The great In­dian construction slow­down

Mint Asia ST - - News - BSY ACHIN P. M AMPATTA


construction sec­tor ap­pears to be fac­ing its worst slow­down since 2008. For three con­sec­u­tive quar­ters, the stalling rate in the realty sec­tor has been in dou­ble dig­its, with the to­tal value of stalled realty projects touch­ing Rs1.27 tril­lion in the Septem­ber quar­ter.

The stalling rate (or value of stalled projects as a per­cent­age of projects un­der im­ple­men­ta­tion), at 12.7%, was at its third-high­est level in nine years, only marginally bet­ter than in the June quar­ter, when the stalling rate hit a nine-year high of 13.3%. The com­mer­cial real es­tate sec­tor has been the worst-hit, with a fifth of such projects get­ting stalled. See Chart 1 The cal­cu­la­tion of the stalling rates is based on the capex-track­ing data­base of the Cen­tre for Mon­i­tor­ing In­dian Econ­omy (CMIE). The data­base pro­vides data on a rea­son­able sam­ple size (at least Rs10,000 crore worth of projects) from June 2008 on­wards. Hence although the data­base has data on projects since June 1995, only the data since June 2008 has been con­sid­ered to en­sure a con­sis­tently large sam­ple size.

The data shows that new projects have come to a grind­ing halt in the real es­tate sec­tor .

ee Chart 2 The slow­down in the sec­tor ap­pears to be driven by sev­eral re­cent pol­icy moves which have been in­im­i­cal for the sec­tor, at least in the short run. Given that most real es­tate deals have a cash com­po­nent, this was one sec­tor that had been ex­pected to be hit by de­mon­e­ti­za­tion (­ofk). The im­pact was felt most strongly in the March quar­ter.

The new Real Es­tate (Reg­u­la­tion and De­vel­op­ment) Act, 2016 (RERA) and the in­tro­duc­tion of the goods and ser­vices tax (GST) also seem to have con­trib­uted to a slow­down in new project an­nounce­ments and to the rise in stalling rates. The in­tro­duc­tion of RERA has im­posed strin­gent reg­u­la­tory re­quire­ments on real es­tate de­vel­op­ers, which small firms are find­ing dif­fi­cult to meet, as a 7 Au­gust note by Har­shal Pandya of

The spike in real es­tate stalling

The pro­por­tion of stalled real es­tate projects has been in dou­ble dig­its for three quar­ters in a row

De­cline in new project an­nounce­ments

Builders have held off on new projects as they grap­pled with mul­ti­ple is­sues in­clud­ing stalling, reg­u­la­tory changes and debt problems. Edel­weiss Se­cu­ri­ties Ltd pointed out. The in­tro­duc­tion of GST has cre­ated un­cer­tainty on how projects will be priced un­der the new tax regime.

The ad­vent of the new in­sol­vency law has also made builders cau­tious since it por­tends ac­tion against er­rant builders.

All of th­ese moves could po­ten­tially trans­form the real es­tate sec­tor by bring­ing large swathes of realty projects within the fold of the for­mal sec­tor over the long run. How­ever, in the short-run, th­ese moves have had a desta­bi­liz­ing ef­fect on a sec­tor which has cre- ated the largest num­ber of non-farm jobs for In­dia’s grow­ing work­force over the past decade (

The slow­down in ru­ral in­comes has meant that in­vest­ments in ru­ral construction have slowed down as well. Both agri­cul­tural and non-agri­cul­tural wages are grow­ing at a much slower pace to­day com­pared to three years ago.

Thus the out­look for the construction sec­tor re­mains clouded. It is not clear how long it will take to see a sus­tained re­cov­ery in the sec­tor.


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