Demonetization – What Can We do to Build on It?

It can be argued that the bulk of the black money is sitting in real estate. This does not mean, that the black money is buried under the real estate. All it suggests is, that some of the wealth of individuals is buried in the real estate they own. It is not liquid and they can gain access to this black money (whether or not generated by them, only in the event of a sale of the asset). In summary. When you go around proudly describing your wealth as being buried in the flat that you own, one part of the realisation is going to come to you in cash, as and when you seek to sell it.

Then of course, there are the folks who generated black money thru other transactions (perhaps even sale of a real estate asset) and they are sitting on some cash and a lot of real estate. With the demonetization effect yet to make its presence felt in real estate prices, all players in the market are waiting with their hearts in their mouth. Real estate prices were already no great shakes in terms of momentum, but now with demonetization, surely there will be a downward drift? How much will that be, and will the effect of demonetization also rub off in the vanishing of the black money component? Clearly, the jury is still out on this matter.

Then there is the overall effect on the consumption in the economy. Whichever way you look at it, till things settle down, we can reasonably expect that consumption will take a beating. Firstly, there is not enough “change” going around, and people’s access to their own money is somewhat curtailed due to various restrictions and sheer availability.

1. Spenders
Sheer availability of cash has become a major dampener. Firstly, there is the issue of having cash available. Then there is the issue of a mental state of wanting to spend. The mood is not encouraging for the latter and the former is in any case dampening the residual mood. Across the board, there will be lesser expenditure taking place and it is the non-essentials that will suffer, first and foremost. These people need a mood elevation as they graduate to electronic transactions.

2. Owners
Most folks will rationalize that this is not the time to sell their real estate. For those who required the liquidity, this is plain bad news, as they see the total transactions come down and the prices drifting downwards. They will be hardly in a mood to undertake expenditures that they can postpone. These folks are also in need of mood elevation.

3. Others.
These are the large middle class who are staying in rented premises and who have no particular need for mood elevation, but due to paucity of currency note availability have been forced to curtail expenditures that involve cash. They will move rapidly to electronic transactions, and go back to equilibrium rapidly.

If you look closely at these categories (there may be other categories as well) the primary need of the day is to elevate the mood and accelerate the process towards electronic cash. The Government has understood that there is need for acceleration towards electronic transactions and are already trying to incentivize the same. For a moment, the adequacy of this incentivization, let us come back to at a later point. It is most reassuring to know that the diagnosis is in the right direction. We will revisit this at a later stage.

One sure way of elevating the mood is to offer an incentive that indicates the new direction of the Government. And that is its goal of seeking ameliorative solutions and not only punitive ones. So, why not do away with long term capital gains for a period of 2 years starting from the next budget. Let’s have a quick look at the positive aspects of the same.

This will surely boost the real estate market immediately in terms of no of transactions. That will elevate the moods of both buyers and sellers. All those who had paid black money for their real estate now stand to gain, since the entire capital gains will be exempt from tax. And this will continue for the next 2 years.

Real estate prices will quickly get rediscovered by the market. This will certainly arrest the downward drift.

It will send a message to the market, that the Government has understood the problem and is also willing to look at ameliorative methods of curbing the usage of cash in real estate transaction.

It will bring liquidity to the market and improve the mood.

Folks will start spending once again and as the migration to electronic cash accelerates, India would have obliterated one major means where unwilling participants were forced to enter the black money economy.