Why housing and urbanisation key to India’s growth story

By Anish Tawakley,

The rate of growth in its urban infrastructure and homes will determine India’s overall GDP growth rate. Growth of these sectors will, in turn, determine the rate of employment creation, growth of the manufacturing sector and also progress on social metrics such as education and healthcare. The good thing about urbanisation and home building is that it is not dependent on vagaries of the rest of the world – the sectors can see strong structural growth irrespective of how the global economy is faring.

Urbanisation and housing were also fundamental to China’s growth over the last four decades.

Key for manufacturing sector growth: Urbanisation and home building are critical for creating demand for manufactured goods. Demand for all durable goods depends on the size of one’s home and workspace. Home building also drives the demand for manufactured inputs like cement, steel and other construction materials.

The only manufactured items that are not constrained by the size of one’s home and workspace are pharmaceuticals, FMCG (toothpaste, soap, etc) and automobiles. Unsurprisingly, India already has a strong manufacturing base in these sectors. The fact that these sectors have developed despite challenges that the manufacturing sector supposedly faces is evidence that manufacturing is constrained by domestic demand more than supply-side factors. In fact, domestic demand creates scale that allows companies to also be more globally competitive. For example, India accounts for over one-third of the volume of medicines consumed in the US.

It is important also to recognize that export demand is unlikely to be a major driver of manufacturing in India’s case, and India will remain a net importer of manufactured goods. Any country that attracts foreign capital (either as FDI or FII or ECB) runs a current account deficit – the current account deficit mirrors the capital account inflow (if reserves are already adequate, as they are in India’s case). Further, given its comparative advantage in services, India will remain a net exporter of services. Now, if the overall current account has to be in deficit and the services sector is a net exporter, it is inevitable that the goods sector will be in deficit. Simply put, goods trade deficit is a feature of the Indian economy and not a bug to be fixed.

Employment generation: The construction sector is a key employment generator – particularly for low-skilled workers. It, thus, addresses a key challenge that the country faces – providing jobs at the low end. As demand for manufacturing goods increases, it will create further employment opportunities.

Urbanisation is also critical for progress on social indicators (education and healthcare) as well. Delivering healthcare and education and upskilling people are less costly in cities compared with rural areas.

Simply put, urbanisation and home building create a self-reinforcing loop by creating employment and income at the lower end, creating demand for manufactured goods and also reducing the cost of upskilling and delivery of social services.  

Resilient to vagaries of the global economy: Supply of cement, steel, labour and land does not get impacted by global factors. What is required is good domestic supply management. The key requirement is that urbanisation is not constrained by domestic zoning laws and urban infrastructure (particularly metros) are built. That will keep prices of urban land in check and allow home building to proceed at a rapid rate.

Growth driver for China over four decades: The urban population in China grew from 200 million in 1980 to over 900 million at present. During this time, rural population shrank from 800 million to less than 500 million. This has translated into 10x growth in its cement and steel consumption. China’s cement demand peaked at ~ 2,500 million tonne (MT), compared with India’s current demand of ~ 400 MT.  

Strong sustained urbanisation and home building activity allowed the Chinese economy to withstand external shocks – be it the Asian crises in 1998 or the global financial crisis in 2008. The growth rate did not drop below 7.5%. In fact, the recent slowdown in China has also coincided with the fact that it now does not need to build houses as rapidly as it did earlier.  Given that over 2/3 of its population is already urban it simply has fewer people making the rural to urban shift than it did in the past – and inevitably this driver of growth has reached its limits.

The author is  co-CIO, equity, ICICI Prudential AMC.

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