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Demonetization in India: economic and real estate impact one year on

Ahead of the Curve, September 28, 2017

Almost one year ago, the Government of India announced a radical policy move which has become known as demonetization.

On November 8, 2016, all 500 Rupee and 1,000 Rupee notes1 were made invalid—amounting to 15.44 trillion Rupees, or 86% of notes and coins in circulation and 12% of India’s total money supply. The cash that was rendered invalid was replaced with new 500 and 2,000 Rupee notes, but these were not circulated in full immediately.

The purpose:

  • Bring income and wealth into the banking system, where it can be more easily monitored and, if necessary, taxed;
  • Help move the population into the digital economy; and,
  • Eliminate fraudulent currency, which is often used by terrorist groups.

How Successful?

The Reserve Bank of India2 has stated that 99% of the currency that had previously been taken out of circulation has now been replaced by the new currency series. This suggests that the informal economy is vigorously trying to reassert itself. Nevertheless:

  • Tax receipts were up 16.9% year-on-year in February 20173—a 24% increase in the number of tax receipts filed.4 In addition, the number of suspicious transactions reported in the banking system rose to 473,000 in Fiscal Year (FY) 2017, up from 106,000 in FY 2016, a possible source of future tax revenue.5
  • Digital and credit card payments were up by 46% and 65%, respectively, in the year to March 2017.
  • Anecdotal evidence suggests that demonetization did reduce the activities of violent groups operating in the region for a period.

What about the economy?

GDP growth has decelerated over the last four quarters, from 7.9% growth in Q2 2016 to 5.7% in Q2 2017. By comparison, most of the rest of the world began to see a pick-up in Q3 2016.

The Centre for Monitoring Indian Economy (CMIE), a private forecaster, estimates that 1.5 million jobs were lost between January and April 2017, as the employment level fell to 405 million people.6

As Figure 1 shows, the Purchasing Managers’ Indices for India indicate that sentiment bounced back quite quickly after demonetization, but has been a bit volatile since.

Ahead of the Curve Real House Prices

Not so much impact on the real estate sector:

  • Office demand remains strong, with strong rental momentum across cities. The structural shift toward a modern service economy and global excellence in Business Process Outsourcing are the dominant trends.
  • Demand for retail space from international retailers is strong, with rents stable or rising in high streets and malls.
  • As elsewhere in the world, there is strong demand for logistics space with rents only held in check by new supply.
  • Residential transactions initially fell but are coming back, with prices stable or slightly lower.

Was it worth it?

On its own, possibly not. It created too much economic disruption, particularly for the rural poor who operate only in the cash economy, and not enough gain. However, demonetization needs to be seen in the context of a wider program of reforms in India which are significant in terms of the nation’s economy, society and real estate sector. These include:

  • The Goods and Services Tax (GST), or the national sales tax: Goods will be able to be transported throughout India without negotiating state by state sales tax systems. This will benefit to economic efficiency in general and the logistics sector in particular.
  • The Real Estate Regulation and Development Act (RERA): Will provide a framework for comprehensive regulation of all phases of the real estate development process at the national and state levels to improve market transparency.
  • Exemption of Dividend Distribution Tax on special-purpose vehicles in 2016: This opens the way for expansion of the REIT sector in India, bringing more professional real estate management and a more diversified set of real estate investment opportunities.
  • Infrastructure status for affordable housing along with other tax reliefs and development incentives under the Pradhan Mantri Awas Yojana (PMAY) scheme.

In addition, the government is about to announce details of a large fiscal stimulus to boost growth. At 69%, India has a debt-to-GDP ratio that is about the same as Germany’s, so India has plenty of ability to spend to support the process of change.

The reform program should be watched carefully as it shows that the real estate sector will be at the heart of India’s exciting, if bumpy, transformation.

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1 Or Specified Bank Notes (SBNs)

2 Reserve Bank of India, Annual Report 2016-2017, August 2017

3 Economic Times, February 11, 2017

4 Forbes, August 8, 2017

5 Bloomberg Quint, August 30, 2017

6 CMIE, July 11, 2017

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For more information about this report, please contact:

Richard Barkham, Ph.D.
Global Chief Economist, Head of Global Research & Head of Americas Research
+1 617 912 5215