Introduction
As a result of macroeconomic instability, rising inflation and difficulties in the labour market and with supply chains, the construction industry has recently experienced price fluctuations and volatility. Simply put, it is now much harder to anticipate costs and supply availability.
Moreover, many people are observing interest rate trends to see if they will continue to rise. However, amidst a global slowdown, Finance Minister Nirmala Sitharaman has said the Indian economy is viewed as a "bright star", with a projected 7% growth rate in financial year 2023.
The Union Budget 2023–2024 pledges to promote a "sustainable economy," focusing on expanding and improving urban infrastructure, technologically-led innovation and all-encompassing economic growth. Highlights from the budget are:
- Emphasis on infrastructure projects, urban planning, affordable housing, domestic production and transition to sustainable energy sources
- A 33% increase in allocation for key infrastructure sectors such as roads and highways, ports, railways, shipyards, airports, public transport and inland waterways
- A 66% higher outlay for Pradhan Mantri Awas Yojana (PMAY), the highest ever expenditure for railways in the last decade
- Plans for 50 new airports
- Announcements to improve first and last-mile connectivity, which is expected to ease logistics challenges for the metals sector.
CapEx spending on green energy generation will support the otherwise carbon-intensive cement and steel industries to meet their energy needs through cleaner alternatives.
The planned investment in infrastructure development will bring building material segments into high demand, specifically cement, steel, aggregates, tiles and others.
The increased domestic demand may affect pricing, although the outlook is uncertain due to wider pressures. The possibility of a European recession may reduce demand and, therefore, pricing. However, China's recent relaxation of its zero-COVID policy will likely increase resource use, particularly as it also invests in infrastructure to boost economic recovery and growth.
2022 construction material review
For the last three years, the construction industry has been hit hard by a 32% increase in the price of key materials, negatively impacting profit margins and project timelines. But in recent months, raw materials prices have remained relatively stable due to government initiatives such as lowering import and export duties.
The prices of construction materials are likely to fluctuate widely over the coming months, affected by variables that include the health of the world economy, general inflation and supply availability.
In March 2022, cement, steel, aluminium and copper prices, along with fuel and labour costs, rose significantly, predominantly as a result of geopolitical tensions and inflationary pressures. However, prices stabilised during 3Q and 4Q 2022.
Source: World Bank
Source: World Bank
Source: World Bank
Source: Gleeds database, Mumbai
Note: Prices are in INR, excluding tax and averaged monthly
Source: SAIL for Mumbai
Note: Prices are in INR, excluding tax and averaged monthly
Material prices
Analysis of USD and INR performance
The primary cause of currency market volatility in 2022 was the Russia-Ukraine war, interrupting supply chains, producing trade imbalances and triggering higher-than-usual inflation across the globe.
A cornerstone of the global economy, the US dollar serves as a reserve currency for international trade and finance. As with any other national currency, the dollar's relative value depends on internal policies, economic activity and outlook. Its variation on the international market is subject to factors such as market psychology and geopolitical risk.
Last year, the Indian rupee depreciated more than 11% against the US dollar. Its poorest performance since 2013 prompted the Reserve Bank of India (RBI) to intervene and dip into reserves to tame imported inflation due to drastic currency rate movements. However, the INR performed better than global currencies, including Turkish lira and British pound sterling.
It is thought that recession worries elsewhere during 2023 may continue to elevate its value.
Source: XE Currency
Construction cost index
Gleeds carried out an extensive exercise to map construction costs across various Indian cities.
The indices were derived using the following methodology:
- A basket of items comprising the most used materials in construction, labour and consumables was established
- These items have been identified and are known to demonstrate the inflationary and dynamic nature of the goods typically used in the construction industry
- Approximate individual quantities were identified to represent a standard commercial building
- Appropriate weightage was given to each of the items and based on weighted average method, a base index was calculated
- December 2019 = 100, this is considered to be the best representation of costs before the uncertainty of the pandemic
- The base city taken for calculation of the index is Bangalore
- Cost movement for the different cities has been mapped.
Conclusion
Material prices may moderate amid ongoing geopolitical complexities during 2023. However, expectations are that lead times for materials delivery will lengthen and there will be a temporary labour shortage.
The outlook for construction costs is stable but cautious as global market volatility is likely to continue, along with interest rate hikes, ongoing inflation, the possibility of an economic downturn in developed economies and challenges related to geopolitical unrest.
Following resolution of supply chain disruption, a more active policy intervention from the government may limit hikes in materials prices. However, cost pressures are likely to persist in the short term.
The announcement of the 2023–2024 budget has created prosperous conditions for the Indian infrastructure sector. Expected to boost economic growth and fuel the job market, it is essential for the construction industry to encourage this trend and open up new opportunities for expansion and innovation.
Gleeds considers the new Union Budget pledges as progressive, showing potential to broaden the country's horizons and strengthen India's economic standing on the international stage.
Padmini G
Market Research and Client Engagement
Manager, India
Ashwin Joshi
Senior Manager,
Sustainability, India
Vishal Shah
Executive Director,
India
View more reports below
Research team contacts
James Garner
Senior Director, Global Head of Insights and Analytics
Edna Benavides
Insights and Analytics Manager, EMEA
Nicola Sharkey
Project Director, UK Insights and Research Lead, UK
Padmini G
Market Research and Client Engagement Manager, India
Res Orgut
Senior Project Consultant, USA
Sherif Sweillam
Director of Business Development, Egypt
Research team contacts
Edna Benevides
Senior Cost Manager, Insights & Analytics Manager, EMEA
James Garner
Senior Director - Global Head of Insights and Analytics
Nicola Herring
Project Director, UK Insights & Research Lead
Padmini G
Market research and client engagement manager, India
Res Orgut
Senior Project Consultant, USA
Sherif Sweillam
Director of Business Development, Egypt
Legal disclaimer: This report was prepared by Gleeds and is for general information only. Neither Gleeds nor any of their partners, directors, employees or other persons acting on their behalf makes any warranty, express or implied nor assumes any liability with respect to the use of the information or methods contained in this paper to any person or party. This document is subject to copyright and must not be reproduced.
