Economy is weak as construction sector faces double-edged sword; here’s why investors are shying away

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February 19, 2020 1:50 PM

The fall in investments in the Indian construction sector is one of the worst among the world's major economies in the last decade.

construction, investment in construction sector, residential investment, economic slowdownA comparison with the other major economies also indicates that India is over-dependent on construction investments. (Bloomberg image)

India’s current economic slowdown is the cumulative result of multiple factors but there are a few of them that have been hurting the economy for a long time. The construction sector is one among them, where the fall in investments has been one of the worst among the world’s major economies in the last decade. The fall in the construction sector is one of the reasons for the economic weakness in the country today, said a report by Motilal Oswal. A comparison with the other major economies also indicates that India is over-dependent on construction investments.

At over 15 per cent of GDP, investments in the construction sector in India are more than double that in the US and Thailand. However, fixed investments in the construction sector in India fell from 19.7 per cent of GDP in FY12 to 15.3 per cent in FY19 while the residential investments have fallen faster from 13 per cent to 7.8 per cent in the same duration. “India and Singapore are the only two nations in our sample of 17 countries (and Euro Area, EA) where residential investments have declined significantly over the past five years,” said the EcoScope report by Motilal Oswal.

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Also, a comparison of residential property prices – in real terms – in the world’s major countries suggests that real prices have grown at an average of 2.7 per cent since 2014 in India, much faster than many other nations. All the economies with higher growth in real prices are either witnessing a good revival in the residential construction sector or it has weakened only marginally. However, this combination of very weak residential construction and robustly growing house prices in India is unsustainable, reflecting that the fall in house prices is a painful solution, otherwise a prolonged slowdown is inevitable, said the report.

Meanwhile, on the brighter side, it is also believed that the investors turned their back on the Indian construction market as it was already on the peak by 2010 and there was little room for return. “By 2010, the market was already saturated, thus the investors shied away from the market as they had options in the other markets to invest and get a handsome return. The construction sector in India can rebound anytime soon,” Hakim Lakdawala, Group Promoter, Goodwill Developers. Mostly for the smaller projects, the increase in demand has started to become visible from the current quarter as well, he added.

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