POTENTIAL FOR WORLD-LEADING MARKET

India has invested heavily in infrastructure in recent years and that trend looks set to continue as the country looks at moving from a regional power to a global one, writes Scott Hazelton

After a strong start to 2022, driven by post-pandemic pent-up demand, momentum slowed into the second half of the year. It is likely that real Indian Gross Domestic Product (GDP) will grow 7.0% in FY2022 (which ends in March 2023), but growth is already easing, and will slow to an average of 5.3% in FY 2023.

While improved private spending and investment pushed demand-side real GDP growth to 13.5% year on year (y/y) for the first quarter of India’s FY 2022, rising interest rates, high energy and food prices, and slowing global demand is cooling India’s domestic demand and exports.

The government’s FY 2022 budget targeted a 24.5% y/y increase in public capital spending. However, increased subsidies and reduced excise duties to mitigate the impact of global commodity price shocks limit the government’s ability to meet its investment spending. Combined with rising inflation, supply chain issues, and tightening financial conditions, this situation will also keep private investment constrained. As a result, real fixed investment growth will moderate to around 7.0% in FY 2023 after growing a projected 13.3% in FY 2022.

The Reserve Bank of India (RBI) is expected to continue raising interest rates in 2023. The geopolitical fallout from Russia’s invasion of Ukraine exacerbated inflation pressures, with consumer price inflation surging to an eightyear high of 7.8% y/y in April. Food prices, already elevated even before the invasion, have been further exacerbated by supply chain disruptions and unfavorable weather in India.

Combined with a passthrough from other commodities and weakening currency, this will keep inflation high. In response to rising inflation and aggressive policy tightening by the US Federal Reserve, the RBI raised its policy rate by 225 basis points to 6.25% between April and December. Patchy economic recovery will outweigh the government’s efforts to attract investment. Despite the existing setbacks, the efficiency of investment in the economy should increase as more sectors will likely open to private investment and as public investment projects become more selective and better managed.

Infrastructure investment

Infrastructure spending accounts for nearly a quarter of India’s total construction spending and nearly half of non-residential spending. The budget for the coming year (FY 2023-24) will likely see increased focus on rural development and infrastructure, with the potential for continued double digit increases in public investment. Traditionally, transportation infrastructure gets the largest share of the public infrastructure budget. India is likely to intensify Production Linked Incentives (PLI) to make India’s business environment more friendly for investors. Such incentives are also aimed at making India less reliant on imports.

An extension of PLIs to a wider range of sectors is likely, particularly semiconductors and components of renewable energy development, specifically electric vehicles. The deepening of investment for the PLI also points to India’s larger objective of positioning itself as a viable alternative for global companies seeking to diversify supply chains.

The medium-term outlook for Indian construction is similar to its recent history. The compound rate over the next five years is expected to be 4.5%, compared to 4.4% over the past five. There are some important distinctions between structure types, however.

The forecast for the residential sector is slightly lower than the past five-year performance, but still above the global average of 2.2% growth. The continued rebound from the Covid downturn yielded growth of 7.7% in 2022, but this is expected to fall to 3.1% in 2023. Growth will accelerate modestly in 2024 and beyond as interest rates subside. While we expect continued public spending on affordable housing, most of the impetus comes from India’s rapid population growth.

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