INTERNATIONAL DEVELOPMENT GROUP

India Country Report – Focus on Construction Sector

Compiled by: Subramaniyam (EM/SAMD)

January – March 2013

This paper is a compilation of information from various sources such as websites and third-party country reports. This document serves solely as a guide and not intended to offer business and/or investment advice.

Country Report - India 2

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Table of Contents

1. Introduction to India .............................................................................................. 3

2. Construction Industry ............................................................................................ 9

3. Investment Scheme ............................................................................................... 11

4. Engagement by Singapore Government ………………................................................. 11

5. Market Assessment................................................................................................ 12

6. References ........................................................................................................... 14

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1. Introduction to India

a) Geographical Profile 1

Location

Southern Asia, bordering the Arabian Sea and the Bay of Bengal, between Burma and

Pakistan

Area

3,287,263 sq km

b) Demographic Profile 1

Population

1,220,800,359 (July 2012 est.)

Population growth rate

1.312% (2012 est.)

Urbanization

Urban population: 30% of total population (2010)

Rate of urbanization: 2.4% annual rate of change (2010-15 est.)

c) Political Profile 1,2

i. Governance

India has a Federal Republic Government, established in 1947 after it became independent.

The Indian political system is supported by Executive, Legislative and Judicial branches.

The political governance system in India was established by the ‘Constitution of India’ in the year 1950. It has given India’s Union Government the governing authority of all its administrative divisions, which comprise of 28 states and 7 union territories.

The Executive branch is constituted by India’s President, Prime Minister and the Council of Ministers.

The Legislative branch is made up of the dual functioning of Lok Sabha or the House of the People and the Rajya Sabha or the Council of States.

The Judicial branch is composed of the Supreme Court, High Courts and subordinate courts. India follows the British law which has been amended to suit local conditions.

ii. Administrative Divisions

28 states

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Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Chhattisgarh, Goa, Gujarat, Haryana, Himachal Pradesh, Jammu and Kashmir, Jharkhand, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Manipur, Meghalaya, Mizoram, Nagaland, Odisha, Punjab, Rajasthan, Sikkim, Tamil Nadu, Tripura, Uttar Pradesh, Uttarakhand and West Bengal

7 union territories

Andaman and Nicobar Islands, Chandigarh, Dadra and Nagar Haveli, Daman and

Diu, Delhi, Lakshadweep and Puducherry

d) Economic Profile 1,3

Overview

While India's recent slowdown is partly rooted in external causes, domestic causes are

also important. The strong post-financial-crisis stimulus led to stronger growth in 2009-10

and 2010-11. However, the boost to consumption, coupled with supply side constraints,

led to higher inflation. Monetary policy was tightened, even as external headwinds to

growth increased. The consequent slowdown, especially in 2012-13, has been across the

board, with no sector of the economy unaffected. Falling savings without a commensurate

fall in aggregate investment have led to a widening current account deficit (CAD).

Wholesale price index (WPI) inflation has been coming down in recent months. However,

food inflation, after a brief slowdown, continues to be higher than overall inflation. Given

the higher weightage to food in consumer price indices (CPI), CPI inflation has remained

close to double digits.

GDP (purchasing power parity)

US$4.735 trillion (2012 est.)

GDP (real growth rate)

6.5% (2012 est.)

GDP (per capita)

US$3,900 (2012 est.)

Income groups (below poverty, LI,MI,HI)

Population below poverty line: 29.8% (2010 est.)

Situation & Growth of Economic Sectors (Agriculture, Industries, Services) 3

Agriculture

Average annual growth of the agriculture and allied sector during the Eleventh Five year Plan at 3.6 per cent fell short of the 4 per cent growth target. Realised growth, however, has been much higher than the average annual growth of 2.5 and 2.4 per cent achieved during the Ninth and Tenth Plans, respectively. Growth has also been reasonably stable despite large weather shocks during 2009 (deficient south west monsoon), 2010-11 (drought/deficient rainfall in some states), and 2012-13 (delayed and deficient monsoon). An important reason for this dynamism has been due to a step-up in the gross capital formation (GCF) in this sector relative to GDP of this sector, which has consistently been

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improving from 16.1 per cent in 2007-8 to 19.8 per cent in 2011-12 (at constant 2004-5 prices).

Table 1: Key indicators (% at 2004-2005 prices)

Industries Overall industrial performance as indicated in Table 2, continued to moderate from Q1 of 2011-12 with growth turning negative in Q1 of 2012-13, before improving to 2.1 per cent in Q3 of 2012-13. The Mining sector production has contracted in the last six quarters. The contraction in the current year was largely because of decline in natural gas and crude petroleum output. Manufacturing, which is the dominant sector in industry, also witnessed deceleration in growth, as did the electricity sector (Table 2). There was, however, a sharp pick-up in growth in October 2012 with manufacturing growth improving to 9.8 per cent, the highest recorded since June, 2011. Growth, however, turned negative in November and December, 2012 and was placed at (-) 0.8 per cent and (-) 0.6 per cent respectively. The moderation in industrial growth, particularly in the manufacturing sector, is largely attributed to sluggish growth of investment, squeezed margins of the corporate sector, deceleration in the rate of growth of credit flows and the fragile global economic recovery.

Table 2: Growth Rate (%)

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Services India’s services sector expanded quickly with double-digit growth in the second half of the 2000s. As the Euro-zone crisis had worsened and growth had slowed, the sector is still growing at a much higher rate than the other two sectors of the economy. India’s services sector has emerged as a prominent sector in terms of its contribution to national and states incomes, trade flows, FDI inflows, and employment. The share of services in India’s GDP at factor cost (at current prices) increased from 33.3 per cent in 1950-1 to 56.5 per cent in 2012-13 as per Advance Estimates (AE). Including construction, the share would increase to 64.8 per cent in 2012-13. With an 18.0 per cent share, trade, hotels, and restaurants as a group is the largest contributor to GDP among the various services sub-sectors, followed by financing, insurance, real estate, and business services with a 16.6 per cent share. Both these services showed perceptible improvement in their shares over the years. Community, social, and personal services with a share of 14.0 per cent is in third place. Construction, a borderline services inclusion, is at fourth place with an 8.2 per cent share (Table 3).

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Table 3: Share & Growth of Service Sector (%)

Global Competiveness Index 2012 – 2013 4

India ranks 59th overall, down three places from last year. Since reaching its peak at 49th in 2009, India has lost 10 places. Once ahead of Brazil and South Africa, India now trails them by some 10 places and lags behind China by a margin of 30 positions. India continues to be penalized for its disappointing performance in the areas considered to be the basic factors underpinning competitiveness. The country’s supply of transport, ICT, and energy infrastructure remains largely insufficient and ill-adapted to the needs of the economy. Indeed, the Indian business community repeatedly cites infrastructure as the single biggest hindrance to doing business, well ahead of corruption and bureaucracy. It must be noted, however, that the situation has been slowly improving since 2006. The picture is even bleaker in the health and basic education pillar. Despite improvements across the board over the past few years, poor public health and education standards remain a prime cause of India’s low productivity. Turning to the country’s institutions, discontent within the business community remains high about the lack of reforms and the perceived inability of the government to push them through. Indeed, public trust in politicians has been weakening for the past three years. Meanwhile, the macroeconomic environment continues to be characterized by large and repeated public deficits and the highest debt-to-GDP ratio among the BRICS. On a more positive note, inflation returned to single-digit territory in 2011. Despite these considerable challenges, India does possess a number of strengths in the more advanced and complex drivers of competitiveness. This “reversed” pattern of development is characteristic of India. It can rely on a fairly well developed and sophisticated financial market that can channel financial resources to good use, and it boasts reasonably sophisticated and innovative businesses.

FDI inflow

Refer to Annex 1: Fact Sheet on Foreign Direct Investment

SWOT

5

a) Strengths:

India has a very large domestic market, and rising domestic demand is a major driver of economic growth.

A vast supply of inexpensive but skilled labour has turned India into the ‘back office of the world’. Around half of the population is younger than 25.

Booming exports of IT-enabled services, from call centres to software developers, are a valuable source of foreign exchange.

b) Weaknesses:

Despite rapid economic growth, India remains a very poor country. According to BMI estimates, India’s GDP per capita was US$1,501 in 2011, a third that of China’s.

Agriculture remains inefficient, and poor monsoon rains can slash rural incomes and consumption. Two-thirds of the population depend on farming for their livelihood.

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India has chronic trade and fiscal deficits, the latter of which has ballooned due to stimulus measures. The government spends a significant part of its revenue on interest payments, salaries and pensions. This limits the amount of money available for infrastructure improvements.

c) Opportunities:

India’s emerging middle class will drive demand for new goods and services. A wealthier society, combined with tax reforms, would serve to boost revenue receipts, relieving fiscal pressure.

The government has implemented some tax reforms. A uniform goods and services tax to be implemented in the near future should help boost compliance, thereby raising government revenue.

d) Threats:

India’s dependency on oil imports is problematic. This undermines the trade balance and makes India vulnerable to energy price-driven inflation.

India is at risk of severe environmental problems. Many of its cities’ air and rivers are heavily polluted, raising questions about the sustainability of the economy’s rapid growth.

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2. Construction Industry

a) Construction Share of GDP and Growth 3

The Construction, the borderline services sector, had been the most vulnerable to global events. With a share of 8.2 per cent as in the previous two years, it has been growing unevenly since the global crisis.

Table 4: Share and Growth of India Service Sector

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b) National or Key Projects

i. Delhi-Mumbai Industrial Corridor (DMIC) ii. Chennai-Bangalore Industrial Corridor iii. Mumbai-Bangalore Industrial Corridor

c) SWOT 5

Strengths:

Foreign direct investment (FDI) of 100% is now allowed in construction. This will allow significant inflows of capital to meet growing demand from the increasing middle class.

There is no evidence that funding is a constraint for developers, or at least the larger ones, in normal economic times.

Cheap labour as more than half the population is estimated to be younger than 25.

Regardless of the nature and extent of the economic slowdown, growth in construction spending in the longer term is likely to continue steadily, driven by a rising population and growing prosperity.

Weaknesses:

Poor working conditions, especially low pay and poor safety requirements, are the norm for millions of construction labourers.

Bureaucracy is excessive by Western standards, and general infrastructure is weak.

Lack of structured regulatory and policy framework, or well defined operating and financing regulations.

The government’s attempts to allow FDI in retail have been met with resistance from opposition parties.

Opportunities:

Population growth rates remain well above replacement level. The number of people living in urban areas is likely to grow significantly, feeding demand for construction.

India’s very large cities are predicted to grow over the next 10-15 years, with Mumbai moving from the fifth- to the second- largest city in the world. Delhi from sixth to third and Kolkata remaining in eight place, but seeing its population increase from around 14 million to around 20 million.

Steel production is India seems to be booming, with more than US$130 billion of investment recorded. Demand is increasing from the real estate sector, and India’s position as a global producer will help the material remain accessible to local developers.

Threats:

India may be unable to cope with its burgeoning population, which has surpassed the 1 billion mark, posing a major threat to the economy as a whole.

Fears remain over the debt burden carried by some of India’s major developers. Resulting high interest rates are likely to keep foreign investment in the sector at bay.

Oversupply of retail premises, and lack of competition, has caused a number of players to re-design intended retail space to incorporate offices or residential property.

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The contribution of the construction sector to GDP may fall as low as 8% as the cost of raw materials is rising. This could dampen development activity in the short term.

3. Investment Scheme 2 , 8

Refer to Invest India website for details on setting up business and foreign direct investments in

India.

4. Engagements by Singapore Government 7

The momentum of bilateral relations with India has been sustained through regular exchange of

high-level visits and interactions between the officials at various levels. The frequent interaction

allows both sides to exchange views on bilateral cooperation and issues of common concern.

Prime Minister Manmohan Singh made an Official Visit to Singapore in November 2011, and

Prime Minister Lee Hsien Loong has agreed to PM Singh’s invitation to visit India in July 2012.

Commerce Minister Anand Sharma also visited in January 2011 to inaugurate the "India Show".

Other notable visits to India include then-Senior Minister Goh Chok Tong's visits in March 2008

and March 2010, and then-Minister Mentor Lee Kuan Yew's visits in October 2007, December

2007 and December 2009.

Relations with India have been further buttressed by the launching of key initiatives, including the

Joint Ministerial Committee (JMC) and India-Singapore Strategic Dialogue (ISSD) during Foreign

Minister Pranab Mukherjee’s official visit to Singapore in June 2007, and the India-Singapore

Parliamentary Friendship Group in January 2012. The JMC is the first institutionalised ministerial

level bilateral mechanism. Co-chaired by the Foreign Ministers, the first JMC was convened in

New Delhi in April 2008. It is aimed at taking stock of bilateral initiatives and identifying new areas

of cooperation. The inaugural ISSD was held in Singapore in early May 2008. Since then, three

ISSDs have been held; the 4th ISSD took place in India in early April 2011. This Track 2 initiative

aims at enabling both sides to gain a better understanding of each other’s views and positions on

the global political, security and economic landscape. Singapore also hosted the Pravasi

Bharatiya Divas (PBD) or Global Indian Diaspora conference in October 2008 in cooperation with

the Indian government and the Confederation of Indian Industry (CII). This annual conference is

traditionally held in India every January and aims to link up overseas Indian communities and to

bring their expertise and knowledge to India. The event was first held outside India in New York in

2007 followed by Singapore. During PM Singh’s State Visit to Singapore in November 2011, both

countries agreed to form the India-Singapore Parliamentary Friendship Group. It was formally

instituted in January 2012.

Singapore and India are mutually important economic partners. Bilateral economic ties have

expanded since the signing of the Comprehensive Economic Cooperation Agreement (CECA) in

2005. Union Commerce and Industry Minister Anand Sharma and Minister for Trade and Industry

Lim Hng Kiang launched the second review of the CECA in May 2010, agreeing on a bilateral

economic roadmap to take the CECA forward in the coming years. Singapore is India's largest

trading partner amongst the ASEAN countries and also India's gateway to ASEAN and East Asia.

Bilateral trade continued to grow strongly reaching S$35.4 billion for 2011, a 16 percent increase

from 2010. India is Singapore’s 10th largest trading partner in 2011. Singapore's investment in

2011 stands at US$2.1 billion: making Singapore India’s second largest investor. Singapore is

also India’s 2nd largest cumulative investor, with cumulative investments of US$12.3 billion.

Singapore investments in India are mostly in the areas of logistics, pharmaceuticals and

infrastructure development. With 5,457 companies as of December 2011, India has overtaken

Malaysia, US and Japan to form the largest foreign corporate contingent in Singapore.

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5. Market assessment

a) GDP Growth 3

As per the Advance Estimates released by the Central Statistics Office (CSO), the Indian economy is estimated to register a growth rate of 5.0 per cent in 2012-13 in terms of GDP at factor cost as against 6.2 per cent in 2011-12 and 9.3 per cent in 2010-11. The growth is on the lower side not only as compared to the recent past but also in the context of growth trends witnessed since 2003-04. The slowdown in the growth of the economy in 2012-13 is mainly on account of the slowdown in the industrial sector which is estimated to grow at 3.1 per cent in 2012-13 as against 3.5 per cent in 2011-12 and significantly lower growth of 1.8 per cent in agriculture sector on top of a growth rate of 3.6 per cent achieved in 2011-12. Services sector is estimated to grow at a rate of 6.6 per cent in 2012-13, which is also lower than that achieved in 2011-12. The slowdown in 2011-12 and 2012-13 has been precipitated by domestic factors as well as factors emanating from the rest of the world particularly advanced economies and India’s major trading partners. The crisis in the Euro-zone area and slow growth in many other advanced economies have affected growth in India through dynamic linkages. Domestic factors, including the tightening of monetary policy, in order to control inflation and rein in inflationary expectations, resulted in slowing down of investment and growth, particularly in the industrial sector.

b) Real estate and Housing 3

Real estate and dwellings has a share of 5.9 per cent in India’s GDP and a growth of 7.2 per cent in 2011-12. The growth of the real estate services in particular has been impressive consistently at over 25 per cent since 2005-6 with 26.3 per cent growth in 2011-12. Housing is a basic necessity for human life and is the second largest generator of employment, next only to agriculture. Housing activities have both forward and backward linkages in nearly 300 sub-sectors such as manufacturing (steel, cement, and builders’ hardware), transport, electricity, gas and water supply, trade, financial services, and construction which contribute to capital formation, income opportunities, and generation of employment.

In 2012-13 property prices have moderated. As per the National Housing Bank (NHB) RESIDEX index for the quarter July-September 2012 compared to April-June 2012 (covering 20 cities, with 2007 as base year), there is a general decline in prices of residential properties in some smaller towns, while the increase in other cities is mostly marginal. In view of increased urbanization, the housing requirements in urban areas have been witnessing increases over the years. The Eleventh Five Year Plan (2007-12) estimated housing requirement of 24.7 million units in urban areas of which 99 percent was in the economically weaker sections/lower income groups (EWS/LIG) segment. As per the estimation of the Task Force on Housing Requirements in Urban Areas during the Twelfth Five Year Plan Period (2012-17), the housing requirement in urban areas is 18.7 million units of which 18.5 million are for the EWS/LIG segment. As per a McKinsey Report, the demand for affordable housing will be 38 million by 2030.

India’s housing and real estate sector faces many challenges. While India is among the top countries in terms of housing and workspace needs, it ranks 182nd in construction permission processes according to the World Bank’s Doing Business 2013 report. There are 34 procedures and the average time taken is 196 days, which increases the sale value by 40 per cent. Rapid increase in land prices, absence of a long-term funding and lending market at fixed rates, limited developer finance, the Urban Land Ceiling Regulations Act (ULCRA) continuing in some states, existing lower floor area ratio in cities, high stamp duties and difficulties in land acquisition are some other issues which need to be addressed.

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c) Assessment for IDG’s current engagement (January 2012 – March 2013)

i. Participating in green conferences

CII - India Green Building Congress 2012

ii. Business trips

Trip to Hyderabad & Chennai from 29 October to 6 November 2012

Trip to Delhi, Gujarat, Goa and Bangalore from 25 February to 2 March 2013

iii. Seminars

Opportunities in Gujarat International Finance Tec-City held on 13 January 2012

at BCA Academy

Doing Business in India held on 4 October 2012 at BCA Academy

d) Assessment for IDG’s future engagement

i. Continue to participate in green conferences & exhibitions

CII-India Green Building Congress 2013 to be held in Chennai from 24 – 26 October 2013

ii. Organise mission trip to Chennai during the CII-IGBC 2013 in October 2013

iii. Organise seminars to educate the industry on India’s potential (DMIC)

iv. Continue to engage the industry through account visits

v. Invite the industry for networking sessions with India delegates when they visit Singapore

vi. Continue to identify projects in GIFT City

vii. Identify opportunities in DMIC projects

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6. References

1. Central Intelligence Agency: https://www.cia.gov/library/publications/the-world-factbook/geos/in.html

2. Invest India: http://www.investindia.gov.in

3. Union Budget and Economic Survey: http://indiabudget.nic.in/

4. World Economic Forum – The Global Competiveness Report (2012-2013)

5. BMI India Business Forecast Report Q3 2012

6. Ministry of Labour & Employment: http://labour.nic.in

7. Ministry of Foreign Affairs Singapore: http://www.mfa.gov.sg/content/mfa/countries_and_region/south_asia/india.html

8. Ministry of Commerce and Industry: http://dipp.nic.in/English/Schemes/Investment_Promotion.aspx