India's Construction Market Report: Gleeds India

The Gleeds India Biannual Construction Market Report gives a comprehensive view of current market trends and detailed cost dynamics analysis supported by market survey with insights into the realities of the construction industry. We believe this report will instil confidence and enthusiasm regarding India's growth trajectory and serve as a valuable resource for stakeholders seeking up-to-date information and insights on market trends within the built environment. To inform this report, prominent stakeholders from various construction and allied sectors have shared their invaluable insights, shaping our understanding of current market conditions and opportunities within India's ever-evolving construction landscape.

FY2024–2025 is a crucial year for the Indian construction industry as it fully embraces the potential of digital transformation that will lead to tangible impacts on project timelines and financial outcomes. With the adoption of diverse streams of technology, we anticipate significant transformation across the sector.

This year will not only witness groundbreaking advancements in construction but also extraordinary global political activity. As reported by Bloomberg and The Economist, 2024 will be the largest election year in history, with countries spreading from Taiwan to Tuvalu participating in the democratic process. However, instead of bringing about stability after a series of chaotic years in the wake of the pandemic, the polling rallies are likely to fan the flames of uncertainty.

In India, amidst the vote-winning announcements, the anticipation for strategic spending commitments and policies to bolster national economic stability became palpable. With global supply chains disrupted due to geopolitical tensions and investors adopting a wait-and-watch approach until the conclusion of elections, there was a slowdown in the initial quarter of the fiscal year, with hopes reviving for short-to-long-term stabilisation after election results were declared.

On the sustainability front, the construction industry is actively transitioning toward a greener and more eco-friendly future, with Declaration de Chaillot — an international cooperation by 70 worldwide countries to adopt and enable the green progression of the construction sector through the Intergovernmental Council for Buildings and Climate. The focus is shifting towards minimising embodied carbon, with the aim of achieving net zero status. The rapid development of innovative technologies, materials, and construction methodologies, in addition to reducing operational carbon, promises to enhance overall industry efficiency and stay compliant with COP agreements.

From previous performance, India's economic outlook looks gradual but promising. Forecasts indicate growth in gross domestic product (GDP) with reductions in the gross value added (GVA) gap, a falling inflation rate, higher goods, and services tax (GST) collections and interest rates sustained as a precautionary measure. However, the outlook is subject to the geopolitical dynamics restoring its status quo. The ongoing war in the Middle East, having escalated to directly involve other countries, along with the likely re-intensification of the Russia-Ukraine conflict, can cause severe supply chain disruptions and negatively influence the global economy, with China's economic performance also serving as a significant factor.

Wider context

The Indian economy admirably exhibited stellar macro-economic resilience despite the slow and uneven global economic performance. The nation recorded a commendable growth rate of 8% for two consecutive quarters, 2Q/3Q FY2024 while recording 5.9% growth in 4Q FY2024. This praiseworthy performance showcased the steady year-on-year growth of 7.6% for FY2024, setting the stage for similarly strong performance in FY2025, pegged at 6.7% by the Reserve Bank of India.

GST collections hit a record high in April 2024 at ₹2.10 lakh crore - a significant 12.4% year-on-year growth, driven by a strong increase in domestic transactions (up 13.4%) and imports (up 8.3%).

Despite disrupted global supply networks, the manufacturing and construction industries contributed significantly to growth, accounting for 14.3% and 8.8% of gross value added (GVA). The service sector saw a 7% year-on-year rise. Recent agreements with non-European Union countries and ongoing negotiations with the United Kingdom for free trade will boost GDP growth.

Amidst elevated uncertainties stemming from adverse geopolitical developments, inflationary pressures show signs of decline. Consumer price inflation in most advanced economies has moderated significantly. The emerging market dynamics are more regionally dependent; India's headline inflation rate is 4.5%.

Footprints of robust construction activity are visible in rising cement production (approximately 4.5 million metric tons per annum) and increased steel consumption (15% year-on-year between February 2023 and February 2024), triggered by increased government spending on infrastructure and rising household demand for real estate.

Despite increasing home prices and higher interest rates on home loans, housing sales and launches were higher in 4Q of FY2024 (17%) than the previous year, accompanied by a decline in inventory overhang.

The rising Services PMI indicates the robust performance of the service sector, which has been in an expanding zone for the last 30 months, spurred by demand buoyancy, productivity gains, and rising intake of new work. With the rapid adoption rate of Generative AI and Machine Learning across all sectors, and favourable forex settings for secondment to India, the overall sentiment in the service sector remains upbeat.


On the commodity front, input costs have decreased due to reduced global raw material prices, yet these reductions are compensated for by increasing labour costs of about 2% on project value.

With the outbreak of the Israel-Hamas war and the Red Sea crisis, commodities prices, including precious metals and crude oil, started to increase as the transportation costs almost doubled ($980 versus $2030 per 20-ft equivalent container in 3Q & 4Q FY2024), leading to elevated procurement costs in construction projects where imports are major cost drivers, such as data centres and high-end industrial plants.

The construction economic landscape in India for 2024 unfolded in two distinct chapters; while the pre-election months saw a temporary slowdown due to subdued government spending, the post-election period has witnessed a reinvigorated growth surge, fuelled by a promising uptick in private investments, instilling optimism for the future.

Economic trends

GDP

Building on the pace of the previous period, India's growth rate reached a six-quarter high of 8.4% in the third quarter of FY2024. This growth represents a significant increase above the 4.3% year-on-year gain achieved in the preceding fiscal year.

The National Statistics Office has estimated India's real GDP to grow at 7.3% in FY2024 in its first advance estimates released in January. The sustained emphasis on public investment appears to have constrained private investment marginally. Yet, cumulative strong aggregate demand has boosted manufacturing and construction activity, causing RBI to revise GDP growth estimates for FY2024 from 7.3% to 7.6%, with the 4Q FY2024 growth rate projected at 5.9%.

This forecast is a modest projection considering the gap between GVA and growth figures, primarily due to the opening of the tax revenue generation window. Likewise, major global agencies have also lifted India's growth projections for FY2024 on the back of remarkable performance in 2Q.

Furthermore, the IMF's medium-term growth forecasts for India remain strong, supported by improving macroeconomic fundamentals and resilient domestic demand.

According to the interim budget, the government's effective capital expenditure for FY2025 is estimated to be 4.6% of GDP, including physical infrastructure and the technology environment. This Budget represents a massive 200 basis point increase from 2.6% of GDP in FY2020.

Employment

India's economy is expected to touch $5 trillion by 2026–2027. Expanding digital infrastructure, along with increasing physical and social infrastructure, particularly educational opportunities, are likely to propel growth in the future.

The International Labour Organisation, in its publication, highlights that non-farm employment growth was sustained during 2019–2022 by growth in construction employment, at 6.4%, just behind the agricultural sector.

The increasing effect on labour productivity, driven by the high capital intensity associated with sectoral operations, is equally dampened by the demographic divergence of the workforce and the proportion of informal workers.

Indian inflation rate

Retail inflation has extended its stay inside the RBI’s 2 to 6% tolerance range for the sixth consecutive month. Headline inflation fell to 4.85% in March 2024, the lowest since May 2023, from 5.1% in February 2024. Moderation in core inflation (non-food, non-fuel) continues to keep inflation under control. Overall, in FY2024, inflation averaged 5.4%, lower than the 6.8% recorded in the corresponding period of FY2023.

Hinging on this softening of inflation, Trading Economics projects the Indian inflation rate to trend around 4.5% for the upcoming quarters of FY2025. At the same time, the 1Q FY2025 may see some temporary spike in consumer-led inflation owing to a higher election-instigated flow of money from the bottom of the economic pyramid.

Construction inflation rate

As per Gleed’s survey regarding the expectations for construction inflation for a 100 cr project for FY2025, 44% respondents thought it will be in the 3%–5% bracket, while 27% opined 5%–7%.

Manufacturing purchasing managers’ index (PMI)

The manufacturing sector grew by double digits in the 3Q FY2024. The India manufacturing PMI reached a five-month high of 56.9 in December 2023, reflecting the sector's strength, as new orders and good demand conditions sustain it. This robust performance is partly due to increased domestic demand and decreased finished product inventory. Volume indicators such as the index of industrial production and the index of eight core industries grew by 5.8% and 8.4%, respectively, in the third quarter of FY2024.

Positive trends in investment inflows, investor confidence, robust domestic demand, and efficient inventory management point to increasing overall economic activity.

Price trends

Amidst robust demand and under the assumption of favourable supply dynamics, Gleeds has projected a construction inflation rate ranging from 3% to 5% for the year 2024. This estimate is contingent upon prevailing headline trends and global geopolitical factors, with fluctuations in commodity prices, notably basic metals, and crude oil, serving as key drivers.

These findings underscore a prevailing sentiment among industry stakeholders regarding the likelihood of inflationary pressures within the construction sector and price increases.

Steel

India is a bright spot in the global steel sector, with demand expanding by 7.7% in 2024, compared to a worldwide growth of 1.9%, according to The World Steel Association's short-range outlook.

Government infrastructure spending and investment in schemes like PM Gati Shakti and UDAN, as well as the promotion of urban transformation via metro rail and NaMo Bharat, will create sustainable demand for the sector. Adequate market demand is also expected in the automobile sector.

Rebar/steel prices have started exhibiting early signs of a hike from their dropping pattern since the start of FY2025. In August and September 2023, prices plummeted to INR 63/kg due to seasonal considerations and planned annual maintenance of steel mills.


From October 2023, the prices went back to half yearly average of INR 65/kg with a slight downward bias on a month-on-month basis, although recording a marginal upward trend in contrast to the other global steel markets. This increase is attributed to raised offer levels from secondary producers despite the sluggish market demand due to the country's upcoming general elections. For the past three months, structural steel rates have hovered around INR 67000/MT.

The rise in raw material prices and coking coal prices globally poses an upward risk to input costs. Except for the election season slowdown in demand, the flourishing domestic market from the infrastructure push is expected to increase domestic prices further in the upcoming quarter.

Cement

When cement pricing hit a peak in October 2023 up to INR 335 per bag, the prospects for cost hikes in FY2024 seemed likely. But appreciably, the price corrected in the next five consecutive months due to heightened competition and expansion in capacity, closing at INR 295 per 50 kg bag as of March 2024, thus averaging the yearly prices at INR 325/bag.

Moderated raw material and fuel prices prevailed in the market, which helped manufacturing companies maintain profitability. These caused a dip of 8.0% in cement prices during the second half of the financial year FY2024. As of March 2024, the approximate cost of 50kg cement bags is circa 12% less than April 2023. Cement prices are expected to increase once the demand heightens after the monsoon season.

Labour rate trends

The upward trajectory of labour rates persists, propelled by escalating demand, mounting inflation, and an impending shortage of skilled workers. The year-on-year labour costs across all cities are averaging a 7% increase during the 3Q/4Q FY2024 period.

Mumbai and Pune have recorded the most substantial surge, a 15% average across the labour categories, with skilled labour rates escalating by up to 19% during the past two quarters. Chennai and Hyderabad have experienced a more moderate 5% increase, and Bangalore's rates remained the same.

The construction sector is pivotal in India's economic landscape, with its workforce as its cornerstone. It employs approximately 13% of the country's labour pool and is the second-largest employer after agriculture. However, significant shortages persist, particularly in specialised trades such as carpentry, electrical work, welding, and masonry. This is impacting organisations which are facing severe issues that limit their operations.


Between 2000 and 2019, the compound annual growth rate (CAGR) for site preparation in construction surged by 17.58%, while building construction grew at a slower pace of 8.79%, creating workforce demand with a defined skill gap.

Although rural participation in informal occupations has somewhat bridged the gap between the labour force and workforce, migration patterns lead to fluctuations in availability, creating disparities in wages and job quality for skilled and semi-skilled workers.

The burgeoning demand for residential properties in Tier 2 and 3 cities underscores the need for a revitalised construction workforce. To address this, the government has launched various skill development programmes to cultivate a competent labour force aligned with industry requirements.

Moreover, the government has adopted a multifaceted approach to bolster the construction labour market, including subsidies for raw materials, improved access to credit, and incentivising private sector investment in infrastructure projects. These efforts aim to sustain industry growth while tackling labour force challenges.

Another pressing challenge in the labour market is the rapid evolution of technologies, particularly post-Covid-19. The increased demand, connectivity and adoption of emerging technologies have led to a gradual transition of skilled workers to the gig economy, creating skill gaps yet to be filled by generative/automation technologies in emerging markets like India.

In terms of remuneration and welfare, the Mumbai and Pune regions experienced a 15% average wage increase between FY2023 and FY2024 due to heightened construction activity. Similarly, other major hubs like NCR (National Capital Region), Hyderabad, Bengaluru and Chennai saw a 5% annual wage rise across skill levels. Wages are expected to increase due to severe shortages, as reported through the Gleeds' market survey.

The push towards mechanical and automated construction, lean construction methods, modular construction, robotics, and 3D printing in the short to long term will help reduce labour cost pressures.

Global geopolitical implications

The upcoming international elections in 2024, particularly those in the US, United Kingdom, Russia, and EU (European Union) countries, are of significant interest to the Indian construction market.

While immediate price fluctuations from these elections may be modest, the 2024 political landscape, marked by numerous elections, holds the potential for substantial changes in the commodity demand and supply dynamics that are currently in play. This information is crucial for stakeholders to stay informed and prepared for any potential shifts.

The outcome of Russian elections bolsters stability within the BRICS bloc, intensifying geopolitical tensions in an attempt to create a stronger alternative to the west. This could impact market sentiment accordingly.

Changes in the political landscape of the European Parliament could steer the EU's policy agenda and legislative direction towards key initiatives such as the Green Deal, 2040 climate targets for 90% emissions reduction, net zero aspirations and decarbonisation of buildings. These changes could ripple through the construction sector, impacting regulations and investment priorities.


Looking at the US elections in November 2024, the resultant ramifications have the potential to affect nearly all asset classes worldwide through significant shifts in trade relations and economic policies, such as continued support for renewable energy stocks and/or efforts towards expansion of oil and gas extraction.

In addition, these electoral cycles can change the sequencing of expected rate cuts and other monetary policies rather than the direction per se. The anticipated volatility in dollar pricing could further complicate global market dynamics and project financing.

Approximately half of survey respondents believe that the current geopolitical dynamics will exert a minor influence on the Indian real estate and construction industry. Among these respondents, roughly equal numbers anticipate positive and negative effects.

Meanwhile, 41% of respondents consider there will be no significant impact, reasoning that any potential effects will offset each other.

Impact of the great Indian elections

The world’s largest election process from 19 April to 1 June in seven phases, was not just a political event but a seismic shift that reverberated across various sectors and outcomes and held immense sway over policies, investor sentiment, and economic stability, intricately shaping the landscape of future national growth prospects.

A stable government coupled with a positive economic outlook historically triggers a surge in investor confidence, igniting market demand across sectors. Elections signify an end to a phase of uncertainty by alleviating concerns about potential policy shifts and structural reforms. A decisive election outcome is known to fuel buyer sentiment, which boosts purchasing activities in the market.

Elections also serve as a catalyst for infrastructure development, with political parties often leveraging promises of projects like highways, airports, metro rail networks and smart cities to garner support. Forecasts by rating agencies like ICRA project a 5–8% increase in road construction for FY2025, with the ministry's project award pipeline surpassing 45000 km as of March 2024.

Moreover, the interim budget signalling a gradual transition towards a more investment-driven economy by incentivising increased foreign direct investments, hope for the enactment of a new labour law, and prospects of an additional $130 billion in infrastructure funding, reinforce optimism for investors.


The construction equipment industry is experiencing bullish sentiments (attributed to the re-election of the same government). Efforts to prepare for the transition towards Stage 5 emission norms, effective 1 January 2025, has prompted a trend of advanced purchasing or upgrading equipment to mitigate potential cost escalations and stay within future budgets.

Furthermore, the elections were poised to define the nation's strategic direction across three critical dimensions: digitisation, decarbonisation, and deglobalisation. With the certainty of a stable government at the centre, the overall national development sentiments will remain consistent with a sustained focus on the semiconductor plants and renewable energy sectors.

With a series of high-value, complex projects recently launched in burgeoning sectors like semiconductors ($10 billion outlay), green hydrogen ($2.4 billion outlay), and hyperscale/edge data centres (0.9GW in 2023 to 2GW by 2026), a combined play of international and national geopolitics will determine the implications for input costs, margins, and prices across various sectors, including construction. Thus, construction industry participants must navigate the evolving political and economic landscape with prudence.

Summing up

To conclude, the construction industry undeniably serves as a barometer for a nation's economic health and developmental stage, influencing various sectors and contributing significantly to the broader economy. The Indian construction industry is anticipated to sustain its growth trajectory, supported by ongoing momentum and the upcoming budget announcement of the new government.

Demand for real estate and commercial office space is rising, especially in Tier 2 cities, driven by businesses' expansion plans and a growing emphasis on creating healthier and sustainable environments.

Technological advancements, particularly in areas such as smart office technology and data centres, present both opportunities and challenges, especially with global market uncertainties (in the case of long lead equipment), environmental sustainability, labour mobility and skilled labour availability.

This surge in demand and the exponential growth of data centres, fuelled by the rise of generative artificial intelligence, is expected to lead to increased rack density, necessitating reliable infrastructure backups such as land and power. Additionally, the rollout of 5G is driving impetus for edge data centres, with early deployments on the horizon.

The construction industry is digitally transforming. Gleeds is committed to this digital transformation to elevate performance, productivity, proposition, and profitability in the industry. Our digital mission is to augment, and tech enable our services, to harness the power of new technology and data, unlocking new insights and patterns that drive smarter decision-making for our clients and people. Our endeavour is to help make the built environment not just structures, but data-rich entities that continue to inform and improve the industry long after they're built.

Ben Huskisson, Chief Digital Officer, Gleeds

It is to be noted that these developments also bring environmental concerns, as the conventional construction of any building contributes to greenhouse gas emissions, which is 21% of global emissions. Given that a substantial portion of India's future buildings that will remain operational for the next 30 years are yet to be constructed, striking a balance between developmental aspirations and environmental commitments becomes imperative.

Amid ongoing geopolitical uncertainties, robust domestic demand and prudent policy measures offer stability and promising potential for profit margins. Firms that adapt to the industry's evolving landscape stand to benefit from these attractive opportunities.