The yin & yang of demonetisation in real estate

Demonetisation of currency has become talk of the town. Not just two, but multiple schools of thoughts have emerged, both in favour and against, with few fence sitters too. Most of these schools of thoughts would need to unlearn and learn through this event, as no economic reform of such magnitude has ever been undertaken in India since the Independence.

With all its pain reflecting through falling Nifty Realty Index, de-growth in terms of value (with deep discounts) and volume of transactions in secondary and resale markets, real estate projects being stretched as informal source of capital is not being available; there surely are gains which Indian real estate and economy as a whole would experience from medium to long term.

Demonetisation has surely led to an artificial illiquidity of tender notes, but that is just the first step towards creating cash-less economy or rather I should say a ‘sustainable economy.’ The idea is not to become like Spain, first country to introduce currency ‘Peseta’ and a first one to be cash-less economy with over 95% of the transactions being electronic (India is at inception with only 3% of the transactions using non-cash methods). But the idea is to bring financial reforms and accountability, not just at top of the income pyramid but at the bottom as well.

This would require radical reforms, not just in taxation system (both indirect and direct tax regime), but in key socio-economic parameters, by curbing income disparity, bribery, corruption and the parallel economy of black money. Although reforms like goods and service tax, widening capital markets - both equity and debt through REITs/ InvITs, FDI reforms for real estate, bringing down corporate and personal taxation, enactment of Real Estate Regulatory body (RERA) to support consumerism, investing in social infrastructure like ‘Swachh Bharat’, Smart City, Home for every-one by 2020 - are good to have, but the effectiveness of these would always be a challenge. The challenge emerges largely from the fact that corruption and bribery, failed consumerism, has led to a parallel economy equivalent to 30% on India’s GDP.

Now, what if we channelise this unaccounted money in our main stream economy? Accounted money would not just widen the base for GST, but enable lower corporate and personal income tax due to reduced dependence for sponsoring subsides towards socio-economic development, higher demand/spending at end-user, empowering consumerism etc. This shall result in enhanced investments and consumption, which shall not just help widening debt and equity capital markets with multiple platforms of investments and lending through formal channel of financing, but also strengthening end user buying, the ‘Gains’ long awaited by real estate sector in India.

So, while demonetisation has led to a slowdown in real estate activities in terms of development-delivery and sales in the short term, the long term gains weigh more on the short term pains, a necessary evil to have. Thus the dawn breaks the darkness.

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