Updated: November 9, 2016 1:27:16 am
While the government on Tuesday took a bold step to scrap the high denomination currency in a bid to unearth all the currency stashed out of the system, bankers and economists feel that it will also have a ripple effect on the real estate and gold transactions, which are the main investment instruments used by individuals to hoard their black money.
A recent report by Ambit Capital shows that India’s ‘black economy’ is over Rs 30 lakh crore or about 20 per cent of total GDP. However, given the fact that the total currency in circulation amounts to a total of Rs 16.6 lakh crore and a large part of would be money that is accounted for and is in circulation, experts say that it is mostly in the form of gold and real estate investments. In fact, according to the Ministry of Finance’s 2012 White Paper on Black Money, the real estate sector in India constitutes almost 11 per cent of the GDP.
Experts say that this move though is likely to impact both gold and real estate transactions in the country and will even hurt the political spending as elections in UP and Punjab (two states that see huge cash spending during elections) are due early next year.
Commenting on the immediate direct impact of the step to demonetise the Rs 500 and Rs 1,000 notes, Deepak Parekh, chairman HDFC Ltd said: “I expect price of real estate to come down. One expects the price of real estate should come down in medium term.”
Anuj Puri, chairman and country head JLL said, “The banning of higher currency notes is a major move which will help curb unaccounted-for cash in the real estate sector. We have just witnessed a tremendous step towards increased transparency in the Indian real estate industry. The effects will be far reaching and immediate, and shake up the sector in no uncertain way,” said Anuj Puri,
While India is the world’s largest consumer of gold consumer and imports a sizeable chunk of its total annual consumption of around 900-1,000 tonnes, some industry insiders feel that this may reduce the demand for pure gold in the near term.
Stating that there could be short-term impact, PC Jewellers managing director Balram Garg said, “This is a very good decision for long term especially for the organised sector. There could be impact on pure gold demand.”
The Ambit report also said that majority of this black money is locked up in physical assets such as real estate and gold. It said that physical savings instruments have been historically preferred to financial savings instruments in India because purchase of physical assets can be funded using black money, while the purchase of financial assets can not be funded in such a manner due to a strong paper trail.
The finance ministry white paper had pointed out that investment in property is a common means of parking unaccounted money and a large number of transactions in real estate are not reported or are under-reported mainly on account of high levels of property transaction taxes.
It also pointed out that bullion and jewellery is another important sector for both generation and consumption of black money. It said, “It is also targeted by black money holders looking towards protecting the value of their black money from inflationary depreciation,” said the paper adding that a fairly large number of transactions in this sector remain totally unreported and therefore facilitate investment and consumption of black money.
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