India’s move to curb corruption and counterfeiting by replacing high-denomination bank notes with new ones will likely have a significant impact on some sectors wrapped up in the cash economy.
Here are five industries likely to see change.
Many property transactions in India are made using cash. Builders often accept 10% to 20% of an asking price in cash to lower both the buyer’s and seller’s tax liability.“You may yourself have experienced when buying land or a house, that apart from the amount paid by check, a large amount is demanded in cash. This creates problems for an honest person in buying property,” Indian Prime Minister Narendra Modi said Tuesday.The use of counterfeit or undeclared earnings in this way has increased the price of real estate, Mr. Modi said. The move to scrap the current 500 and 1,000 rupee bills could reduce prices, analysts said.“This will clean up the real estate sector and bring down the cost of doing business,” says Dhiraj Relli, chief executive of HDFC Securities.
Investing in gold is another way some Indians keep money from the eyes of tax officials. The country is one of the world’s biggest consumers of the precious metal, along with China.According to various estimates, the current volume of gold in Indian households is above 20,000 tons. Analysts say if people are no longer able to use wads of 500- and 1,000-rupee notes to buy gold, they will have to put it into the formal banking system or invest it in stocks, mutual funds or bonds instead. This is also likely to slow down India’s gold imports and reduce foreign-currency outflows.
India is one of the largest two-wheeler markets globally. In rural India, many farmers buy motorbikes and scooters with cash after they sell their their crops.The current measure may slow down two-wheeler sales as buyers are expected to postpone their purchases until they replace their existing bank notes with the new ones.No wonder, two-wheelers stocks are one of the biggest losers on India’s benchmark S&P BSE Sensex index today, falling between 4% and 6%.
rMany people in India also prefer to buy televisions, fridges or air-conditioners with cash. Some of those purchases involve money derived from corruption.Others are made by people who might not have a bank account and are purchasing the products as dowry items. As a result, the move to replace the existing high-denomination notes is expected to hurt sales in this segment.
rMicrofinance companies that disburse loans to poor people will likely face difficulty collecting or disbursing cash in the near term. In the worst case, they may have to postpone loan-repayment installments and disbursements may not happen in the next 10 days due to a shortage of currency notes, says broker Religare Capital Markets Ltd. However, things will likely stabilize after few weeks, it adds.