Economic Outlook India: Bouncing back

Following a disappointing performance over the last year, the Indian economy will remain weak, with GDP growth of less than +5.5% over the near term. The outlook for the next two to three years is better, but still remains subdued, with growth expected to increase in line with a modest recovery in investment.

Over the medium term, favourable export growth, a revival of economic reforms, and greater contributions from the service and construction sectors will push the economy to around +8% growth.

Inflation remains above the central bank’s comfort range of 5-6%, but the monetary authority will sacrifice prices control in favour of economic growth, so policy is expected to ease in 2013. Looser credit conditions and lower costs will help industrial production, while domestic demand, particularly investment, will also begin to stage a mild recovery.

The Indian government wants to speed up market overhauls, construction, and infrastructure improvements to sustain economic growth, but reforms have been a casualty of political gridlock and opposition. As a result, IHS Global Insight expects only a shallow recovery in investment, in part driven by domestic policy uncertainties, and a weaker economic climate.

Infrastructure spending will be a crucial driver of construction activity as India continues to urbanise, leading to new demand even as the existing framework remains creaky. The infrastructure index in India has been improving dramatically over the past year driven by the coal, steel, refinery, fertiliser, cement and electricity sectors.
Infrastructure priority

When Prime Minister, Manmohan Singh, reshuffled his cabinet in November, he indicated that infrastructure developments needed to be prioritised, singling out energy supply bottlenecks as a particular obstacle to economic growth.

The cascading failure of India’s northern power grid last July an indicator of a system that is so overloaded that a 12% power deficit exists during peak demand.

The failure also indicated a need to change the power management infrastructure as an overload in one region ultimately brought down the grid in 20 of the country’s 29 states – affecting a total of 670 million citizens overall. Nuclear power will be one winner in this expansion as the goal is to increase the share of power generated from this source from 3% today to 25% by 2050.

In addition, the Cabinet Committee on Investment has been established to fast-track big projects, starting with infrastructure schemes. With its creation, the Finance Ministry hopes to push through around 89 stalled projects, each worth more than INR 10 billion (US$ 185 million).

Infrastructure is not alone in seeing growth. Residential construction will also continue to expand given an increasing population, improving average income and urbanisation.Residential spending has achieved additional impetus in the short term as severe flooding in north-eastern

India left 2.2 million homeless. US$ 91 billion has already been granted to alleviate the effects, particularly in Assam province.
But while infrastructure and institutional spending – largely publicly financed – have seen strong growth, commercial and office investment has lagged.

Office construction in India is also certain to rebound in the future as global markets recover, particularly in the technology sector. The US is already on the mend, although Europe still faces a prolonged slump. However, real optimism comes from the retail sector, which together with lodging and warehousing comprises the commercial sector.

Opening market

India’s Parliament has voted against a measure that would have forbidden foreign multi-brand retailers from entering the country. State governments can still prevent such market entry, but the construction industry is optimistic. Prices for commercial real estate in the large cities (population over 1 million) where foreign retailers can open have risen, and quality retail space is in short supply.

As a result of this, the expectation is that large retailers will need to construct new space in order to enter the market.

The question is how eager retailers will be to construct new stores given the prevalent weakness of infrastructure such as water and electricity in the country, as well as a lack of connectivity and parking.

When considering the construction opportunities over the medium term, it is important to note that the growth is back-loaded. For example, while total construction will see average compound growth of +8.8% over the next five years, growth in 2013 will be +6.2%.

It will take time for recovery, reform and confidence to rebound, but as that occurs growth will approach double-digit rates. In the near term, construction growth will be stronger in China than India, but those roles will reverse by 2014.

While the construction outlook for India has diminished in the last year or so, it still offers significant potential.

The next two years will be slower than we have come to expect from the country, but still strong in comparison to global standards. However, the continued emergence of the Indian economy is clear, and the need for new and upgraded facilities must be met.