This move is just one of many steps. Let me first establish the context and list the other pieces (as I understand them):
> India recently executed / implemented a nationwide biometrics id scheme which has now allowed the govt. to create bank accounts for a very large fraction of the population that previously didnt have access to banking.
The untaxed / cash based transaction system has distorted multiple facets of the Indian society and economy: from vote buying to a distorted realty market. This also blocks investment. When 20% of your net economy is sitting in closets, it is a large wasted opportunity.
> Apropos the fragmented tax system, the Indian parliament finally passed a monumental tax reform pack (first proposed by the opposition parties when they were in power and then opposed by BJP, the current dispensation in power, but I digress).
> This bill, among others moves the country to a digital transaction / electronic payments based tax & transaction system.
> The govt has clearly established a desire (and has now demonstrated the will) to move towards an electronic payment / transaction system, the benefits of which are obvious, especially in terms of minimising pilfering of welfare money, etc. (The national ID scheme now allows for direct cash transfers without middlemen, corruption, etc.)
(You can see where this is leading..)
86% of the Indian currency is high value (denominated in the ₹500 and ₹1000 notes that have now been banned).
The govt has stated that the new high denomination notes that are being issued will not replace the entire 86% in physical cash. It will be a smaller fraction.
This does two things:
a) people who deposit old currency notes will now, perforce, have to move to electronic / card based transactions.
b) it forces individuals to declare their "black" or untaxed money and also move to the electronic payments system.
So, I think this move helps significantly since it is part of a larger push towards electronic transactions etc. In conjunction with the changes in the tax system (and expected / anticipated reduction in income tax rates / increase in exemptions), this move, while painful in the short term, is potentially transformative for the Indian economy and society.