NEW DELHI (Reuters) - Prime Minister Narendra Modi on Friday defended his decision to withdraw high denomination bank notes from circulation, as a deadline to end severe cash shortages passed with Indians still queuing at banks to deposit savings and withdraw money.

India's Prime Minister Narendra Modi looks on before launching a digital payment app linked with a nationwide biometric database during the "DigiDhan" fair, in New Delhi, India, December 30, 2016. REUTERS/Adnan Abidi

Modi abolished 500 and 1,000 rupee bills on Nov. 8, taking out 86 percent of cash in circulation, in a bid to fight corruption, end terror financing and turn India into a cashless society.

The move, however, caused a major cash crunch as the government struggled to replace old notes with new 500 and 2,000 rupee bills. Modi had asked for 50 days, until the end of this month, to ease the crisis.

Speaking in New Delhi at the launch of a digital payment app linked with a nationwide biometric database, Modi exhorted Indians to reduce their dependence on cash.

“The world is surprised to see the way we’ve overcome the challenge after 86 percent of cash was withdrawn,” Modi said.

He is expected to address the nation on New Year’s Eve to further talk about so-called “demonetization”.

While cash shortages have eased somewhat, bankers and analysts said the situation is far from normal and could last at least another six months. They said the move could hit economic growth and lead to job losses and a drop in demand for goods.

Only 35-40 percent of ATM machines were dispensing cash, according to Ramaswamy Venkatachalam, managing director, India and South Asia, Fidelity Information Services, a banking technology provider.

The government has put a weekly cap on how much an individual can withdraw from an account at 24,000 rupees, but many banks were only handing out 10-15,000 rupees to clients because they did not have enough cash to go around, said Harvinder Singh, general secretary of All India Bank Officers’ Association, which represents nearly 300,000 bankers.

Singh said ATM operations were unlikely to be normal before the end of February.

“I’m here to deposit a few old notes before the deadline expires,” said Rakesh Kumar, lining up outside a bank in New Delhi.

“But I expect the government and RBI (central bank) to quickly replenish banks and ATMs with new notes so that we can withdraw without any trouble.”

Modi’s radical decision is turning into a test of his popularity, and is already a central issue in Uttar Pradesh, India’s most populous state, where the outcome of state elections early next year will be key for Modi’s expected bid for a second term in 2019.

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The cash shortages have started to make some allies and members of his ruling Bharatiya Janata Party anxious, with some distancing themselves from the move.

The opposition, led by the Congress party, has joined forces, mocking the government for being ill-prepared and blaming it for hardships faced by the poor as a result. It has called for Modi’s resignation.

“In the last 50 days, the people have been put (through) enormous hardship and suffering,” said P. Chidambaram, a senior leader from opposition Congress party and former finance minister.

“Altogether, the whole exercise has been a case of total mismanagement, administrative collapse and widespread corruption,” Chidambaram added, accusing the government of taking the decision in haste.

Chidambaram said Modi should make “a categorical announcement” that all curbs on cash withdrawals would end.