Economic Outlook: India
By Scott Hazelton12 April 2011
Over the next five years, India will offer the strongest growth of any major construction economy, including Brazil and China. Although China will remain the global growth leader in 2011 and probably 2012, the expansion of its construction market will tail-off as the Government's stimulus spending comes to an end. By contrast, India's already strong growth will continue in the short term and strengthen in the coming years.
Key to the improving construction outlook is the evolution of India's economy. The GDP growth trend has been around +8.0% for the last 20 years, compared to +3.5% to +5.5% in the mid 1980s and at the same time the volatility of economic growth has subsided.
The most recent complete annual data shows that by the end of 2009, India had a rapidly expanding US$ 1.3 trillion economy - the third largest in Asia, after Japan and China. The available evidence suggests that India's real GDP grew close to +9.0% in 2010. Yet, per capital GDP remains fairly low by regional standards and is less than half of China's.
But there are considerable pockets of wealth, and India also enjoys a rich spread of natural resources and has a large population that could be employed more productively to put economic growth on an even higher path. However, key institutions such as the education system are not yet up to the task.
Residential construction spending slowed with the global economic downturn, but is expected to bounce back at a rate of +8.2% this year. Credit conditions remain tight, and growth is expected to remain near +8.0% for the next two years before gradually increasing thereafter.
India is one of the least urbanised countries in the world, with less than 30% of its population living in towns and cities. However, the urban population is expected to reach nearly 600 million people in the next five years.
This will drive growth in the residential sector at an average of +8.5% to US$ 88 billion. The next five years will see an acceleration to +10.5% average growth, taking the value of the sector to US$ 145 billion.
The clear opportunity will be in the urban housing sector, and the demographics of migration from rural to urban environments in other countries suggests that the largest share of the urban opportunity will come from affordable housing.
Future spending in non-residential structures is forecast to grow from US$ 126 billion in 2010 to US$ 205 billion in 2015, at an annual growth rate of +10%. By 2020 spending is expected to reach US$ 308 billion driven by growth of +8.5% from 2015 to 2020.
Commercial construction is one of the more developed segments within the non-residential segment - India is already thought to have some 600 shopping malls. However, the steady growth of the middle class, along with rising incomes in general, suggests that the Indian consumer market will quadruple by 2025, driving significant expansion in the construction of retail space.
Similarly, India's strength in business services and IT has already created a substantial base of office space, the demand continues to grow in the large and medium cities with three cities alone - Mumbai, Delhi and Bangalore - projected to increase office space by 20 million ft2 (2 million m2) per year to keep pace.
Continued industrial expansion, and the continued evolution toward higher value products will drive new, expanded and upgraded manufacturing facilities. Increasing urbanisation will require the construction of schools, health care facilities and government buildings to maintain and improve upon the level of services.
Infrastructure construction will continue to be a key priority for India, and spending in this sector is forecast to increase accordingly. Investment is expected to increase from US$ 84 billion in 2010 to US$ 129 billion in 2015, at a growth rate of +9.0%. Growth will slow slightly to +8.4% in the 2015 to 2020 period, taking annual spending to US$ 189 billion in 2020.
The challenge for achieving this remains financing as India deals with chronic fiscal imbalances. Still, India has made extensive use of public-private partnerships to leverage government investment, and the regulations governing such investments have been liberalised in recent years.
Indeed, rules governing foreign investment and ownership have been reformed throughout the economy and foreign direct investment is likely to double over the next five years as a result. With strong growth offering the potential for solid returns, money should be available for projects with proven value and/or critical importance.
India, like many countries that engage in official five year plans, often falls short of what are typically ambitious national goals. However even falling short on US$ 1 trillion plan suggests a significant opportunity.
The outlook for India remains strong, and its potential is even greater. With opportunities across virtually all segments of the construction market, and with the probability of sustained, world-leading growth, construction companies need to have a strategy for this market.