Was demonetisation in India a step too far?

Just a couple of days ago we covered the developing situation in India which has seen some of the country’s highest denominated banknotes classified as illegal going forward. This surprise move by the authorities has seen queues outside many of India’s banking institutions and a growing backlash from the investment community. So, was demonetisation of the Indian bank note system a step too far?

Very little notice

The move by the Indian government was effectively rushed out overnight and caught many people by surprise. This in itself has caused a significant backlash from the real estate sector with some sellers receiving cash payments which they now need to declare and introduce into the system. However, was there any other choice for the Indian government looking to rid the real estate sector in particular of undeclared cash transactions?

How much notice should the government have given?

In reality, if the Indian government had given significant notice of the pending change in banknote denominations then money-launderers and those with undeclared funds would have rushed through as many transactions as possible. So, on one hand the government could not give notice because this would alert the criminal fraternity but on the other it has certainly impeded those acting totally above board.

Will this really impact Indian real estate prices?

Only time will tell but by definition money-laundering and undeclared funds is a secretive area to the extreme. Some experts believe that luxury real estate prices in India could fall by 25% although we often get these pessimistic reports in light of significant changes. However, it is well-known that many luxury properties change hands for cash payments and not all of these funds are declared or totally above board. So, we will almost certainly see a reduction in transactions at the luxury end of the Indian real estate market but to what extent this will impact prices remains to be seen.

Greater transparency

This latest change by the Indian authorities is just one of many ways in which the government is looking to tackle money-laundering and undeclared funds. Despite the fact that India has one of the largest populations in the world, and great potential for real estate investors, transparency has been a problem for many years. The fact is that any improvement in transparency will improve confidence in the system and the market and ultimately attract more investors in the future.

In reality any reduction in activity because of money-laundering/undeclared funding issues should be replaced by the introduction of new investors in the longer term.

What next for the Indian government?

There is no doubt that the current Indian authorities are certainly looking to “clean up” a real estate market which has been the subject of much controversy over the years. Protection for both property developers and property investors, together with greater transparency, certainly bodes well for the future. Whether we should expect any future regulations to be “introduced overnight” is debatable but the authorities are certainly sending out a signal to those with undeclared funds and the criminal fraternity.

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