Construction and infrastructure, drivers of Indian growth

This year the Indian economy has once again maintained growth levels above 7%. The anticipated rise in GDP in fiscal 2016-2017 (ending 31/3/17) is +7.1%, slower than the +7.6% of 2016 (the best result at a world level), while the forecasts for the next 12 months range between the IMF’s 6.6% and the Indian Economy Ministry’s 7%.

Without question investments in infrastructure remain the main growth driver. According to the World Bank, the Indian government is expected to allocate 3-4% of the country’s GDP to infrastructure investments to ensure annual economic growth of between 7% and 8%.

Development of the transport network (motorways, railways, ports and airports), the creation of smart cities and industrial clusters, and public residential building projects are the cornerstones of India’s current political agenda aimed at bridging the country’s infrastructure gap. In turn, public and private investments are driving the construction sector, a segment that accounts for 8% of India’s GDP and employs more than 35 million people.

One of the most important measures launched by the government is the allocation of US $375.4 billion of funds in three years starting July 2016. This includes US $120.1 billion set aside for the development of 27 new industrial clusters and US $75.1 billion for road, railway and port connectivity projects.

A further boost to the construction sector will come from the easing of FDI (foreign direct investment) norms in various sectors, including real estate and construction development, and the 2016 tax reform which introduced the Goods and Services Tax (GST) as a single tax on goods and services at a national level.

• The main construction projects

The most ambitious infrastructure project is without question the Delhi Mumbai Industrial Corridor, a US $100 billion joint public and private project that will be completed by 2040. The first of its four phases includes the construction of 8 industrial cities (smart cities with between 1 and 3 million inhabitants) with the aim of expanding the country’s manufacturing sector. The industrial corridor will pass through 7 states from the capital to Mumbai and will have a total length of 1,500 kilometres.

India’s sheer geographical size and the need to connect different areas of the country are providing a major boost to investments in the construction of large airports. It is no coincidence that one of the largest infrastructure projects undertaken in recent months is the Navi Mumbai International Airport. Work is expected to be completed by 2019 at a total cost of US $2.4 billion. The airport stems from a public-private partnership in which private investors hold a 74% stake.

In the railway sector India is preparing to build its first highspeed rail project, the Mumbai-Ahmedabad bullet train network, a 508 kilometre line which will connect the financial capital Mumbai with Ahmedabad in the state of Gujarat. The project is expected to be completed by 2023 and will involve investments of US $14.66 billion. Some 81% of this will be financed by Japan through a 50-year loan at interest rates of 0.1%. In its 2017-2018 budget, the Indian government has allocated US $36.2 billion of funds to the transport sector, including US $19.7 billion for railways and US $9.7 billion for motorways.

• Real estate

The real estate market is expected to witness growth starting in the third quarter of 2017, driven by the new Real Estate Regulatory Authority (RERA) passed by the Indian government in March 2016 with the aim of regulating the construction sector. The bill has made it compulsory for all real estate projects to register with the regulator before launching a project if the land area is more than 500 square metres or has over 8 apartments. To protect buyers, developers would have to put 70% of the money collected from a buyer in a separate account to meet the construction cost of the project. This rule would restrict real estate companies from diverting the money into other projects and guarantee the completion of the project on time.

Growth of the real estate sector will also be boosted by better access to credit and lower interest rates on home loans.

In the public housing segment, the government has included US $3.5 billion of investments in the Housing for All project which involves the construction of 10 million homes by 2019. For purchases, the National Housing Bank will refinance individual housing loans of about US $3 billion.