Myself, another Brit and an Indian colleague from Delhi had meetings down in Goa last month and went to a small seafront restaurant in the evening and were half way through the meal when we noticed the no credit card sign behind the bar. Deepali had been there before and paid by card but it seems the card system in the area was down, as were the ATMs we later found, fortunately I had more than enough cash on me to meet the bill as I'm used to things that should work one way in India not working unless there's cash involved. Please don't tell me where I can or can't eat or go as a foreigner, this was my 49th trip into India, I've covered almost the whole country in the 15+ years I've been working there and actually had an apartment there for 2 years when I commuted in regularly for weeks or months at a time.
I understand why the move was taken but am also sure that those with large amounts of money hidden from the tax man will have already found ways to get around the rules to ensure their losses are minimised, the corrupt in India are among the most creative and innovative I have ever encountered. Since that is the case then those who will suffer most are the poor, illiterate and rural masses for whom 1,000 Rs is a significant amount.
As for there being no paperwork necessary, the bathroom's the only place where that is generally true in India. Even as a foreign national departing at the airport changing most of the useless currency I was saddled with involved the completion of 2 declaration forms, copies taken of my passport and boarding pass and signatures on 2 other certificates and the government receipt. If you can't see how that is a deterrent to the poor, if they are even close enough to a bank to take their cash in then you maybe need to get out and experience the real India a bit more.