Demonetisation hurts 5 sectors

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.

Real Estate
Many property transactions 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 cheque, a large amount is demanded in cash. This creates problems for an honest person in buying property,” Prime Minister Narendra Modi said this while announcing demonetisation. The use of counterfeit or undeclared earnings in this way has increased the price of real estate, Modi said. The move to scrap the current 500 and 1,000-rupee notes could reduce prices, analysts said.

Gold
Investing in gold is another way some people 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 households is above 20,000 tonnes. 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 will slow down gold imports and reduce foreign-currency outflows.

Two-wheelers
India is one of the largest two-wheeler markets globally. In villages, many farmers buy motorbikes and scooters with cash after they sell 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-wheeler stockists are one of the biggest losers on BSE Sensex index, falling between 4% and 6%.

Consumer durables
Many people 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.

Microfinance
Microfinance 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 instalments and disbursements may not happen in the next 10 days due to a shortage of currency notes, says broker Religare Capital Markets Ltd.