By: Anshuman Magazine, CMD, CBRE South Asia
Track2Realty: India’s economy grew 5.7% y-o-y in Q1 2014 (April–June) beating market consensus forecasts of 5.3%, and showing signs of recovery following annual growth numbers of between 4.4% and 5.2% in each quarter between Q1 2012 and Q4 2013.
A new political dispensation in the month of May 2014, a forward-looking budget favoring investments and economic reforms in July and now green shoots of economic recovery—it seems India’s economy has finally started to roll. India’s Gross Domestic Product (GDP) during the first quarter (April–June) of FY 2014–15 grew at a better-than-expected rate of 5.7%.
Besides being the first quarterly growth announcement under a newly elected government, evidently this is India’s highest quarterly growth rate achieved over the past two-and-a-half years.
With the economy having grown at a sluggish 4.7% during the previous fiscal, and a lackluster 4.6% in the last quarter (January-March), the current rebound in quarterly growth raises hopes of a steady recovery and further growth in the forthcoming quarters.
Policy support and improved sentiment drove faster growth in Q1 2014. The previous government took steps to support the economy by reducing excise duties for manufacturers and launching financial sector reforms.
Following the election of the new government in May 2014, market sentiments improved and drove a pick-up in activity and investment. Foreign Direct Investment (FDI) alone saw a dramatic 34% y-o-y increase during Q1 2014 as MNCs reacted positively to the new government’s reform agenda.
Manufacturing and construction growth sped up markedly. This recovery arrived on the back of improved performances in the mining, manufacturing and services sectors.
Manufacturing grew 3.5% y-o-y in Q1 2014, compared with a 1.2% y-o-y decline in the same period last year, and drove a pick-up in growth in the national Index of Industrial Production (IIP) in Q1 2014, which grew 3.9% y-o-y, compared with a 1% annual decline in Q1 2013.
Looking at real estate, the construction sector grew 4.8% y-o-y in the first quarter of 2014 over 1.1% y-o-y in Q1 2013; and the financing, insurance, real estate and business services sector grew by 10.4% y-o-y.
Reform-focused agenda will support continued growth in the real estate and construction sector. The new political dispensation has a reform-focused agenda aimed at re-invigorating investment flows and reviving consumption. It has relaxed curbs on FDI into the housing sector, permitted the set-up of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs), promoted faster infrastructure creation, and decided to develop 100 SMART cities and new industrial clusters through co-operation with countries such as Japan and Singapore.
Outlook: Economic recovery and strengthening demand for commercial real estate. The Finance Minister’s recent economic assessment has hinted at economic recovery, citing weaker inflationary pressure and new reforms driving improved investor confidence.
Looking forward, faster infrastructure approvals and corporate decision-making both look likely in the coming months, which will support investment and demand for commercial real estate. A relaxation in interest rates is required to revive sagging demand in the housing sector and generate investor confidence.
High interest rate levels will temper the growth outlook somewhat, especially since inflation—though weakening—remains stubbornly high at 8%. With this in mind, the onus will be on the government to follow through with the reforms outlined in the Union Budget 2014–15 to support India’s economy.
