21
april 2015
international
construction
ECONOMICOUTLOOK
Untapped potential
>
Untapped potential
D
espite the brighter picture painted by the
rebasing of GDP data, India’s economic
recovery looks uneven. Real GDP grew
+7.5% year-on-year in the fourth quarter, but
domesticdemand remainsweak. Both investment
and private consumption are struggling to grow,
and themanufacturing sector ismuted.
On the plus side, a number of forward-looking
indicators, including the purchasing managers’
index, suggest an improved outlook. Softening
inflation, easing commodity prices and input
costs, ample liquidity in the financial system, and
rising business and consumer confidence should
enable demand topickup.
Meanwhile, themonetary easing initiatedby the
central bank in January2015,with additional rate
cuts expected throughout 2015, should stimulate
credit growth and boost domestic demand. The
timing and extent of furthermonetary easingwill
depend on fiscal and external developments, and
remain conditional on favourable inflation.
IHS Global Insight expects the central bank
to deliver as much as 125 basis points (1.25
percentagepoints) in additional rate cuts in2015.
Coupled with the government’s efforts to revive
investment, this should help India’s economy to
grow +7.4% in the fiscal year (FY) endingMarch
2015, further accelerating to+7.9% in2015/16.
The resounding victory the Bharatiya Janata
Party (BJP) in the 2014 Parliamentary elections,
and the formation of the first non-coalition
government in 30 years, have put PrimeMinister
NarendaModi in a strong position to transform
the economic landscape.
Secondbudget
The second BJP budget—presented in late
February—outlines a clearer path for reforms.
However, the approach remains gradual and
measured, rather than immediate and fast paced,
and structural reforms in the private sector will
continue tooutpace those in the public sector.
India’s plentiful, undeveloped natural resources
offer untapped potential, while the skilled,
educated labour force boosts prospects for both
the private and public sectors. The dynamic,
successful overseas Indian community also sparks
domestic entrepreneurial activity, both directly
and indirectly. Rapid urbanisationwill also act as
an important force of change in the long term.
However, the government’s optimistic economic
growth target of upwards of +10% a year still
remains out of reach. Such rapid growth would
require a substantial increase inpublic andprivate
investment.
In order to bring the economy back on track
and fully realise this potential, India will have to
speed up investment, liberalise its rigid labour
market, eliminatewasteful subsidies, anddiversify
from IT-enabled services into value-added
manufacturing andfinancial services.
Net foreign investment inflows are seen picking
upon improvingpost-electionbusiness sentiment.
Strong post-electionmomentum has turned into
a sharp rise in foreign direct investment (FDI)
inflows to India, upby a factorof five toUS$39.9
billionduring the first half of fiscal year 2014–15
India will also benefit from lower world oil
prices since it is a significant oil importer. The
impact of lower oil prices could provide a 0.5%
to0.8% stimulus to IndianGDPgrowth in2016.
Themost recentBJPbudget introduced an array
of reforms focusing on tax rationalisation and
infrastructure investment. It includesanambitious
plan to upgrade India’s poor infrastructure, with
nearly US$ 11 billion to be spent in FY2015/16
alone on roads, railways, ports and other projects.
In a separately announced railway budget, annual
spendingwas increased 52% from prior spending
and envisaged a total investment of nearly
US$ 137 billion in India’s outdated rail network
over the next five years.
In the energy sector, the budget proposed an
expedited commissioning of five ultra-mega
power generation projects of 4 GW each and
electrification of 20,000 villages by 2020. In
housingandurbandevelopment, thebudget stuck
the existing “Housing for all”programme tobuild
20 million house in rural areas and 40 million
houses inurban India by 2022.
This would be financed in part with aNational
Investment and Infrastructure Fund with annual
inflow of INR 200 billion (US$ 3.1 billion). In
addition, the government has introduced tax-
free infrastructure bonds for projects in the rail,
road and irrigation sectors, and encouraged
government-run ports to develop under the
Companies Act, which should help attract
investors.
Construction outlook
Since the Indian business community routinely
cites infrastructure as the single biggest hindrance
to doing business, ahead of corruption and
cumbersome bureaucracy, this budget is a critical
step toward advancing Indian competitiveness,
as well as representing a boon to construction
companies.The construction outlook reflects the
current realities in India, while building on the
expectation for reform.
The forecast for the residential sector is strong
compared to some markets, but weak compared
to total Indian construction. Urbanisation,
government spending, population growth and an
emerging middle class contribute to growth, but
investment is targeted elsewhere.
Office construction has been strong for the past
The Indian construction sector is picking up, but the new government will need to be boldwith
its economic reforms if it is to hit its growth targets.
Scott Hazelton
reports.
Construction growth forecasts by sector
Annual growth 2015-2019
Annual growth 2009-2014
0%
2%
4%
6%
8%
10% 12%
Infrastructure
Industrial
Institutional
Commercial
Office
Non-residential
Structures
Residential
