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Indian PM Narendra Modi faces his biggest electoral test since gaining power as the country’s most populous state, Uttar Pradesh, goes to the polls for a new state assembly.

Narendra Modi took Uttar Pradesh, which is home to over 200 million people, when he won the 2014 national election.

Uttar Pradesh election is being seen as a referendum on Narendra Modi’s decision to ban high value banknotes in India.

The move led to a cash shortage, hurting individuals and businesses.

Image source Reuters

The performance of Narendra Modi’s governing Hindu nationalist Bharatiya Janata Party (BJP) in Uttar Pradesh was important because it will be seen as an indicator for India’s national politics.

The move to scrap 500 ($7.60) and 1,000 rupee notes in November 2016 was intended to crack down on corruption and so-called black money or illegal cash holdings.

However, his government has admitted that the withdrawal of high value banknotes, which was met with shock in India, has had an “adverse impact” on the economy.

Narendra Modi has defended the decision, which he said was made in the interests of the poor.

The prime minister has personally led the campaigning for his party with the aim of encouraging a strong showing at the polls, which would strengthen his chances of a second term in 2019.

Uttar Pradesh voted overwhelmingly for Narendra Modi’s BJP in 2014.

Indian government has announced that the 500 ($7.6) and 1,000 rupee banknotes will be withdrawn from the financial system overnight.

The surprise move is part of a crackdown on corruption and illegal cash holdings, PM Narendra Modi said in a nationwide address on TV.

“Black money and corruption are the biggest obstacles in eradicating poverty,” he said.

New 500 and 2,000 rupee denomination notes will be issued to replace them.india-bank-notes-withdrawn

Banks have been told to exchange existing high denomination rupee notes over the next 50 days.

The move is designed to lock out money that is unaccounted for – known as “black money” – which may have been acquired corruptly, or be being withheld from the tax authorities.

India – the seventh largest economy in the world – is overwhelmingly a cash economy, with most of its currency stored in 1,000 and 500 rupee notes.

Narendra Modi explained the thinking behind the move in an unscheduled speech on November 8.

“On one hand, we are number one in economic growth and on the other we are ranked 100 in global corruption rankings,” he said.

“Despite various steps, we have improved only to 76.”

It is seen as the boldest move by any Indian government to clampdown on tax evaders.

The 500 and 1,000 rupee notes are the highest denomination notes in the country and are extremely common in India. Airports, railway stations and hospitals will only accept them until November 11.

People will be able to exchange their money at banks between November 10 and December 30.

Narendra Modi’s ruling Bharatiya Janata Party came into power in 2014 promising to bring billions of dollars of black market money into the country’s financial system. His government is half way through its term of office.

The announcement comes just over a month after the Indian government raised nearly $10 billion through a tax amnesty for Indians to declare hidden income and assets.

Government guidelines say it is possible to exchange 4,000 rupees – but it is not clear if this is per day or in total.

Critics say the new rules may make it especially difficult for people who choose to keep their cash at home rather than in a bank account and for people with large rupee cash reserves who live abroad.

If there is a legitimate explanation for the cash, the authorities say, it will be possible to exchange it.

Cash points will close on November 9 and in some places also on November 10 – a development that it seems may cause cash blockages or queues at ATMs.