Demonetisation is going to be a boon for fintech companies offering cashless options. There are literally several dozen choices in terms of mobile wallets and the United Payment Interface (UPI) already offered by most banks and will soon be offered by all.
This move will lead to faster adoption of cashless mechanisms. But, it will cramp consumption in the short run. Since consumption is a large component of Indian Gross Domestic Product (GDP), that will mean a slowdown in overall GDP growth for several months.
The impact will be felt mostly in the invisible informal economy. It will not show up so strongly in official statistics. Lower income people, who live below the tax net will suffer, along with the super-rich who have large concealed incomes. Rural consumption will slow down.
The informal economy will get badly hit. That is the purpose of this move, since a large portion of it is black. But unbanked people at the bottom of the pyramid also become collateral damage. Some negative impacts will be visible in the formal economy. The informal economy (not all of it is black) is somewhere between 20-30 per cent of the official GDP.
There is a constant flow of assets between the formal and informal economy. Say, you pay an auto driver (who does not pay income tax, since his income is lower than minimum taxable) and your cash, therefore, goes to the informal economy. The auto driver buys chocolate and watches a movie with his family. Your money returns as formal revenue for the chocolate manufacturer, for Bollywood, the cinema hall, service tax, etc.
The demonetisation will, very likely, cause a crash in sectors which absorb a lot of black cash flows, since the black cash flow will stop, for a while at least. This could mean corrections in real estate values and in associated sectors such as construction, housing finance and banking. Big wedding ceremonies will become rarer, and sales in high fashion and interior decoration, hospitality, etc, will be reduced.
Unfortunately for the investor, fintech players are mostly unlisted, while the consumption-driven sectors mentioned above are represented by many listed companies. Banks on their own form the largest component of major indices such as the Nifty or Sensex. Taken together with housing finance and other non-banking financials, the financial sector is huge. And, banks, as everyone knows, are in trouble. If exposures to real estate are hit by write-downs and defaults, their balance sheets will be stressed even more.
Will the demonetisation present an opportunity for investors willing to buy into distressed assets? After all, real estate will surely remain a popular asset class. If there is a crash in real estate values, there could be a rise in demand. Every real estate major holds large unsold inventory. All will take hits if the black component of real estate deals is wiped out or reduced.
However, once prices drop below a certain level, the market will start to clear. Unsold housing units will eventually be bought if there’s enough discount. The housing finance non-banking financial companies (NBFCs) and the banks with large mortgage exposures must be terrified about possible defaults if there is a crash in the real estate market. At the same time, they could end up gaining volumes by financing many more mortgages if real estate prices come down.
Unfortunately, the real estate market is opaque and very local — prices can vary on opposite pavements of the same street, let alone across locations. So, it would be hard to guess how much values could fall and to set any timeframe for this correction. It’s quite possible that banks will also shore up the real estate market. It could also go into ‘zombie mode’ for a while with no deals occurring (and therefore no price changes) until new notes are in circulation and there has been some re-accumulation of black cash.
Curbing tax evasion in real estate would be critically important to actually reducing the black economy in size. Since real estate has a long value chain and it is a major source of employment, pain in the real estate sector will affect several other segments. This is a short-term threat for investors in that space. It could be a long-term investment opportunity. It’s hard to judge timeframes or to guess what reasonable levels of corrections could be.
