India Biannual Construction Review 1Q/2Q 2023
Economic trends
GDP
The union government’s Economic Survey reports that India will experience GDP growth of 6.0–6.8% in 2023–2024, depending on the trajectory of global economic and political developments. For the fiscal year that ended in March 2023, the economy is projected to expand by 7% (in real terms); down from the previous financial year's figure of 8.7%. In comparison to its peers, India has a strong outlook, with resilient foreign investments that have helped it to weather significant external shocks during the previous year.
According to the Ministry of Finance, growth is expected in financial year 2024 due to robust credit disbursement. Additionally, a cycle of capital investment is expected to strengthen corporate and banking balance sheets. The expansion of Digital India initiatives and its integration with game-changing policies such as PM Gati Shakti, the National Logistics Policy and Production Linked Incentive schemes to boost manufacturing output will provide additional support to the economy.
Source: Economic Survey
- The government’s projection is comparable to those of multilateral organisations such as the World Bank, International Monetary Fund (IMF), Asian Development Bank (ADB), Moody's and the Reserve Bank of India (RBI)
- The IMF anticipates a slowdown in the Indian economy in financial year 2023–2024, projecting growth of 6.1%, down from 6.8% in the previous fiscal year
- The World Bank, State Bank of India (SBI), Moody's, Fitch and RBI expect GDP to range between 6.0% and 6.6%
- UBS Group AG expects GDP growth to moderate to 5.5% during 2023–2024 due to slowing global growth and policy tightening
- Goldman Sachs and ADB estimate the growth rate for 2023 to be 5.9% and 7.2%, respectively
- The ADB's growth forecast remains unchanged, supported by structural reform and public investment that stimulates private spending.
Source: Press Information Bureau
Employment
According to data published by Centre for Monitoring Indian Economy Pvt Ltd (CMIE), in December 2022 unemployment in India reached an all-time high of 8.3%. This is a substantial increase from January 2022, when the unemployment rate was 6.56%.
In January 2023, the rate was 7.14%, increasing to 7.45% in February. The number of unemployed persons in the labour force increased from 31.5 million to 33 million.
Urban areas have high unemployment rates. The December 2022 30-day moving average was 10.09%, rising from 8.92% in November 2022. The rate plummeted to 8.55% and 7.93% from December 2022 to January and February 2023.
According to CMIE, the rural employment rate rose slightly in December 2022, dropping from 7.55% in November to 7.44% in December. The rate will rise to 7.23% in February 2023 from 6.48% in January.
There are many factors contributing to unemployment. Some of the key issues are: a lack of job opportunities, automation and technological advancements, insufficient skills and training availability and the lack of access to capital and financing for start-ups and small businesses. Employment opportunities are limited but there are numerous applicants and as a result, a significant portion of the population is out of work.
The COVID-19 pandemic initiated unforeseen demand for digital and remote work, creating surprising opportunities. Productivity trends have returned to their pre-pandemic levels and as we enter the Chat GPT era, further transformation is anticipated as artificial intelligence (AI) supports the workforce, allowing concentration on added value and analysis.
Source: CMIE
Source: Trading Economics as of January/February 2023
Global inflation
- Economic global growth is anticipated to decline from 3.4% in 2022 to 2.9% in 2023, before recovering to 3.1% in 2024. The IMF sees far fewer countries in recession in 2023 and no longer anticipates a global recession, allowing the growth forecast for 2023 to rise from a previous estimate of 2.7% in October 2022
- The IMF forecasts that global inflation will decline to 6.6% in 2023 and 4.3% in 2024, which is still above pre-pandemic levels of approximately 3.5%, but significantly less than the 8.8% observed in 2022
- Potential energy price increases, ongoing deglobalisation, structural labour market issues and faster-than-anticipated economic recovery in China remain among the most significant risks that could accelerate price growth in 2023
- Government policies are expected to continue playing a significant role in controlling inflation. Central banks will likely maintain high interest rates to help curb inflationary pressures, while fiscal stimulus packages are likely to be used to boost consumer spending and stimulate economic growth
- Overall, global inflation levels are likely to moderate compared to 2022. However, inflation forecasts remain elevated and the situation volatile. As such, it is important for businesses and individuals to remain vigilant and take steps to protect themselves against the potential effects of rising inflation.
India inflation rate
Inflation in India is projected to reach 5.2% in 2023 and 4.5% in 2024. Lower food prices and tighter monetary policy will contribute significantly to price stability. In 2023, lower commodity prices, higher borrowing costs and weaker pent-up demand are anticipated to moderate the growth of consumer prices.
In February, India's retail inflation exceeded the central bank's target for a second month, rising to 6.44%, although March then saw a reduction to 5.66%.
Central banks that slowed monetary tightening (after initial signs of cooling price pressures) are becoming more aggressive as inflation persists. Since last May, RBI has increased its policy rate by 250 basis points to 6.5%; an increase to 6.75% would place India's repurchase rate at its highest level since February 2016.
Currently, India is experiencing sticky inflation, a term used to describe the rate of inflation decline as slower than anticipated. In essence, higher food and fuel prices have permeated the economy, making other things more expensive. Despite subdued demand and pricing power, unprecedented input cost pressures have manifested as higher output prices, particularly for goods.
However, India is not the only country experiencing sticky inflation; the US and countries located in the eurozone are also experiencing this phenomenon.
Source: Statista
In our survey, when asked what steps are being taken to mitigate the impact of inflation, the majority of respondents (84%) cite value engineering as the first step, followed by substituting construction materials (59%) and alternative construction methodology (55%).
A further 43% of respondents indicated that they are implementing new digital tools to reduce the impact of the rise in inflation and 36% are implementing new project delivery methods.
When asked about their anticipations for market inflation in 2023, 2024 and 2025, all respondents predicted that it would exceed 5%.
Wholesale price index (WPI) and consumer price index (CPI)
The WPI measures prices at the production or manufacturing level, incorporating goods traded between businesses.
India’s WPI inflation eased to a 24-month low of 4.73% in January 2023, from 4.95% in December 2022, lowering further still to 3.85% in February. In March inflation further fell to 1.34% recording the lowest level since October 2020. Manufacturing and fuel inflation have progressively contributed to the precipitous decline in the WPI. This new low could be favourable for corporate companies, as a decline in wholesale prices could reduce pressure on earnings. Lower input costs may also have a positive effect on retail prices.
The WPI for crude petroleum and natural gas decreased from 39.71% in December to 23.79% in February. Inflation for fuel and energy surged to 15.15% from 18.09% in December. In 2023, it is expected that the WPI will remain an important tool for policymakers to track production costs around the country. The WPI is anticipated to remain relatively stable, though there may be fluctuations due to changes in supply and demand.
India’s retail inflation dropped to a 15-month low of 5.66% in March 2023. In February, inflation was 6.44%, decreased from 6.52% in January. The rate remained above the RBI tolerance band of 2–6% for the first and second consecutive months but fell in the third month.
The sudden drop within the tolerance band is a result of the RBI’s tough stance in its monetary policy for the month of April, as inflation figures returned to above 6% in January and February, with core inflation also remaining above 6%.
USD to INR
The Indian rupee is expected to be under far less pressure than it was in 2022. Having experienced its worst year since 2013, when a combination of global and domestic issues affected its stability, last year saw primarily global factors influence the exchange rate.
Though uncertainty was expected during the first half of 2023, recovery prospects appear brighter as 3Q approaches. In March, the rupee was seen to be holding up well against the dollar, maintaining a range of INR 80–82/USD.
According to a 2023 Indian economic survey, efforts to promote international trade settlement in Indian rupees are intensifying. Certainly, once these initiatives gain traction, the economy's reliance on foreign currency could decrease, making it less susceptible to external shocks.
Source: Exchange Rates
Source: Global Economy
Purchasing manager index (PMI) — Manufacturing
The PMI began 2023 on a weak note as output and sales growth slowed, decreasing from December's high of 57.8 to 55.4 and falling further again to 55.3 in February. Nonetheless, it has remained well above the 50-mark, which represents ‘no change’, for the nineteenth consecutive month.
Despite some loss in momentum, the sector appears likely to remain in expansion mode. Rising backlogs and the purchase of additional inputs indicate that companies will continue to increase output in the months ahead, as less challenging supply-chain conditions are now allowing businesses to rebuild inventories as planned.
