India’s overnight decision to scrap 500 and 1,000 rupee notes is an effort to crack down on the the huge problem of black money in the country.
India’s currency move will hit property and gold
MUMBAI // Property and jewellery are among the sectors that could be hit by a surprise move by India to scrap 500 rupee (Dh27) and 1,000 rupee notes.
On Tuesday evening, Narendra Modi, India’s prime minister, addressed the nation to say that the two highest denominations of cash notes would become illegal tender by midnight that same evening, in an effort to crack down on the huge problem of black money in the country.
Black money, on which tax has not been paid or which has been obtained through illegal activities, is frequently used in property transactions in India.
“Prices coming down to more reasonable levels in the residential property market cannot be ruled out,” said Shishir Baijal, the chairman and managing director of Knight Frank India. “In the immediate future, the sector will be under serious pressure with volume and number of transactions in residential and land markets seeing a substantial downward trend.”
But the effects on the sector in the longer term will be positive, analysts agree.
Anuj Puri, the chairman and country head of JLL India, said that Mr Modi’s initiative would “help curb unaccounted-for cash in the real estate sector” and was “a tremendous step” towards greater transparency, which would “give the Indian real estate sector more credibility and make it more attractive for foreign investors”.
The jewellery sector is another industry that receives a large amount of cash, with gold often considered an alternative to the formal banking system as a means of storing wealth.
Kumar Jain, who runs a jewellery shop in Zaveri Bazaar in Mumbai and is a member of the Mumbai Jewellers Association, said that the sector was already being affected.
“Nobody’s buying gold bullion,” he said. “Some jewellery sales are happening but people are carrying cheques or they’re placing an order and they’ll come within a day or two and pay me. It’s the wedding season and people will have to follow the Indian culture of buying gold.”
India is still very much a cash-based economy. On Tuesday evening, there were long queues at cashpoints, which were drained of 100 rupee notes as Indians tried to make sure that they would have some legal tender. Banks and ATMs were shut yesterday.
The Bombay Stock Exchange benchmark tumbled almost 6 per cent yesterday morning in reaction to the move, before recouping some of the losses to end the day down 1.2 per cent at 27,252.53. The rupee weakened slightly against the US dollar initially but then strengthened as the dollar moved in reaction to the outcome of the US presidential elections to trade at 66.45 rupees at the end of the day, after opening at 66.79.
“The long-term impact of the crackdown on black money will be positive for tax revenue collection and instilling confidence of doing business in India,” said Murthy Nagarajan, the head of fixed income at Quantum Mutual Fund in Mumbai. It would also help to keep inflation in check, he said.
With restrictions on cash withdrawals put in place, India will make a significant step away from its cash-intensive economy.
“We can expect more credit and debit card transactions, increase in digital payments, mobile payments and online banking,” said Prem Rajani, the managing partner at Rajani Associates, a law firm in Mumbai.
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