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January 08
16:47 2017

How policy reforms are likely to boost Indian Infrastructure and Real Estate Market in year 2017 ?

The recent surgical strike by the Indian Government by demonetizing the high value notes and introducing the new currency notes became a country wide debate due to the sudden impact on the spending capacity of people across the country. This followed by even further restrictions on usage of paper money and limits on withdrawal of cash from ATMs and bank branches. The laymen across the country faced multiple issues on account of lack of paper money in hand which made even meeting the daily living and urgent hospitalization impossible in the first few days.  Even though the sudden impact and criticism swallowed down in the weeks gone by, the common man in India still feel angry, upset and concerned about the outcome in the long term. Here we explain the important consequences of demonetization and ceiling on usage of paper currency in the economy and specifically how it is going to impact the real estate and infrastructure sector in the country.

Low spending in the initial few days due to lack of paper money – less construction, no wages to casual and contract labours, consequential low spending on materials and services allied to the sector, less financing activities by banks and financial institutions etc lead to an unprecedented crisis in the sector. We have even witnessed migrant labours going back to their home towns from cities due to cash crunch. The sudden impact faced by this sector is not a permanent loss as the investments in infrastructure and real estate  are normally pre-planned, budgeted and the funds for these are usually earmarked months and years before the commitment itself. These kind of massive spending are normally from the pockets of big infrastructure companies, government and real estate developers who would have planned it seeing the long term outlook of the country’s economic development. The big ticket investments are all with a clear set of timelines, mainly because of public demands and necessities and resultant actions by the local governments, which are set to continue irrespective of the central government policies, whether on demonetisation or black money eradication. A small delay on the primary and secondary market buying by individuals can be expected for the short term period considering the lack of knowledge and uncertainty faced by these class of people. It is impractical to assess the impact of the decision on the macro-economic environment at this stage. However a slower growth in the cash incentive and unorganised sector can be envisaged. The recent initiatives by the RBI withdrawing the incremental CRR requirement and MSS (Market Stabilisation Scheme) will infuse further liquidity in the system and consequential impact like lower interest rates going forward. The Securities and Exchange Board of India (SEBI) has also recently relaxed norms for real estate investment trusts (REITs), globally one of the popular vehicles to invest in the real estate sector, in addition to relaxing the Rules for investing in the infrastructure sector through Infrastructure Investment Trusts (InvITs).

The planned movement towards plastic money will lead to more collection of tax in the system since most of the small scale operators in the infrastructure segment were not complying with the taxation norms and were depending on the cash transactions. These market operators cannot ignore the massive demand since most of the construction activities would have been committed and are in the pipeline. However, the process will lead to higher valuation of private infrastructure projects, resulting in more value share for the sector compared to other sectors within the whole ecosystem. The sector was not showing its real size due to the parallel economy which were funding the main stream investments across the secondary market. It is going to be a good news for the sector since the infrastructure and real estate market in the country were showing a size significantly less than what was intended to be. The short term pain is going to be offset by more long term enduring benefits. The decision is good for the developers, banks and home buyers since everything will get measured in a far transparent and superior manner going forward. The sector will attract more PE investments going forward, which has witnessed a 22% growth in investments in the first three quarters of year 2016. In addition, the proposed implementation of GST in India will be an added advantage for the real estate sector.

Author:  Jayaraj Thannimangalam

Founder & Director –

Image Credits: Nancy Via under Creative Commons legal code

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Jayaraj Thannimangalam

Jayaraj Thannimangalam

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