Former Finance minister P Chidambaram on Saturday warned of lay-offs and retrenchment as the after-effects of the withdrawal of Rs 500 and Rs 1,000 notes are likely to last longer than expected.
Chidambaram said the government did not appear to have consulted Chief Economic Advisor Arvind Subramanian while taking the decision. “My suspicion is the only knowledgeable economist in the government, Dr Arvind Subramanian, was not consulted,” he said. He said the second-order effects of demonetisation are already visible in places like Tirupur and Surat, where lay-offs and retrenchments have started. The second-order effects will be more prominently felt if farmers do not have money to buy fertiliser and hire labour. “So I think the consequences will certainly be negative,” he said at Mumbai LitFest.
The demonetised Rs 500 and Rs 1,000 notes accounted for over 86 per cent of the total Rs 16.24 lakh crore value of banknotes in circulation as on March 31, 2016, according to Reserve Bank of India’s latest annual report. “You are seeing the first-order effects of withdrawing, sucking out 86 per cent of the currency in circulation from the market. The first order will continue for several weeks now. Then you will see the second-order effects,” Chidambaram said.
On the short-term impact, he said there are many people now living with very less money and are not consuming, which means produce, especially perishable produce like vegetables, fruits, are not being sold.
He said it was too early to quantify the damage, which has been done because of the decision. “The PM’s time out for 50 days might ease the liquidity crisis at individual’s hands, but it won’t solve many other problems,” he said.
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“Take a simple arithmetic. They demonetised 2,200 (total volume) crore Rs 500 and Rs 1,000 notes. The capacity of all printing presses taken together is 300 crore notes per month. So, even if you print note for note, it will take seven months. If you print smaller denominations notes like Rs 100 for Rs 500, it will take five times more time. Think somebody didn’t think through… that’s not unusual for the government,” he said. Chidambaram said the exercise will not completely remove the counterfeit notes from the system. “There is only Rs 400 crore of counterfeit currency, 0.028 per cent in a total circulation of Rs 16.24 lakh crore. If somebody can tell me in five seconds, how many zeros are there in 16.24 lakh crore, I am willing to give him Rs 100, very priced now,” Chidambaram said.