Budget 2023: Outlook For Construction Industry

The construction industry in India contributes significantly to the country’s economy. It plays a vital role in the growth of various sectors such as real estate, infrastructure, and manufacturing. Here’s an outlook on the Budget 2023 for the construction industry in India.

Government’s focus on infrastructure development

The Indian government has been working to improve the country’s infrastructure in recent years. This year, the government increased capital expenditure on infrastructure investment by 33%.  The allocation of Rs. 10 lakh crore for 2023-24 represents 3.3% of GDP and is expected to have a significant positive impact on the economy. The construction industry, (incl. segments like cement and steel), is likely to enjoy increased government spending.  As a result of increased construction activities, the demand for building materials such as cement, and steel, is likely to rise.This allocation also translates to the creation of new job opportunities.

The Budget 2023 is in line with the aim of strengthening local economies. The budget proposes more commercial, residential, and retail development for tier 2 and tier 3 cities.

Roads, airports, and railways are critical components of the country’s infrastructure. The development and expansion of air, rail, and road infrastructure are likely to provide new opportunities. Industry experts have also identified other positive developments. For example, take the government’s focus on improving first- and last-mile connectivity by identifying 100 critical transport projects in ports, coal, steel, fertilizer and food grain sectors. Logistics costs can account for as much as 8% of GDP on a global scale, while in India, it is between 12 to 14% of GDP. Therefore, this move in addressing transportation challenges would bring considerable relief and streamline logistics for the metals sector.

The large allocation towards infrastructure in the budget 2023 has provided a significant boost to the construction industry. The construction of infrastructure and real estate projects is expected to drive up the demand for construction materials especially steel and cement. Despite the anticipated increase in demand, however, both steel prices and cement prices will remain stagnant. Additionally, the expansion of railways and the construction of fifty new airports bode well for the construction industry.

Affordable housing and Pradhan Mantri Awas Yojana (PMAY)

The Budget 2023 has increased the allocation for Pradhan Mantri Awas Yojana by 66% to INR 79,000 crore. This move aims to reduce the gap between demand and supply in affordable housing.  It also provides more disposable income for homebuyers. The increased investment in the housing segment will also raise the demand for construction material.  This move affects both affordable and mid-segment projects. The surcharge reduction from 37% to 25% in the new tax regime is expected to provide a boost to the luxury segment housing. This budget announcement is expected to benefit both the affordable and luxury housing segments. The increased investment in the housing sector will positively impact the economy. It is a step towards improving the overall standard of living.

Real Estate Investment Trusts (REITs)

The budget 2023 has achieved tax parity for all types of income received by REIT/InvITs unitholders. Starting from April 2024, income received in the form of ‘repayment of debt’ by REIT/InvITs unitholders will be taxed. This is currently considered a pass-through.

Roadblocks for the construction industry

The industry faces several roadblocks that can hinder its progress. These challenges include

• Limited availability
  There is a limited supply of construction materials. This can be due to several reasons eg. inadequate production, logistical constraints, and supply chain inefficiencies. Even global markets can often have an impact, eg. in the case of steel prices. This can lead to delays in construction projects and cost overruns.

• Price volatility
  The prices of construction materials in India are highly volatile. For example, cement prices fluctuate rapidly due to factors eg. demand-supply dynamics, transportation costs, and government policies. Steel prices fluctuate based on global supply chains. Domestic production capacity and even seasonal factors are relevant factors. This makes it difficult for contractors to estimate costs and manage project budgets.

• Quality issues
  There currently is a lack of strict standardization and quality control. This grey area limits the production and distribution of construction materials in India. Blindly choosing lower cement prices can result in substandard materials being delivered. Which directly leads to safety risks and lower-quality buildings.

• Payment delays
  Delayed payments can also pose a challenge in procuring construction materials. This can result in cash flow issues and delays in construction projects.

The budget announcements made around green energy, financial inclusion, transport and logistics and ease of doing business provide much-needed support to the construction industry to overcome roadblocks, promote growth, create jobs, and stimulate economic development.
Further, procuring construction materials through renowned suppliers like OfBusiness ensures you get genuine products in the least amount of time and at the right price despite heavy demand.