The ‘Core’ of India’s Slowdown: Construction Investments
Painful correction or prolonged slowdown?
18 February 2020
The Economy Observer
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
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
– Research analyst
(Nikhil.Gupta@MotilalOswal.com); +91 22 6129 1555
– Research analyst
(Yaswi.Agrawal@motilaloswal.com); +91 22 7193 4196
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.