The primary reason behind this massive decision is to take down the menace of unaccounted money circulating in the economy. In my view, this move will be effective with initiatives taken by the government in weeding out corruption. Layer upon layer of regulation breeds inefficiency and gives way to corrupt practices. Demonetisation accompanied by Deregulation will produce great results.
As per syndicated reports, black money constitutes 25-30% of India’s GDP indicating that the size of the parallel economy could be about Rs 28 lakh crore. Demonetisation is expected to bring a substantial amount of funds into the system. It will also bring a larger number of people into the banking system.
Since 2010 there has been a lot of pain in the market where developers sold properties at low prices and then were hit by severe inflation, resulting in a large number of projects being uncompleted. Construction and approval costs spiraled out of control. This was coupled with very high interest rates as borrowings are essential for construction projects. Most projects sold in that period resulted in heavy losses on the balance sheets of developers
Demonetisation is expected to reduce inflation and interest rates considerably which would make projects viable. Developers will be able to have a handle on costs through the life of the projects.
The primary residential market and projects undertaken by credible and reputed builders will not be affected. Transactions in these markets are broadly financed through legal channels of banks and housing finance institutions providing home loans to buyers. Projects in cities where there is a cash component will only be affected. Here also the benefits will be that the market will adjust to more open transactions making the projects viable for funding.
In the past one year, there have been some positive and potentially long-lasting changes in the Indian real estate. The passing of RERA (Real Estate Regulation and Development Act 2016), the Benami Transactions Act in addition to the demonetisation move will only ensure that a higher degree of transparency enters the industry. Players who conduct their business with transparency will thrive. These policy initiatives will not only ensure more credibility to the industry, but also make it attractive to global investors. Our population growth and the consequent need for more development will only grow. Investors shall be able to trade with more confidence and not be wary of the security of their investments. The Indian real estate sector will only emerge stronger, healthier and poised for sustained growth.
A major impediment to real estate development in India remains the approval process. The Government has rightfully laid great emphasis on improving India's ranking in the World Bank global Ease of doing Business Index and continuously monitors the same looking at improvements in ranking as a success. The same World Bank released an Ease of obtaining Construction Permits Index. Here India ranks a shocking 183 out of 187 countries. We are in the same club as war torn countries where institutions have collapsed and literally offices which accord approval have been bombed to rubble. It would be welcome if the Government can look into this as well and take pride to improve our rank on this index also.
The benefits of low inflation, low interest rates and transparency will give a big boost to real estate development in the country, only if it is coupled with deregulation.
The author, Surendra Hiranandani is Chairman & MD of House of Hiranandani.