Demonetisation of Rs 500/- and Rs 1000/- Notes: My view

Tonight , Mr. Narendra Modi , our honourable Prime Minister announced a surgical strike on the black money by annulling the Rs 500/- and Rs 1000/- notes as legal tenders. Kudos to our Prime Minister to take such bold step. There is no denying of the fact that all of us would face operational inconvenience in the next coming days . However , we have to take some pain today for tomorrow’s gain. 

It is interesting to analyse the immediate impact of this step in certain industries. My view is that real estate sector would face unprecedented crisis as significant amount of black money is locked in real estate. I expect that the property price may crash in the short term and this can create lot of pressure on real estate industry . Banks and Non Banking Finance Companies ( NBFC)s would have lent under a product called Loan Against Property ( LAP) . With the prices falling , LAP portfolio of banks and NBFCs may come under severe pressure. Banks and NBFCs should immediately take proper risk management measures for their entire LAP portfolio. The stock market can react negatively towards the real estate sector and accordingly real estate stock can come under selling pressure. However this throws opportunities for quality real estate players to shine in the future . I expect that quality real estate developers would get more private equity and institutional fund in the short to medium term. 

I feel that the other sector which would get very adversely impacted is Gems and Jewellery sector. Black money plays an important role in this sector too. Accordingly , this sector would face lot of problem in terms of reduced sales . The gems and jewellery stock can come under selling pressure. 

Rural sector can face reduction in demand . Fast Moving Consumer Goods (FMCG) companies are banking on the revival of rural demand on the back of very good monsoon . However , this move would reduce this positive impact as significant portion of the rural economy is moving on cash economy. So in the short term , the demand would take a beating . This would result in the reduction of turnover and this can put selling pressure on the FMCG counters . 

My perception is that many businesses are running on black money and these industries are surviving due to the support of black money . Increasing competition is eating the business margin on a continuous basis and the black portion of the business ( for which it is not paying taxes ) is supporting their business. These businesses would come under severe pressure and the impact can be felt in the economy. If these businesses have borrowed from the bank , Non Performing Loan on account of these businesses would go up. Banks should carry out an internal assessment of this factor and put a special monitoring programme for businesses where the black component is involved. 

However , the government has prepared its ground quite remarkably well by building up proper payment infrastructure in which common people would not suffer in the long term. Government has helped people to open bank account under Jan Dhan Yojana and the introduction of Unified Payment Interface ( UPI) would reduce the dependence on peer to peer cash transaction . Gradually common people would be accustomed to the newer processes by adoption of these new measures. 

Overall , this is a very bold and brilliant step towards eradication of black money. The intention of our Honourable Prime Minister is very clear and he has again proved his courage to take very bold steps. There can be operational glitches and it may happen that operational problems may take credit out of this step. However , I want to congratulate our Honourable Prime Minister for this very bold step. 

Tonight , Mr. Narendra Modi , our honourable Prime Minister announced a surgical strike on the black money by annulling the Rs 500/- and Rs 1000/- notes as legal tenders. Kudos to our Prime Minister to take such bold step. There is no denying of the fact that all of us would face operational inconvenience in the next coming days . However , we have to take some pain today for tomorrow’s gain. 

It is interesting to analyse the immediate impact of this step in certain industries. My view is that real estate sector would face unprecedented crisis as significant amount of black money is locked in real estate. I expect that the property price may crash in the short term and this can create lot of pressure on real estate industry . Banks and Non Banking Finance Companies ( NBFC)s would have lent under a product called Loan Against Property ( LAP) . With the prices falling , LAP portfolio of banks and NBFCs may come under severe pressure. Banks and NBFCs should immediately take proper risk management measures for their entire LAP portfolio. The stock market can react negatively towards the real estate sector and accordingly real estate stock can come under selling pressure. However this throws opportunities for quality real estate players to shine in the future . I expect that quality real estate developers would get more private equity and institutional fund in the short to medium term. 

I feel that the other sector which would get very adversely impacted is Gems and Jewellery sector. Black money plays an important role in this sector too. Accordingly , this sector would face lot of problem in terms of reduced sales . The gems and jewellery stock can come under selling pressure. 

Rural sector can face reduction in demand . Fast Moving Consumer Goods (FMCG) companies are banking on the revival of rural demand on the back of very good monsoon . However , this move would reduce this positive impact as significant portion of the rural economy is moving on cash economy. So in the short term , the demand would take a beating . This would result in the reduction of turnover and this can put selling pressure on the FMCG counters . 

My perception is that many businesses are running on black money and these industries are surviving due to the support of black money . Increasing competition is eating the business margin on a continuous basis and the black portion of the business ( for which it is not paying taxes ) is supporting their business. These businesses would come under severe pressure and the impact can be felt in the economy. If these businesses have borrowed from the bank , Non Performing Loan on account of these businesses would go up. Banks should carry out an internal assessment of this factor and put a special monitoring programme for businesses where the black component is involved. 

However , the government has prepared its ground quite remarkably well by building up proper payment infrastructure in which common people would not suffer in the long term. Government has helped people to open bank account under Jan Dhan Yojana and the introduction of Unified Payment Interface ( UPI) would reduce the dependence on peer to peer cash transaction . Gradually common people would be accustomed to the newer processes by adoption of these new measures. 

Overall , this is a very bold and brilliant step towards eradication of black money. The intention of our Honourable Prime Minister is very clear and he has again proved his courage to take very bold steps. There can be operational glitches and it may happen that operational problems may take credit out of this step. However , I want to congratulate our Honourable Prime Minister for this very bold step.