The last time I tried to purchase residential property in India’s financial hub, Mumbai, I was a little surprised by the fact that the property owner specifically mentioned that the deal would be an all cheque deal, “No cash sir, I will take 100% cheque”, is what he said. This prompted me to dig a little deeper, so I looked up some properties on the Internet and called the owners and builders, the maximum cash (read: black money) they would accept was 20%. Nobody, and I mean nobody, accepted more than that. Further probing revealed that a similar situation exists with rentals.
Now, since property prices in Mumbai are high, and have been increasing at a rapid pace, I might add, the money value invested in property is significant. Also, since cash is not accepted here, this would mean that the use of black money in India is reducing. Besides, a few years ago, after the advent of dematerialization of shares, the use of cash in the stock market too has been significantly negated.
Now, what this effectively does, is that it reduces the earning power of black money.
So, if the earning power of black money is reducing, where's it all going? Is it put away in sacks and locked up in safes? Or is it all being spent?
Well, I think not, the Indian businessman is too shrewd to let inflation erode his money, and too conservative to blow it all up.
What this brings me to is of far greater significance.
It could well be that companies are converting these funds and bringing it onto their books. On speaking with a few known small to medium entrepreneurs, my suspicions were confirmed, and in fact, we are now witnessing a de-laundering effect. What this brings me to, is the fact that the growth rate of companies, and thus the economy, from a macro perspective, is not what the balance sheets depict.
Essentially, financial statements are showing over-inflated revenues and deflated costs. What this does is it reduces the net cash flow of the promoter and company combined, as it increases the tax outflow for nothing but investment in the business itself. This explains an increase in the tax collections, which Mr. Chidambaram, by his own admission, allocates at least partially to increase in compliance.
This may be witnessed in sectors moving towards organization, like transport, infrastructure etc. Further, this will be more significant in promoter-driven and family-owned companies and newly-formed corporates (i.e. partnership firms, proprietorships recently converted to corporates etc.)
I am in no way alleging that there is no real growth at all, or that all companies are doing this, but what I am propounding is that we should all try to take balance sheet figures with a pinch of salt, more so, in the case of companies which have just converted from partnerships and proprietary firms to corporates.
Moving on now, to what sort of impact we could expect to see. While overall this is a plus for the economy going forward, after the clean up exercise or write-back of siphoned-off funds into the books, the financial statements will depict a true view of the company and, by and large of the economy. However, while this change is taking place investors and financiers need to discount the growth rates, projected growth rates, cash flows and thus intrinsic values of these companies.
All in all it's a caveat for investors "Just take it with a pinch of salt".
Note: My medium to long-term outlook for the Indian economy remains bullish
Now, since property prices in Mumbai are high, and have been increasing at a rapid pace, I might add, the money value invested in property is significant. Also, since cash is not accepted here, this would mean that the use of black money in India is reducing. Besides, a few years ago, after the advent of dematerialization of shares, the use of cash in the stock market too has been significantly negated.
Now, what this effectively does, is that it reduces the earning power of black money.
So, if the earning power of black money is reducing, where's it all going? Is it put away in sacks and locked up in safes? Or is it all being spent?
Well, I think not, the Indian businessman is too shrewd to let inflation erode his money, and too conservative to blow it all up.
What this brings me to is of far greater significance.
It could well be that companies are converting these funds and bringing it onto their books. On speaking with a few known small to medium entrepreneurs, my suspicions were confirmed, and in fact, we are now witnessing a de-laundering effect. What this brings me to, is the fact that the growth rate of companies, and thus the economy, from a macro perspective, is not what the balance sheets depict.
Essentially, financial statements are showing over-inflated revenues and deflated costs. What this does is it reduces the net cash flow of the promoter and company combined, as it increases the tax outflow for nothing but investment in the business itself. This explains an increase in the tax collections, which Mr. Chidambaram, by his own admission, allocates at least partially to increase in compliance.
This may be witnessed in sectors moving towards organization, like transport, infrastructure etc. Further, this will be more significant in promoter-driven and family-owned companies and newly-formed corporates (i.e. partnership firms, proprietorships recently converted to corporates etc.)
I am in no way alleging that there is no real growth at all, or that all companies are doing this, but what I am propounding is that we should all try to take balance sheet figures with a pinch of salt, more so, in the case of companies which have just converted from partnerships and proprietary firms to corporates.
Moving on now, to what sort of impact we could expect to see. While overall this is a plus for the economy going forward, after the clean up exercise or write-back of siphoned-off funds into the books, the financial statements will depict a true view of the company and, by and large of the economy. However, while this change is taking place investors and financiers need to discount the growth rates, projected growth rates, cash flows and thus intrinsic values of these companies.
All in all it's a caveat for investors "Just take it with a pinch of salt".
Note: My medium to long-term outlook for the Indian economy remains bullish
-Puneet Gulwani
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