This is certainly an issue here. Often, services will be refused if you can’t provide change.
You need change for everyday stuff like: bread (Rs.10), milk (Rs.10), taxi to station (Rs.20), bus/train ride (Rs.8), cigarette (Rs. 5), quick breakfast (Rs. 20), etc.
Now, let’s assume you’re a taxi driver. You start off your day with Rs. 50 in your pocket, in change. If your first passenger has only a Rs. 500/- note, you’re screwed, 'coz no one’s going to give you change early in the morning. So, instead, you refuse the passenger. Also, if the passenger had only a Rs. 100 note, and his ride cost him Rs.50, you have to give him all your change. So you’re left with a Rs. 100 note and no change. You’re screwed again. Although it’s easier to get change for Rs. 100, you’re still going to waste your time and energy trying to get someone to give it to you.
Now assume millions of people that have the same predicament. Nobody wants to give out change, everyone wants to keep change.
The service providers (e.g. taxi driver) need to be able to service their customers. The customers (e.g. passenger) need to be able to avail of services. So both try to retain change.
In the morning it’s almost impossible to get change (because most service providers start with a small kitty). Towards evening it gets easier.
Rs. 500 is also refused often because of the proliferation of fake notes of this denomination (the highest denomination in common use).
This behaviour is noticed mainly with respect to essential services. The customer doesn’t have this problem if s/he goes to high billing places, like an uppity restaurant, or a night club, etc. Here, the service provider takes the hit of 95 coins for Rs. 100 in order to be able to service all customers.
The shortage of change might be artificial, in that everybody is hoarding. I’m not sure how the government views this, or what their plans are to address this issue.
I’ll ask around and see what others have to say.