Economic Outlook: Temporary slowdown in India

11 April 2012

Annual growth by sector in India

Annual growth by sector in India

Aggressive monetary tightening in India in 2010 and 2011 means the slowing of the economy is becoming more pronounced. There will be significant headwinds in early 2012 - a sharp deceleration in growth, strong credit linkages with a weakening Europe and less room for manoeuvre than in the last cycle of 2008.

However, after moderation in the next two years India's growth momentum is expected to return to its historical trend. It is important to note that even with this moderation, GDP growth will still be a respectable +7%, and the acceleration in two years or so should see it return to +8%.

The development of India's information technology (IT) industry, coupled with economic reforms will see the country integrate further into the global economy.

Although India's manufacturing sector has reignited in recent years, the services sector will continue to lead India's growth. Overall, India's fundamentals for growth are on a relatively solid footing and are in a position to support strong, sustainable economic expansion for the foreseeable future.

Construction prospects

So while the long term outlook for Indian construction remains strong, there could be challenges in the near-term given weaker demand for new orders, especially from the private sector. Data for the first half of the current fiscal year suggests public sector investment in construction has improved, but that it has been offset by a steep decline in private sector activity.

Construction increased +4.3% in 2011, with moderate expansion in building and infrastructure activity. However, it rose only +1.3% in the first quarter, with a sharp rise in the number of stalled projects.
There are reasons for optimism in the medium term and beyond, however. The coalition government is likely to remain in power until at least 2013 and it has a strong political mandate to accelerate reform, with privatisation, divestment, deregulation and infrastructure spending likely to increase over the near and medium terms.

This is critical because even as construction companies have healthy order books, almost all report lags in completing work due to issues with land acquisition, regulatory delays and access to skilled labour. Even so, the current ad-hoc approach to liberalisation will continue, drawing on distinctions between priority and non-priority sectors.

Foreign direct investment (FDI) and other capital inflows are also expected to increase as India remains an attractive investment destination. It would also appear that while inflation remains well above the central bank's comfort range, the monetary authority will be willing to sacrifice prices control for economic growth.

The perilous fiscal situation in India suggests that the use of build-operate-transfer (BOT) arrangements will expand. This requires construction companies to invest substantial equity into their projects. Tight credit conditions have also led prime contractors to support weaker sub-contractors to get their projects completed. Access to capital, and the assumption of a rejuvenation in FDI are key to the construction outlook.

Despite the temporary lull in economic activity, India's fast-growing service sector, which accounts for more than half of the Indian economy, will remain a key driver. Still, robust public investment and infrastructure development will partially offset the effect of falling private demand.

According to Finance Minister Pranab Mukherjee, the Indian government is planning to speed up market overhauls, construction, and infrastructure improvements to sustain economic growth. It is India's massive need for infrastructure to support increasing rates of urbanisation and to support planned GDP growth that will drive spending.

Indeed, it is infrastructure that will lead growth over the next five years, principally in transportation and energy. Energy has a slightly stronger growth rate as India desperately needs to upgrade its power generation capability with both conventional and emerging energy sources. Transportation comprises the largest share of infrastructure spending, with large-scale investments planned in highways, both greenfield airport development and upgrades as well as improvements to the performance and safety of the rail network.

Within the structures segments, office construction will remain the growth leader as India continues to expand its powerful services sector. Industrial construction will also fare well as India invests in refineries, coal processing and other means to improve energy independence.

Residential construction offers strong growth at +8.3% over the next five years as the country sees the demographic shifts associated with urbanisation. Yet, India remains a country with significant income inequality, and the population shifts will be met with relatively low cost housing that does not generate the growth that might come with larger floor space units.

Outlook

The outlook for India has diminished with the slowdown in Europe and weak recovery in North America. The next couple of years will see construction growth slower than we have come to expect from India, but still strong by global standards.

This will be a bump in the road, however, as India's development path and long-term potential remain secure. Construction companies will need to manage their finances and order books a little more closely over the next couple of years, but the long-term potential of this market remains strong.

Latest News
Jury concludes that Caterpillar owes $100m to importer amid US lawsuit
A jury in the US has concluded that Caterpillar must pay $100 million to an importer, following a legal dispute between the two companies.
Kanamoto eyes North America move
Company aims to double overseas revenue in next six years
Smart Construction to unveil Edge 2 at Intermat
New launch ‘an advancement’ in simplifying drone surveying processes and point cloud data processing