I was asked my views on the effects of this historical event and here are my two bits.
Disclaimer: I am an absolute Modi fan and truly feel that India is exceptionally lucky and blessed to have him as our PM.
Now, coming to the demonetisation.
The ‘parallel economy’ as I know it is something that is in motion. For example, if one sells a house and gets a part of the sale proceeds in ‘black’, one does not store it, it is used to say, invest in another house, renovate the present house, buy gold or something like that. The cash is always in motion. It does contribute to the economy almost as much as the ‘white’ economy, but the government hates it because they don’t get their pound of flesh from it!!
So, unfortunately, people indulging in the parallel economy will not be hit too much – the ones who really get hit would be those who hoard cash – people like politicians who hoard money for elections (isn’t it hilarious that the common man who has no money to buy food says on TV that things could have been planned better, but we will bear it, in contrast to the politicians who are crying hoarse that the common man has been harassed) or builders who hoard it to buy land.
Now, coming to real estate. I am of the opinion that there will always be a ‘parallel’ economy as far as there are taxes. What this ‘demonetisation’ has successfully done is that it has dried up the fountain of black money. So, deals have to be done in white only. People who have urgent need of money may sell off in white and / or at a discount – but this scenario was always applicable, demonetisation or not. So, there should be a small drop in prices. This will be until the system is again charged with enough cash, which may take 9 – 12 months from now. After that, I feel it will be business as usual.
The other side of the coin is as follows. Almost 14 lac crores are expected to be deposited into banks. Assuming only 9 or 10 lac crores are actually deposited and half of that amount is withdrawn, still the banking system will be richer by 4 to 5 lac crores. This means banks will have to lend it out aggressively. They have been cribbing that big businesses are not borrowing and also the RBI has tightened norms for Non Performing Assets, so lending norms are stricter. Hence, I feel the banks will look to boosting home loans – one of the safest investments for them. The interest rate may come down to almost 7%. That will definitely give a boost to the real estate market.
In all this, the most important point is not whether black money will come out or will the jewellers get raided. Most guys are rather worried with the thought that if Modi could come up with this action plan – which will make him immensely unpopular amongst his vote base – the businessmen, then, what will he do next?
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