ECOSCOPE: The ‘Core’ of India’s Slowdown: Construction Investments; Painful correction or prolonged slowdown?

The ‘Core’ of India’s Slowdown: Construction Investments; Painful correction or prolonged slowdown?

• Fixed investments in the construction sector (residential and non-residential) in India amounted to 15.3% of GDP in FY19, lower than the peak of 19.7% in FY12. Residential investments have fallen faster from ~13% of GDP in FY12 to 7.8% in FY19.
• During the past decade (2010s), the fall in India’s construction investments was one of the worst among the world’s major economies and, as such, is one of the reasons for the economic weakness in the country today. A comparison of India vis-à-vis the world’s other major economies suggests that the former’s dependence on construction investments is much higher. At over 15% of GDP, investments in the construction sector in India are more than double of that in the US and Thailand.
• Further, notwithstanding the sharp fall in India’s residential investments in the past decade, the share of residential investments in India’s GDP is still the highest compared to other major economies and almost four times the size in other emerging economies such as South Africa and Thailand.
• Details also confirm that, unlike in India, residential construction investments have grown faster than non-residential construction investments in most other major economies. In fact, India and Singapore are the only two nations in our sample of 17 countries (and Euro Area, EA) where residential investments have declined significantly over the past five years.
• Notwithstanding weak residential construction investment, a comparison of residential property prices – in real terms – in the world’s major countries suggests that real prices have grown at an average of 2.7% since 2014 in India, much faster than many other nations in our sample. All the economies with higher growth in real prices are either witnessing a good revival in the residential construction sector with its share at highest level in many years, or it has weakened only marginally.
• This combination of very weak residential construction and robustly growing house prices in India is unsustainable, reflecting that the fall in house prices is the most ideal – albeit painful – solution. Otherwise a prolonged slowdown is inevitable.
• Further, although official data on construction investments in India is released only annually with a big lag of 10 months, several proxies – such as cement production, steel consumption, IIP for NMMP and collection of ‘stamps’ & registration fees’ by states – confirm renewed weakness in the sector in FY20, after some growth in FY18/FY19 (at least partly helped by very weak period from FY14-17).
• Finally, the details of the collection of ‘stamps’ & registration fees’ by states confirm that the weakness in the construction sector is majorly attributed to the largest (or Tier-I) states. Growth in ‘stamps & registration fees’ moderated from 15.3% in 9MFY19 to only 4.5% in 9MFY20 for the five largest states (which account for over 50% of total receipts), while growth eased from 19% to 10.5% for other 13 states. Maharashtra (MH) and Delhi (DL) are the two most affected states from this slowdown, as ‘stamps & registration duty’ accounts for more than 10% of their total receipts.