Demonetisation, electoral bonds and realty sector: Is there a nexus?

Have big players in the realty sector put the demonetisation booty—the wiped out high denomination currency notes that people deposited in banks—into electoral bonds?

They may well have. Under the prevailing law, neither the companies, the State Bank of India nor the political parties are obliged to reveal details of the purchasers of bonds and the beneficiaries thereof.

A reading of Dr Arvind Subramanian's draft working paper for the Harvard University’s Centre for International Development leaves one wondering if that may be the case.

“After demonetisation, considerable amounts of cash made their way to banks, who on-lent a major part of that to NBFCs. The NBFCs, in turn, channeled this money to the real estate sector. By 2017-18, NBFCs were accounting for roughly half of the estimated Rs 5,00,000 crore of outstanding real estate loans,” says Dr Subramanian, who co-authored the paper with Josh Felman, the former head of the International Monetary Fund’s India office .

Subramanian was named the chief economic adviser to the Government of India in Oct 2014. The two described the present scenario as “a Great Slowdown”, and trace the origin to a fallout of the infamous demonetisation that Prime Minister Narendra Modi sprung on a stunned nation on the evening of November 8, 2016. All high denomination currency notes became bits of paper and over 86 per cent of cash was wiped out of circulation.

According to the former CEA, by 2017-18, NBFCs were accounting for roughly half of the estimated Rs 5,00,000 crore of outstanding real estate loans. The real estate sector was itself sick by then, with a huge inventory of unsold houses and apartments valued at over Rs 8 lakh crore by mid 2019.

Dr Subramanian and Felman say this “second wave of Twin Balance Sheet” crisis is about the poor balance sheets of realty sector being reflected in the balance sheets of NBFCs that lent to the sector. This showed itself when the Infrastructure Leasing and Financial Services collapsed in Sept 2018.

Now the catch is what happened to the money that banks lent to NBFCs which in turn lent to the big players in the realty space? Was it round-tripped by way of electoral bonds?

Since March 2018, electoral bonds worth at least Rs 6,128.72 crore were issued, and Rs 6,108.47 crore encashed. The BJP garnered 95 per cent of the Rs 222 crore bonds issued in the first tranche of bonds, according to data compiled by the Association for Democratic Reforms.

The electoral bonds, meant to provide transparent funding to political parties, have become very controversial because of the opaque manner of funding. Only the companies, SBI and the concerned political parties know who donated the money. Even the Election Commission does not know. Information obtained through RTI shows that the government did not want to involve the Reserve Bank of India, which clearly had objections to the way the bonds were designed by the finance ministry.

What points a needle of suspicion at anonymous members of the realty sector as possible donors is the fact that the government had, last month, announced the setting up of a Rs 25,000 crore alternative investment fund (AIF), aimed at providing relief to developers with unfinished projects to ensure delivery of homes to buyers.

And interestingly enough, while the government would chip in Rs 10,000 crore towards the fund, the SBI, which sold the electoral bonds, and the LIC have been mandated to infuse the remaining sum.