Liquidity issues to stay for three months: Arvind Panagariya

He, however, parried the question when IDFC Bank's chief Rajiv Lal flagged concerns over banks' NPAs as toll road companies do not pay up.

Mumbai, Nov 25 Niti Aayog Vice-Chairman Arvind Panagariya today acknowledged that the demonetisation move will impact economic activity and growth due to lack of liquidity in the system which could be in short supply for three months.

"In the short run, you have a liquidity crunch. It is going to impact economic activity and it is also happening. The problem is being gradually solved, liquidity is being put into the system back and at the pace at which we're going, I imagine that might be maximum a quarter during which this shortage will stay," he said at an Asia Society event here.

Stating that the liquidity situation is better now than it was a fortnight ago after Prime Minister Narendra Modi announced the surprise move to scrap Rs 500 and Rs 1,000 notes, Panagariya said the last month within the quarter will see a small shortage of liquidity.

Speaking a day after former prime minister Manmohan Singh's statement about impact of up to 2 percentage points on growth, Panagariya said, "I think it's a matter of a quarter and how much impact on the growth rate that happens in this quarter is anybody's estimate."

He said the exercise has positives like getting a lot of money into the formal financial system, and the increase in deposits will enhance financial intermediation in the economy and make it an "exciting quarter" for financial firms.

Panagariya said the smooth flow of vehicles due to a limited period toll waiver and zero hassles from policemen looking for bribes will also be of help.

He, however, parried the question when IDFC Bank's chief Rajiv Lal flagged concerns over banks' NPAs as toll road companies do not pay up.

"What is more important, economic growth or asset quality?" Panagariya asked.

PTI