There is no doubt that the recent demonetisation of Indian banknotes is having a profound impact on the economy. Perhaps the hardest hit area in the short term will be the real estate market which was often used as an umbrella for undeclared/money laundered cash. Even the most ardent critics of the Indian government are applauding this move which will add a layer of transparency to a market which had often been seen as corrupt. So, could Indian demonetisation spread to other countries around the world?
Money-laundering and Indian demonetisation
Money-laundering has been an issue in each and every investment market around the world to some extent. Criminal gangs are always on the lookout for new ways to launder money and effectively bring it back into the “system”. Demonetisation of the Indian currency system has seen the number of cash transactions in the Indian real estate market slashed which has flushed out an array of undeclared/illegal funds. So, could any other countries follow the Indian template?
Countries closely watching India
While few governments around the world have made any direct comment about the recent changes in India, it is known that many governments are watching the situation. While the impact on the real estate market has been headline news for some time it is the impact further down the economic chain which is gathering pace. Many experts predict we will see:-
The opening of many new bank accounts
Greater opportunities in the financial industry
Reduced expenditure on luxury items
Increased tax income
More realistic real estate prices
A reduction in money-laundering
Reduce corruption
We may well see some countries which have volatile/emerging real estate markets following suit to increase transparency and attract both domestic and international investment. There is no doubt that the Indian experiment has been a greater success than many had predicted. The initial shock from the overnight move has now given way to optimism for the longer term.
Money trails
Perhaps the greatest by-product of the Indian demonetisation will be the ever more detailed money trail available to the authorities. This will ensure that as much of the money finding its way into the Indian real estate system is “clean” and can be traced back through various transactions. Improved transparency should never be underestimated as a magnet for both domestic and overseas investment. Unfortunately the Indian real estate market has been susceptible to fraud and manipulation for some time now although finally the Indian authorities have taken action.
The only downside in the short to medium term is reduced liquidity in some areas of the Indian real estate market and “softer” prices. However, as many articles have discussed, the long-term benefits far outweigh the short-term issues.
Conclusion
The Indian authorities made a very brave move demonetising the currency system without any prior warning. Now that the initial shock has worn off it is becoming apparent than other countries around the world are monitoring the situation very carefully. The Indian template could be replicated in many other volatile/emerging real estate markets. Watch this space.