India Biannual Construction Market Report 1Q/2Q FY2025
Polling perspectives
In 2024, the world is all set to witness a monumental political exercise involving 64 countries and nearly half the global population. This extensive electoral process, which involves 4.2 billion people and accounts for more than 60% of global economic production, requires attention and strategic study.
What are the effects of elections on economies? To begin with, new administrations often make swift changes in fiscal and monetary policies in the near term. Over a more extended period, new governments can reshape global trade dynamics, disrupting the established import-export flows and supply chains and injecting volatility into commodity markets, thus altering investor sentiments.
Of all financial assets, currencies are typically the first to respond to election outcomes and evolving economic policies they represent. Therefore, it is crucial to stay attentive and monitor these election-related developments. Vigilance is vital not just for assessing potential opportunities and risks in currency markets but also for gaining insights into broader economic trends.
Global geopolitical implications
The upcoming international elections in 2024, particularly those in the US, United Kingdom, Russia and EU countries, are of significant interest to the Indian construction market.
While immediate price fluctuations from these elections may be modest, the 2024 political landscape, marked by numerous elections, holds the potential for substantial changes in the commodity demand and supply dynamics that are currently in play. This information is crucial for stakeholders to stay informed and prepared for any potential shifts.
Elections in Russia and India, both key members of the BRICS trading bloc, could see trade within the bloc boosted at the expense of external partnerships, thus driving up the prices for commodities exported to non-BRICS members.
The outcome of Russian elections bolsters stability within the BRICS bloc, intensifying geopolitical tensions in an attempt to create a stronger alternative to the west. This could impact market sentiment accordingly.
Changes in the political landscape of the European Parliament could steer the EU's policy agenda and legislative direction towards key initiatives such as the Green Deal, 2040 climate targets for 90% emissions reduction, net zero aspirations and decarbonisation of buildings. These changes could ripple through the construction sector, impacting regulations and investment priorities.
Looking at the US elections in November 2024, the resultant ramifications have the potential to affect nearly all asset classes worldwide through significant shifts in trade relations and economic policies, such as continued support for renewable energy stocks and/or efforts towards expansion of oil and gas extraction.
In addition, these electoral cycles can change the sequencing of expected rate cuts and other monetary policies rather than the direction per se. The anticipated volatility in dollar pricing could further complicate global market dynamics and project financing.
Approximately half of survey respondents believe that the current geopolitical dynamics will exert a minor influence on the Indian real estate and construction industry. Among these respondents, roughly equal numbers anticipate positive and negative effects.
Meanwhile, 41% of respondents consider there will be no significant impact, reasoning that any potential effects will likely offset each other.
The great Indian elections
Figure 29
Sources: Indian National Stock Exchange, Macrobond. Analysis by Franklin Templeton Institute.
The heat is on. Amidst the scorching Indian summer, voters in India have started casting ballots, unfolding the world’s largest election process, which spans from 19 April to 1 June in seven phases.
This electoral spectacle is not just a political event but a seismic shift that reverberates across various sectors and outcomes and holds immense sway over policies, investor sentiment and economic stability, intricately shaping the landscape of future national growth prospects.
Taking a cue from past patterns, a stable government coupled with a positive economic outlook historically triggers a surge in investor confidence, igniting demand in the commercial real estate sector. Drawing from the trends observed during the 2014 and 2019 Lok Sabha elections, it's anticipated that this election year will witness a similar uptick in commercial property sales and new project launches.
Elections signify an end to a phase of uncertainty for potential buyers by alleviating concerns about potential policy shifts and structural reforms. A decisive election outcome is known to fuel buyer sentiment, which boosts purchasing activities in the market.
Besides, the sustained demand growth in domestic residential and commercial markets in Tier 2 and 3 cities positively influences the Indian real estate sector. The recent announcement in the interim budget regarding the expansion of the PM Awas Yojna, aiming to add two crore houses for the middle-income group over the next five years, exemplifies this positive trend.
However, the prospect of new administrations ushering in fresh agendas and priorities introduces an element of unpredictability, thereby influencing investor confidence. The convergence of such advantageous policy measures, trust in the economy and political stability augment the prospects of the residential real estate industry.
Elections also serve as a catalyst for infrastructure development, with political parties often leveraging promises of projects like highways, airports, metro rail networks and smart cities to garner support.
Forecasts by rating agencies like ICRA project a 5–8% increase in road construction for FY2025, with the ministry's project award pipeline surpassing 45000 km as of March 2024.
Moreover, the interim budget signalling a gradual transition towards a more investment-driven economy by incentivising increased foreign direct investments, hope for the enactment of new labour law and prospects of an additional $130 billion in infrastructure funding reinforce optimism for investors.
Given the potential for unfavourable outcomes post-election, a significant portion of these investments are made in the pre-election period, explaining the heightened investment activity in the 90 days surrounding election dates.
Considering the current investment landscape, the uptick in investments temporarily boosts the accommodation and retail sectors. Post elections, the incoming government is expected to sustain this momentum by adhering to the allocation of INR 2450 crores for the FY2025 against INR 1690 crores in FY2024 for the travel and tourism sector.
On a different front, the construction equipment industry is experiencing bullish sentiments attributed to the elections on model code of conduct lines. However, efforts to prepare for the transition towards Stage 5 emission norms, effective 1 January 2025, temper this enthusiasm. This counterbalance has prompted a trend of advanced purchasing or upgrading equipment to mitigate potential cost escalations and stay within future budgets.
Furthermore, these elections are poised to define the nation's strategic direction across three critical dimensions: digitisation, decarbonisation, and deglobalisation. With the certainty of a stable government at the centre, the overall national development sentiments will remain consistent with a sustained focus on the semiconductor plants and renewable energy sectors.
Depending on global relationships, decrees in supply chain diversification and/or a protectionist attitude will determine investment decisions even as economic trends will continue without any significant effects on the overall situation.
With a series of high-value, complex projects recently launched in burgeoning sectors like semiconductors ($10 billion outlay), green hydrogen ($2.4 billion outlay), and hyperscale/edge data centres (0.9GW in 2023 to 2GW by 2026), a combined play of international and national geopolitics will determine the implications for input costs, margins and prices across various sectors, including construction. Thus, construction industry participants must navigate the evolving political and economic landscape with prudence.
Our survey respondents are optimistic about the influence of the elections on the Indian construction and real estate sector, with about 65% saying they will generate slight or significant positive impacts.
