India Biannual Construction Market Report 1Q/2Q FY2025
Economic trends
GDP
Source: MOSPI
Building on the pace of the previous period, India's growth rate reached a six-quarter high of 8.4% in the third quarter of FY2024. This growth represents a significant increase above the 4.3% year-on-year gain achieved in the preceding fiscal year.
The National Statistics Office has estimated India's real GDP to grow at 7.3% in FY2024 in its first advance estimates released in January. The sustained emphasis on public investment appears to have constrained private investment marginally. Yet, cumulative strong aggregate demand has boosted manufacturing and construction activity, causing RBI to revise GDP growth estimates for FY2024 from 7.3% to 7.6%, with the 4Q FY2024 growth rate projected at 5.9%.
This forecast is a modest projection considering the gap between GVA and growth figures, primarily due to the opening of the tax revenue generation window. Likewise, major global agencies have also lifted India's growth projections for FY2024 on the back of remarkable performance in 2Q.
Source: Media reports
The RBI's survey of professional forecasters has upgraded India's real GDP growth from 6.4 per cent to 7.0 per cent for FY2025.
The International Monetary Fund (IMF), in its January 2024 World Economic Outlook, revised India's growth projections to 6.7% from 6.3% in its October 2023 issue. Furthermore, the IMF's medium-term growth forecasts for India remain strong, supported by improving macroeconomic fundamentals and resilient domestic demand.
According to the interim budget, the government's effective capital expenditure for FY2025 is estimated to be 4.6% of GDP, including physical infrastructure and the technology environment. This budget represents a massive 200 basis point increase from 2.6% of GDP in FY2020.
Employment
India's economy is expected to touch $5 trillion by 2026–2027. Expanding digital infrastructure, along with increasing physical and social infrastructure, particularly educational opportunities, are likely to propel growth in the future.
The International Labour Organisation, in its publication, highlights that non-farm employment growth was largely sustained during 2019–2022 by growth in construction employment, at nearly 6.4%, just behind the agricultural sector.
The increasing effect on labour productivity, driven by the high capital intensity associated with sectoral operations, is equally dampened by the demographic divergence of the workforce and the proportion of informal workers.
In March 2024, India's unemployment rate showed a slight decrease to 7.64% from 8.01% in the previous month, aligning with the typical yearly trends. The urban unemployment rate also saw a decline from 8.55% in January to 7.93% in February, while the rural unemployment rate increased to 7.23% from 6.48%. These figures, shared by the Centre for Monitoring Indian Economy (CMIE), provide a crucial snapshot of the current labour market situation in the country.
In FY2024, the labour force participation rate (LFPR) for the July to September quarter remained steady at 49.9%, similar to the April to June quarter's 49.3%. Notably, the participation rate of the female working population was slightly higher than their male counterparts. However, it's important to interpret these figures with caution, considering the quality of employment generated and potential limitations in the data.
The question is whether this shift is temporary or more permanent. Nevertheless, this may be only the beginning, given recent low productivity patterns and automation trends in an artificial intelligence (AI) era.
Source: CMIE
Source: Trading Economics
Global inflation
According to the IMF, global headline inflation is expected to fall from an off-late high annual average of 6.8% in 2023 to 5.9% in 2024 and 4.5% in 2025.
The fall in global inflation in 2024 reflects a broad-based decline in global core inflation. This dynamic differs from that in 2023, when global core inflation fell a little on an annual average basis and headline inflation declined mainly on account of lower fuel and food price inflation. In 2024, core inflation is expected to fall by 1.2 percentage points after contracting by just 0.2% points in 2023.
As the global economy approaches a smooth landing, the central banks are expected to remain cautious and maintain a precise balance in easing their fiscal policies to avoid potential target undershoots.
The US central bank is upholding the old rates after three shallow rate cuts in 2024 due to persisting inflation, while the European Central Bank and the Bank of England are optimistic about rate cuts by 0.7% & 0.44%, respectively.
Irrespective of the policy divergence, such rate cuts may backfire, impacting exchange rates, import costs, and overall inflation. Intensifying supply-enhancing reforms are hopeful to facilitate both inflation and debt reduction.
While the inflationary pressure is largely decreasing at variable rates in different countries, ongoing conflicts, such as those in Iran, the Gulf of Khambhat and the reescalation of the Russia-Ukraine war, or political instability caused by changing governments continue to pose risks to the projected figures.
India inflation rate
Retail inflation has extended its stay inside the RBI’s 2 to 6% tolerance range for a sixth consecutive month. Headline inflation fell to 4.85% in March 2024, the lowest since May 2023, from 5.1% in February 2024. Moderation in core inflation (non-food, non-fuel) continues to keep inflation under control. Overall, in FY2024, inflation averaged 5.4%, lower than the 6.8% recorded in the corresponding period of FY2023.
Despite price volatility in certain food items, headline inflation stayed below 6% throughout the previous fiscal year except in July and August 2023. Hinging on this softening of inflation, Trading Economics projects the Indian inflation rate to trend around 4.5% for the upcoming quarters of FY2025. At the same time, the 1Q FY2025 may see some temporary spike in consumer-led inflation owing to a higher election-instigated flow of money from the bottom of the economic pyramid.
The impact of declining international commodity prices has been reflected in a moderation in core inflation, which echoes imported inflation in India. The core inflation dropped from 6.1% in FY2023 to 4.4% in FY2024, and it continued to fall for the tenth consecutive month in March 2024 to 3.4% conditional on the supply chain remaining undisturbed and the geopolitical escalations remaining restrained; core inflation is anticipated to linger around the same levels.
Source: MOSPI
Construction inflation rate
When asked about their expectations for construction inflation for a 100 CR project for FY2025, 44% of survey respondents thought in the 3%–5% bracket, while 27% of respondents feel that the inflation may go up in the range of 5%–7%.
Wholesale price index (WPI)
The WPI measures prices at the production or manufacturing level, incorporating goods traded between businesses.
India's WPI returned to positive territory at the end of 2023, following a seven-month decline. The contraction began in April 2023 and reached a negative high in June of the same year.
The reduction was due to a drop in global commodity prices, such as basic metals and chemical/chemical products, as well as the previous year's high base statistics during a significant part of 3Q FY2024.
In November 2023, the WPI showed a first positive uplift of 0.39% (year-on-year) in FY2024 but then fell to 0.2% in February 2024, followed by a rise of 0.53% in March.
Despite this spike, WPI inflation for the full fiscal year FY2024 remained low at -0.7%. This is significantly lower than India's FY2023 WPI inflation of 6.52%, with reduced input costs being a crucial driver. Cheaper raw materials and cheaper fuel have been major drivers of this low yearly WPI inflation.
This reduction is also visible in the pricing of manufactured goods (-0.85%) and fuel (-0.77%). With the fading of a supportive base, it is expected that WPI inflation will rise in the coming months.
The recent increase in global commodity prices, driven mostly by increased Brent crude prices and industrial metal prices, is anticipated to add to upward pressures, but the RBI is confident that it will remain between 2.0 and 4.0% for the next fiscal year.
Source: Office of the Economic Advisor
USD to INR
While the GDP prognosis for FY2025 is remarkably optimistic, the weakening of the Indian rupee cannot be ignored.
The Indian national rupee (INR) has fallen against the US dollar (USD) by 2.9% from FY2023 to INR 82.66/USD from INR 80.32/USD. Such persistent weakening would make the imports costlier, potentially pushing up domestic inflation.
Despite this, the downfall in global commodity prices in FY2024 kept the rupee constant at roughly 83 INR/USD at the end of the fiscal year, albeit maintaining an all-time high forex kitty at US $645 billion+.
With the increase in commodity prices of about 25%-30% during the later periods of the year starting from November 2023, pressures became evident. The forex value also fell against most major currencies, including the euro, British pound, and Japanese yen, owing to haven feelings. Further progress of these commodity prices will harm the rupee.
Looking ahead, the Indian rupee exchange rates are projected to remain higher, with rates likely to stay within the 88 INR/USD range for 2025. In light of this, it is beneficial for businesses to proactively manage their currency exposure and align their business strategies accordingly.
Source: X-Rates
Source: Global Economy
Manufacturing purchasing managers’ index (PMI)
The manufacturing sector grew by double digits in the 3Q FY2024. The India manufacturing PMI reached a five-month high of 56.9 in December 2023, reflecting the sector's strength, as new orders and good demand conditions sustain it.
This robust performance is partly due to increased domestic demand and decreased finished product inventory. Volume indicators such as the index of industrial production and the index of eight core industries grew by 5.8% and 8.4%, respectively, in the third quarter of FY2024.
Positive trends in investment inflows, investor confidence, robust domestic demand and efficient inventory management point to increasing overall economic activity.
