MORE GROWTH TO COME

India is set to lead the Asia-Pacific region when it comes to real total construction spending, writes Scott Hazelton 

India’s fiscal year 2023–24 performance remains resilient, driven by the services sector and investment activities. India’s economic expansion continued into the September quarter of 2023, with real GDP (Gross Domestic Product) growth reaching 7.6% year over year, driven by a surge in manufacturing and construction, government spending, and a improved investment climate. Key indicators like the S&P Global India Services Purchasing Managers’ Index (PMI) have shown resilience, leading to an estimated real GDP growth of 6.9% for fiscal year 2023– 24 (ending March 2024). GDP growth will slow modestly to 6.5% in fiscal year 2024–25. While the upcoming election is anticipated to stimulate the economy through increased government and election-related spending, private-sector spending may waver early in the year because of the inherent uncertainty associated with election cycles. India’s fiscal year 2023–24 budget announced that total spending would rise 7.5% with capital expenditure surging 33% to a record-high ten trillion rupees, supporting fixed investment growth.

However, election-related uncertainty may stall private-sector investments, likely yielding growth of 6.6% in fixed investment during fiscal year 2023–24. Fixed investment spending should pick up from the September quarter of fiscal year 2024–25, supported by stabilised private- and public-sector plans and resulting in growth of 7.4%.

Construction spending boom

India is set to lead the Asia-Pacific region with real total construction spending expected to grow by 11.0% in 2023 and 10.0% in 2024, an upward revision for both years. The positive outlook comes with improvements across all subsectors. Housing will remain robust, with demand outpacing supply, fuelled by a strong economy, rapid population growth, and a rising urbanisation rate.

Despite high interest rates, the all-India house price index recorded a 3.4% year-overyear increase in the July–September quarter of 2023–24.

The outlook remains optimistic, with the final quarter traditionally accounting for a significant share, pointing toward a strong start to the year. We expect residential construction in India to increase 9.5% in 2023, slowing to a still strong 8.9% in 2024.

We anticipate a surge of 7.5% in nonresidential structures spending for 2023, driven by commercial construction. The resurgence of consumer sentiment and growing consumer purchasing power have fueled strong leasing momentum. Furthermore, a robust economic outlook and favorable consumer spending patterns have encouraged an increase in mall supply, with the latter half of 2023 recording a rise in supply across tier one cities. The retail market is expected to witness more than 50 shopping malls open by 2025. Nonresidential structures spending is expected to rise by 7.2% in 2024, mainly driven by a 13.4% jump in office construction. The fourth quarter of 2023 witnessed strong demand for office spaces in India, with many cities recording their best performance since the pandemic. Although the technology sector’s contribution to office leasing has been decreasing, overall demand held strong.

India’s interim budget

On February 1 India’s Finance Minister Nirmala Sitharaman presented the interim budget for the fiscal year starting April 2024 (FY 2024–25). The budget envisions a modest increase of 6.1% in total spending to 47.7 trillion Indian rupees, with almost no increase in real spending. There are no proposed changes to tax rates or import duties, although the budget does retain or extend certain tax benefits for start-ups and investments made by sovereign wealth or pension funds.

The finance minister emphasised a continuing focus on infrastructure spending and broader capital investment, which have become the main drivers of India’s GDP growth post-pandemic. Real fixed investment grew 11% year over year in the September 2023 quarter, reaching 35.3% of GDP, versus 30.5% in FY 2019. However, the planned increase in state outlays on capital expenditure in the budget was set at 11%, a deceleration from the average expansion of nearly 30% in the past three years.

Source: S&P Global Market Intelligence

The budget includes outlays for continued development of three major economic railway corridor programs: to serve the transportation of energy, minerals, and cement, improve port connectivity, and expand high-traffic-density corridors. This is alongside 1.3 trillion rupees for 50-year interest-free loans for capital expenditure at the state level. With private investment reviving only gradually, the capex allocations in the budget may be insufficient to sustain further increases in the share of total fixed investment within GDP.

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The government’s continued focus on its infrastructure agenda while seeking fiscal consolidation rather than undertaking electorally motivated social spending in the pre-election budget is a positive performance indicator for India’s debt market, diminishing the fiscal uncertainty traditionally associated with election cycles. Lower interest rates should help the revival of private sector investment. Apart from water and sewer works, the outlook for infrastructure is stronger than in recent history – data does include a brief slowing of infrastructure in 2020 when some spending was routed toward Covid relief. The largest increase will be seen in transportation infrastructure as the proposed budget includes not just the traditional large investment in highways, but also spending for rail and ports to improve supply chains and trade. India is chronically energy starved. The aggressive spending planned will reduce, not eliminate what is a major hindrance to economic growth. The focus of the spending will continue to shift to renewable sources of generation. Even though growth declines for water/sewer, it remains strong.

The current budget is less generous to rural areas than in the past, so it is likely that urban work will continue but rural irrigation will see slower growth. IC