Outlook for Construction & Construction Equipment in India

 – SCOTT HAZELTON

Director, S&P Global Market Intelligence

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 GDP will grow 7.0% in fiscal year (FY) 2022 (which ends in March 2023), but with growth already easing, it will slow to an average of 5.3% in FY 2023. The government’s FY 2022 budget targeted a 24.5% year-on-year (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 and broad fiscal deficit targets. Combined with rising inflation, persistent 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.

Patchy economic recovery will outweigh the government’s efforts to attract investment, such as production-linked incentive schemes and further foreign direct investment liberalization. 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 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 not be released until early February, but there are expectations that it will see increased focus on rural development and infrastructure, with the potential for continued double-digit increases in public investment. Traditionally, transportation infrastructure—particularly road and rail—comprises the largest share of India’s public infrastructure budget, and that remains the assumption with our outlook.

The medium-term outlook for Indian construction is remarkably stable. The compound rate over the next five years is expected to be 4.5%, compared to 4.4% over the past five years. Absent the large pandemic-induced swing, the outlook is actually a bit stronger than pre-pandemic growth and at a higher level of investment.

The residential component of the total will be 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 back to 3.1% real growth in 2023. Growth will accelerate modestly in 2024 and beyond as interest rates subside. While S&P Global Market Intelligence expects continued public spending on affordable housing in coming budgets, most of the impetus comes from India’s rapid population growth and increasing household income. 

Office construction will continue to improve and outpace total non-residential structures. A recovering global economy and India’s strength in IT and other service industries increases in demand. Real growth slowed to 3.6% on inflationary pressures in 2022 from 9.1% in 2021, but S&P Global Market Intelligence expects 5.5% real growth in 2023. Retail construction, lodging and food service were decimated by the COVID downturn, and even a double-digit recovery in both 2021 and 2022 could not offset that hole. However, while retail sees limited long-term potential as consumers migrate to e-commerce, the hospitality industry should continue its recovery, with 2.6% real growth in 2023, but moderation thereafter. India’s manufacturing industry has been damaged by adverse trade conditions, particularly imports from mainland China, compounded by competition from other low-cost Asian competitors. Re-shoring of manufacturing by the US and Europe given supply chain concerns will also be a damper on further development. The bright spots are transportation equipment and electrical and electronic products, where global demand is strongest and production linked incentive (PLI) schemes are most utilized.

Infrastructure has been a top performing segment over the past five years, and it will remain strong over the forecast, given current public policy. The historical data is dominated by growth in the water/sewer sector, which includes significant past investment in irrigation. This segment remains strong moving forward due to expected rural investments, particularly in clean potable water as well as irrigation. The need to improve the current electrical grid, particularly as new generation moves to wind and solar, will encourage growth to recur, but the cost per kilowatt (kw) to build green energy is decreasing.

Spending on construction equipment will expand roughly in line with construction activity, although at a slightly faster rate as Indian contractors increase equipment adoption to improve productivity. Real (inflation adjusted) sales for construction equipment was US$3.6 billion in 2022, with an expectation of roughly 5% annual growth over the next five years.

India’s production of construction equipment is roughly equal to its demand at $3.2 billion in 2022. India exports about as much value of equipment (US$2.2 billion) as it imports ($2.3 billion). The value of exports will expand at roughly an annual 5% rate over the next five years, while imports expand at roughly 4% as India becomes even more competitive as a global producer and also meets more of its domestic demand. India currently accounts for about 2.2% of global trade, both imports and exports. That share will expand to 2.5% by 2027, a small share gain, but nearly US$700 million in value.

India’s outlook is strong compared to the global average. India is poised to become the third largest economy in GDP, behind the US and China. Its population is expected to become larger than China’s in 2023, making India the world’s most populated country, with a population density significantly higher than China’s.  India also aspires to move from a regional power to a global one. This requires significant investment, suggesting a world-leading construction market for the near future.

Hits: 5