Holding that the demonetize move was not well thought out, former Finance Minister P Chidambaram on Saturday said its after-effects will continue for a longer period than expected and wondered whether government had consulted its chief economic advisor before taking the decision.
The demonetized 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 at Mumbai LitFest here, when asked what the repercussions he was seeing of the exercise.
"My suspicion is the only knowledgeable economist in the government, Dr Arvind Subramanian, was not consulted," he said. Talking about the first-order effects, 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. Chidambaram said the second-order effects 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, who have sworn their farms, do not have money to buy fertiliser and hire labour. "So I think the consequences will certainly be negative," he said.
He, however, said it was too early to quantify the damage, which has been done because of the decision. Talking about the 50 days' time Prime Minister Narendra Modi had asked for his anti-black money initiative to show results, Chidambaram said it might ease the liquidity crisis for individual hands, but won't solve many other issues.
"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. "Take a simple arithmetic...they demonetized 2,200 (total volume) crore Rs 500 and Rs 1,000 notes. The capacity of all printing presses taken together is 300 crore 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 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 is 16.24 lakh crore, I am willing to give him Rs 100, very priced now," Chidambaram said.
When asked about a brokerage lowering country's growth target to 0.5 per cent in the second half due to demonetization, he said the situation was not that dismal. "That's a very aggressive statement. I don't think it is so bad," he said. Brokerage firm Ambit Capital yesterday said the demonetisation-driven cash crunch that is playing out in the country will paralyse economic activity in the short term.
"Hence, we expect GDP growth to decelerate from 6.4 per cent in the first half of financial year 2016-17 (as per it's estimate) to 0.5 per cent YoY in the second half with a distinct possibility of GDP growth contracting in third quarter of the current fiscal," Ambit said in a report.
It also has cut its financial year 2017-18 GDP growth estimate to 5.8 per cent y-o-y from 7.3 per cent earlier.
