It is now accepted that the Rs 14-odd lakh crore of cash that Prime Minister Narendra Modi hopes to sanitise through demonetisation will tackle only the stock of black money in the economy, that too partially. But what of the flow of black money, lubricated by structural deficiencies in transactions that encourage its generation in the first place? In this context, Mr Modi’s advisors may need to take cognisance of the difference between black cash hoards, the proportion of which is relatively small, and black wealth, as represented by real estate and gold amassed in bank lockers and so on. Of the two, real estate is easier to tackle. As with other aspects of the shadow economy, there are no firm estimates of the amount of black money sunk in real estate. But a good indication comes from the fact that the realty market, already depressed by anaemic demand, is estimated to fall a further 30 per cent over the next six to 12 months as a result of demonetisation. This is because, according to realtors, only one in five buyers is willing to conclude a cheque deal.
The realty market is uniquely incentivised for black money transactions because of a curious but easily remedied asymmetry in the nature of the business. The major shortcoming lies in the “circle rate,” which is the minimum value on the transfer of a plot or built-up property. The circle rate varies across locations. In essence, it is an artificial floor rate decided by the state government and is rarely revised; as a result, circle rates are mostly way below actual market rates. In cities such as Mumbai, the market rate could be double the circle rate; in Delhi the gap is about 30 per cent. This anomaly influences part-cash payments principally because stamp duties, which most states view as a major source of revenue, are typically high — they range from three to 10 per cent of the value of the deal. So buyers (who have to pay this impost) prefer paying the differential between the nominal price and the market price in cash and officially registering a lower deal size; the higher the differential, the lower the duty. Banks are also happy to fund this cash portion, albeit at usurious rates.
It is true that market rates have fallen or are expected to fall closer to circle rates but it is a fair bet that once the cash supply in the economy is back to equilibrium, this practice will resume. Being a state subject, Mr Modi’s powers to force changes here – such as altering the frequency of circle rate calibration to, say, every quarter or lowering stamp duty – may appear limited. But the Bharatiya Janata Party now rules, either alone or in alliance, in 12 Indian states, accounting for 43 per cent of the country’s population. It should be possible for him to exert his influence on these states to restructure real estate market practices to diminish the incentive for the creation of black money and set a virtuous example. Doing so will send signals that he is genuinely interested in curbing black money and certainly silence detractors who dismiss demonetisation as an election gimmick.