Infrastructure industry: Some positives on the wholesale price index
One sector, however, is screaming: construction. Developers in the National Capital Region even threatened to halt construction work in March when commodity prices soared so high and the Confederation of Real Estate Developers Associations of India (CREDAI) announced that the cost of steel had increased by 121% and that of cement. by 38% in the past two years, which in turn had increased the cost of construction by at least ₹500 per square foot. The sector demanded immediate intervention, including liberal import policies for building materials.
85% of WPI’s products include non-food items, minerals, crude oil and natural gas, and manufactured goods. Many of these industrial products are used in the construction of infrastructure, homes and buildings. And it is these same products that have recorded very high inflation rates. The CPI has only one item – housing services – which measures the inflation of real estate rents, which only registered an inflation of 3.47% in April 2022. This low level of inflation reflects the woes of the construction sector on the demand side.
Although some inventory movement has begun in major real estate markets across the country, there are still large unsold inventories and unfinished projects. Caught in this double pressure, the construction and real estate sector is in a state of deep distress.
India’s construction industry recorded a Gross Value Added (GVA) of ₹7.35 lakh crore (at 2011-12 prices) in 2021-22, as shown in the second advance estimate of GDP released on February 28, 2022 This was less than the pre-Covid GVA of ₹7.58 lakh crore in 2019-20. This confirms that India’s investment in buildings, factories and infrastructure has stagnated.
Nirmala Sitharaman steered the 2022-23 Union budget towards capital spending and announced major spending to bolster infrastructure projects. PM
The Shakti program received its first expenditure of ₹20,000 crore. The Indian government has also announced five major infrastructure projects and plans to extend the highways by another 25,000 km. However, with soaring commodity prices, it will be impossible for the GoI to meet the physical targets of the National Infrastructure Pipeline (NIP), PM Gati Shakti, Smart City Mission and other infrastructure initiatives, even when fully spending the increased expenses.
India needs to take care of basic policy reforms to boost the construction, real estate and infrastructure industry. The industrial and urban GVA per hectare is 200 times the GVA provided by agriculture. This requires changing existing land policies to increase the supply of urban, industrial and commercial land by 10 million hectares. Unbalanced tax and regulatory incentives, as well as measures favoring owned accommodation and disfavoring rental accommodation, must be rectified.
The Reserve Bank of India (RBI) needs to remove its monetary policy bias in favor of the CPI, which ignores the reality of wholesale prices. India’s property tax regime is vexing and complicated, and the construction industry continues to face a complex Goods and Services Tax (GST) regime.
Real estate is subject to heavy stamp and registration duties, made quite complex and expensive by the introduction of a system of artificial registration values. These artificial values create further tax complications for both buyers and sellers. The tax regime for the construction and real estate sector should be simplified into a single value-added regime eliminating stamp duty.
India cannot become a prosperous nation without its construction, real estate and infrastructure sector experiencing double digit growth.