We started 2014 with a lot of hope, expecting the Modi government to come out with big bang reforms. However, there was initial disappointment as the government did not do anything big-bang and continued with its policy of taking small steps towards a better India. And suddenly, we had a big bang day-before yesterday! The government’s master stroke to eradicate black money and transform India into a cashless economy will throw up huge opportunities in times to come (of course there will be some short term pain). We are sure there is too much being written about it, so we will restrict this article to how you can benefit from the impending transformation in our country.
1) Real Estate will become more Affordable
Most of the black money in India is parked in real estate, gold and luxury goods. With this crackdown on black money, expect the “property buying aggression” of business class to subside. In fact, a lot of benami properties purchased by investors in the boom times will come in open market for liquidation. However, there wouldn’t be enough buyers to pay in “full white”. All this is coming at a time when real estate sector is already in doldrums on account of large pile of unsold inventory in all major cities.
Through our emails in the past two years, we have been constantly arguing against the idea of buying a property on borrowed money. The biggest reason was that real estate in India is an over-priced asset. We expect property prices to correct to a more reasonable level in the next two years. Hope we have been able to de-motivate at least some of you from buying a property on borrowed money.
2) Bank FD rates & Home Loan Rates are set to Decline
Lower property prices have a domino effect on everything – your rentals will come down, your cost of doing business will come down and overall inflation may come down further. Also, banks will be flush with money as people scramble to deposit cash into bank accounts from today. Hence, bank FD rates may come down permanently. For those of you who keep most of your savings in bank fixed deposits, please consider this as an early warning.
One more point here – banks will be big beneficiaries of this as a lot more money will flow through banking channels.
3) Government will be Richer and will spend more on Infrastructure and Uplifting Poor People
Rough calculations estimate that government of India will earn Rs. 300,000 crores in taxes from the entire exercise of converting black money to white. Apart from that, government’s recurring tax revenue is slated to go up because most businessmen will now start paying taxes. The government can use this money to further its development agenda like building roads, railways, smart cities, affordable housing, etc. While it’s too early to say, we would carefully watch this space for investment opportunities.
4) Many Old Businesses will Die, Many New will be Created
Few business friends once proudly told us “In India, the only profit that you make is that what you can save by not paying taxes”. All such businesses will now have to evolve or face extinction. For example, large number of middle-men like iron & steel traders, textile merchants, real estate agents, etc were important because they managed the “credit risk” between counter-parties. If India turns into a cashless economy, payment settlement will be easier and some of them will no longer have a purpose. Another example would be the local jeweller – if he pays all taxes, he is no longer competitive compared to a large player like Tanishq. On the other hand, organized sector will stand to benefit.
All this will throw up interesting opportunities in the stock market. At the same time, we have to be careful not be remain invested in a dying business. For example, we were very positive on a jewellery company until yesterday. However, more than 50% of jewellery sales happen through cash. Now with the turn-over events, we are not exactly sure if jewellery demand will sustain for the next two years.
5) The Tax paying Salaried Class is Richer by 20% Overnight
While most working professionals have little to do with black money, the eradication of it will make you relatively richer by 20%. If you are wondering how, please be sure that almost 80% of the business community will lose some money in this exercise. Also, your home loan rates are set to go down in the coming months. On a lighter note, it’s the victory of the law abiding, tax paying service class. And that salaried income won’t be enough to make you wealthy, you will need to deploy your salary in a better way.
6) Stock Markets will throw some Interesting Opportunities, you can’t Ignore this Asset Class
Next three months could be challenging for the stock markets as a lot of re-alignment will happen. The consumption cycle will slow down for a quarter or two as people adjust to new reality. However, it will also be the time to go out and shop for stocks. We are in for a “selective” multi-year bull cycle. Also, with real estate and FDs no longer remaining an attractive investment option, you will be be forced to look at equities. The sooner you realize the better it will be your wealth creation.
If you chat with your friends in USA, you will realize that almost everyone is forced to invest in stocks through 401k as the FD rates are lower than 2%. India is still a little away from this situation but we will eventually get there. Most of us hesitate to invest in stocks due to negative perception or lack of expertise or sheer lethargy. There is enough professional help available if you wish to invest in markets.
Happy Investing! Stock market is the easiest way to participate in the on-going transformation of the country.
P.S: Equity as an asset class in extremely rewarding in the long term, however only individuals who can bear interim volatility should invest in stocks. Kindly consult your investment advisor before acting on advice provided here.