India Biannual Construction Review 3Q/4Q 2023
Economic trends
GDP
Note: Growth rates are calculated using the same quarter of the previous year.
The National Statistics Office (NSO) reported that India's GDP annual growth rate rose to 7.8% in the April-June quarter of 2023, compared to 6.1% in the previous quarter. Driving this strong growth was the service sector, which grew 12.2%. The construction sector is also growing at a healthy pace of 7.9%.
Whilst this growth is positive, it is important to note that it was achieved on a relatively low base year effect. The Reserve Bank of India (RBI) has projected India's real GDP growth for fiscal year 2023–24 at 6.5%. Given the strong momentum witnessed in the first quarter of FY24 and a growing digital economy and startup ecosystem, commentators expect higher outputs.
More substantial domestic consumption supported by rising incomes and pent-up demand arising from the near elimination of the COVID-19 pandemic will be the key driver of India's GDP growth in FY2024. Additionally, the government's robust investment activity and increased infrastructure spending will maintain the economy's buoyancy in an otherwise challenging global outlook.
Touching on the risks, rising borrowing costs, ongoing inflationary pressures, and withdrawal of pandemic-related fiscal support measures pose challenges. The rise of geopolitical volatility due to the Israel-Hamas conflict will potentially restrict the growth momentum by pulling down the global trade performance and inducing new supply chain disruptions.
With the current government's tenure expiring in 1Q FY2025 and numerous state government elections, potential administration challenges with government spending may also weigh in on growth. However, overall, the outlook remains positive based on solid foundations for growth.
Source: The data has been collated from media reports/publications from the source organisations.
Reporting by organisations such as the World Bank, International Monetary Fund (IMF), Asian Development Bank (ADB), Moody's and the RBI supports the growth forecasts.
Employment
According to data published by the Centre for Monitoring Indian Economy Pvt Ltd (CMIE) in August 2023, the unemployment rate in India reached 8.1%. This is slightly better than the start of the fiscal year in April 2023, when the unemployment rate was 8.50%. The rate further reduced to 7.10% in September 2023, marking an improved shift with the lowest rate recorded since September 2022.
Urban areas have higher unemployment rates compared to rural areas. The current fiscal year started with an elevated urban unemployment rate of 10.30% in April 2023, gradually reducing to 8.06% in July 2023. With August becoming the driest on record in over a century, the unemployment rate increased to 10.09%. With rains picking up from September and as the key festivities come up, the unemployment rate reduced to 8.94%.
In rural regions, the unemployment rate staggered between 7.7% and 6.2% in the period from April to September 2023. Overall, for 1Q FY2024, the unemployment rate was 6.6%, well below the pre-pandemic range of 7.8%–9.7%, says MOSPI.
On the Labour Force Participation Rate (LFPR), the April to June quarter showcased a marginal increasing trend, with the female working population contributing to the rise. This took a turn in September, when the LFPR fell to 40.9% from 41.2% in August 2023.
The COVID-19 pandemic shifted demand to digital and remote work and created business opportunities for white-collar firms. Productivity trends have returned to pre-pandemic levels, but automation threatens job security.
The question is whether this shift is temporary or more permanent. Nevertheless, this may be only the beginning, given recent low productivity trends and the direction automation trends are taking in the artificial intelligence (AI) era.
Global inflation
The global economy has more or less recovered from the pandemic disruption. However, pressure is increasing again due to geopolitical tensions. High inflation rates remain a key concern.
Predicted global headline inflation rates are declining from 8.7% in 2022 to 6.8% in 2023 and 5.2% in 2024. Stringent central bank policies and softening commodity prices are aiding the cause.
On the other hand, core inflation is declining more gradually as a reflection of the pass-through effect. Trends show an annual average of 6.5% in 2022, with expectations this will decrease to 6.0% in 2023 & 4.7% in 2024.
There are several risks to the global economy. The El Niño weather pattern could affect commodity markets, increasing raw material prices. China’s slow economic recovery from unresolved real estate problems could affect the global market. If the Israel-Hamas conflict intensifies, production and supply chain disruptions could occur.
Despite improved financial conditions compared to earlier in 2023, borrowing costs for emerging markets and developing economies remain high, constraining room for pending and raising the risk of debt distress.
India inflation rate
In August, the RBI revised its inflation projections, pegging the retail inflation for FY2024 at 5.2% (earlier 5.0%), following a steep rise in food prices, thus pulling the overall inflation rate to a striking 15-month high of 7.44% in July 2023.
Nevertheless, this increase was controlled the next month, thus moderating the average inflation until August 2023 to 5.6%, within the tolerance bracket of 2–6%.
On the other front, core inflation (inflation excluding food and fuel components) is seen to stabilise more gradually and is 4.86% in August 2023, which is the lowest since May 2020.
Government interventions such as duty adjustments, increased interest rates and monetary policy tightening helped control inflation in the short term.
Globally, it is expected the overall inflation rates are likely to remain circling near the upper limit of 6% for the coming quarter, thus convincing RBI to maintain a pause on its repo rate cycle for 2023–24 until any signs of inflation generalisation into non-food or fuel baskets. Any significant global geopolitical situations will adversely affect inflation.
Note: 2Q FY2024 to August.
Construction inflation rate
When asked about their expectations for construction inflation in 2024, survey respondents predicted that it would lie between 5.0% to 6.0%.
Wholesale price index (WPI)
The WPI measures prices at the production or manufacturing level, incorporating goods traded between businesses.
India’s WPI deflated for the fifth consecutive month in August 2023 to -0.52% and is currently slow-paced. The contraction started in April and reached its negative peak in June 2023 at -4.18%. The reduction is attributed to the fall in global commodity prices like basic metals and chemical/chemical products, not to mention the high base figures from the previous year.
The reduction is also reflected in the prices of manufactured products (-2.37%) and fuel prices (-6.03%). Given the current increase in crude oil prices and rainfall deficit, WPI inflation will likely enter the positive territory shortly. Like retail inflation, with high bases fading in the future, expectations are that WPI inflation will rise and moderate between 2.0–4.0% for the next fiscal year.
USD to INR
The Indian rupee has been under pressure against the US dollar since April 2023. The rupee fell from around 80 INR/USD in early April to over 83 INR/USD at the end of September 2023. The value also depreciated against most major currencies, including the Euro, British pound and Japanese Yen.
This downward pressure comes from the tightened Federal Reserve policy within the US, widening trade deficits from export bans and concerns about global economic growth. Increasing geopolitical risks in the Middle East are also making the market volatile.
Overall, the outlook for the Indian rupee exchange continues to be mixed, with the rates likely to remain within the 85 INR/USD range for the second half of the fiscal year. It could be a good idea for businesses to hedge their currency exposure and strategise their business plans accordingly.
Manufacturing purchasing managers’ index (PMI)
India's manufacturing PMI showed a robust improvement as new orders and output increased at the quickest rates in nearly three years during August 2023. The index turned from its declining trend, casting an optimistic increase to 58.6 (previously 57.7 in July) in August, indicating the second-best improvement.
A healthy demand and favourable market conditions encouraged Indian manufacturers to increase production. Market reports indicate that the firms geared up to handle rising demand by scaling up and rebuilding their inventories to shield themselves against potential raw material shortages.
While the capacity pressures were broadly stable, the input cost inflation necessitated increased selling prices. However, the need for competitiveness will likely restrict this price inflation.
