Greener Pastures Ahead: Demonetisation-Induced Withdrawal Symptoms Only Temporary

When India, as much as the rest of the world, was glued to the news on the US Presidential election and the developments that would lead to an upset win for Republican candidate Donald Trump, few would have thought that Prime Minister Narendra Modi would manage to steal Mr Trump's thunder by announcing something with a much larger implication for the common Indian.

Modi's late-evening announcement on November 8 that the Rs 500 and Rs 1,000 currency notes would cease to be legal tender within a few hours not only got most Indian on their feet and rushing to the closest automated teller machine (ATM), but also drowned, completely, the frenzy around the electoral battle between Trump and his Democratic rival Hillary Clinton.

Suddenly, the developments in India piqued the interest of the world media as much as – if not more than – those in the US. Some experts and commentators went on to say that many countries around the world might look to the Indian model to curb the flow of unaccounted money into their respective financial systems. By the next day, Modi had completely hijacked the media attention that Trump should have, rightfully, received. 

Discussing the previous day's developments with his junior colleagues in the newsroom of a national daily, Delhi-based media professional Saurabh Tripathi (name changed on request), could not help but smile. Tripathi, whose team had done elaborate preparations for a comprehensive coverage of the US election, could relate the episode with his own situation.

Tripathi, a bright young journalist, has done very well for himself professionally. In his career of a little over eight years, the 29-year-old has secured a position that few are able to achieve at his age in the conventional media sector. As he grew professionally, his pay package increased proportionately, and with that also grew the need to put the money to good use. Like most upwardly mobile Indians, he thought of buying a home as a worthy investment bet. He did find a small 1BHK apartment to his liking in the national capital which cost him a bomb.

He could now look back at the travail and smile, because it was over. He had aborted the plan midway, and now he was only happy that he had done so. When he had stepped out in search of a home, what had come as a crude shock to this naïve journalist was the real difference between what he would have to pay and what he would be perceived to have paid.

The seller quoted for his property a price of Rs 65 lakh. But he wanted Tripathi to put on record a rate computed by the prevailing circle rate, which came to about Rs 40 lakh. Tripathi learnt that by doing so he would save a little on stamp duty charges, while the seller would be able to cut corners on the payment of capital gains tax. 

But so far as he was concerned, it was not all savings and joy. No bank would offer more than 80 per cent of the value of the property as a home loan. With an on-paper value of Rs 40 lakh, Tripathi would not be able to secure more than Rs 32 lakh. That would leave him with a deficit of Rs 33 lakh – more than half the total value. 

Knowing that he would have to make some upfront payment as margin money, he had saved about Rs 15 lakh. But this new home-buying formula left him in a quandary. How would he arrange the remaining Rs 18 lakh? And, what about the six per cent stamp duty and one per cent registration fees, which he would have to pay over and above this? 

He, like most honest middle-class tax-paying salaried professionals, did not have any so-called “black money”. So, he decided not to go for a home purchase. 

Tripathi's is not the only case of despair associated with home purchase. The common man of India often finds it difficult to venture into buying a property. The thought itself is rather daunting to many.

However, when PM Modi announced his government's decision to demonetise the currency notes of Rs 500 and Rs 1,000, the hearts of those sellers sank who undervalue their property transactions and earn thick piles of notes from buyers.

Let us not be mistaken here. The sellers were not the only ones who got the blow. They found fellow sufferers in those buyers who try to pump in their ill-gotten piles of cash into real estate sector, seen as a safe asset class. As a matter of fact, real estate had over the years become the favourite asset class for people to park their unaccounted money in. These high-value transactions helped them take care of a whole lot in one go. 

With this category of buyers and sellers wiped out from the scene, India's real estate sector is set to spring back to its feet, in better health and geared for a more wholesome growth.

There could be initial pains for the sector in the short term, especially with a sudden flight of capital. The day after the demonetisation announcement, the BSE Realty index suffered a major jolt, with leading listed real estate companies like DLF and HDIL taking the biggest hit. The index slipped over 10 per cent over its previous close.

“I believe the capital that is chasing land will come down. I don't see an immediate fall in land prices, but transactions will certainly freeze. The overall decline in land prices will have a cascading effect. I shudder to think of developers who have a huge pile of inventory, they will be in deep trouble. Eventually, they will have to reduce prices,” PropTiger Chief Executive Officer Dhruv Agrawala had told The Financial Express.

In all this frenzy, we must not forget that it is the rural India where keeping cash is more common. Large-scale investments are also made in these greener pastures to park huge piles of unaccounted money.

On the merits of the demonetisation move, Agarwala said: “This is a fantastic move to bring sanity and transparency in the real estate sector. I think there will be a lot of inflow of foreign capital, because land prices will come down. But, more importantly, 'Housing For All' will finally become a reality, as cheaper land will eventually translate into cheaper homes. While there will be short-term pain, the real estate sector will benefit fundamentally in the long run.”

Pranjul Bhandari, chief economist, India, HSBC, seems to feel similarly about the move. “In the short run, the move can be disruptive for growth (via negative wealth effect for those losing net worth and transactional inconvenience for consumers and producers). Cash-heavy sectors are likely to be disrupted the most,” a Business Standard report quoted Bhandari as saying.

The move, in the long run, indeed is likely to cure the economy of some fundamental ailments, even as it slows down growth in the short to medium term. 

Meanwhile, banks are suddenly flush with a lot of liquidity. As soon as banks opened on November 11, the first time since the demonetisation announcement two days earlier, people rushed to branches to deposit their cash in hand before they would turn into pieces of worthless paper. So much so that by midday on November 11, State Bank of India alone had received deposits worth over Rs 53,000 crore.

Besides, the demonetisation move is likely to help the Reserve Bank tame inflationary pressures which would give it the comfort to initiate further cuts in the repo rate. On November 10, Nifty PSU Bank index surged 9.5 per cent, touching a 52-week high. 

This might augur well for the real estate sector in the medium term as enhanced liquidity and lower repo would mean banks would be in a position to lower their interest rates on loan products. With cheaper home loans, real estate sales will also get a major boost.