live in the cash economy that is estimated to account for a fifth of India‘s US$2 trillion gross domestic product and who have low confidence in banks or plastic cards.

Old high denomination bank notes are seen kept in buckets at a counter as people stand in a queue to deposit their money inside a bank in the northern city of Kanpur, India, November 10, 2016. Photo: Reuters/Adnan Abidi

When banks reopened on Thursday after a day’s break, there were long queues all across the country as people rushed to exchange the demonetized currency for new 500 and 2,000 rupee notes.

Many banks had sent text messages to customers on Wednesday night about the reopening of their branches and the documents required to exchange their money.

“I had to skip my breakfast and I’m very hungry but can’t leave the queue as my family needs money desperately,” one customer told a TV news channel.

Surender, standing in a queue for over an hour at a bank in Thane, Mumbai, said: “Modi’s announcement came as a surprise. I am left with no money now … Still, I welcome the (demonetization) move.”

Cleaner system

An angry customer, tired of waiting, demanded a separate queue for senior citizens. Many said they skipped going to work to deposit or exchange notes.

Banks will extend working hours on Friday and remain open on Saturday and Sunday to clear the backlog, although ATMs began functioning again on Friday.

In television interviews, Finance Minister Arun Jaitley defended the move, saying India was moving to a “cleaner system”, and rebutting criticism that the government was resorting to arbitrary and authoritarian methods of running the economy.

But he said it would take two or three weeks for new 500 and 2,000 rupee notes to be put into circulation.

Asia Times Financial is now live. Linking accurate news, insightful analysis and local knowledge with the ATF China Bond 50 Index, the world's first benchmark cross sector Chinese Bond Indices. Read ATF now.