Budget Impact on Construction Sector

By Akshay Chaudhury

Challenges faced by the Industry:

  • Low-cost finance via FDI, ECB, and domestic banking assistance: Both the Centre and state must work together to remove bottlenecks for faster implementation of the reform measures in order to promote FDI in real estate. The ECB route should be opened for developers and FDI must be permitted in limited liability partnership (LLP) realty firms
  • A little clarity on land titles: Cross purchase shouldn’t suffer tax. So if the proceeds from the sale of commercial property are used to buy residential property or vice versa, capital gains tax shouldn’t apply. This exemption should be extended to cases where properties in both categories, residential and commercial, are from the proceeds of a single property.
  • The tedious process of getting project approvals: The red tape and time involved to approve real estate projects has caused the sector much grief. This issue can be addressed by a single-window clearance mechanism that will not only reduce the gestation period of projects but will also insulate them from cost escalations and delays in handing over possession.

Expectations from the Budget:

  • Industry status to the sector which contributes almost 15% to the Indian GDP
  • Clarity on GST and a raise in HRA deduction allowance
  • Single-window clearance mechanism which would ramp up supply and help rationalize prices and ensuring construction quality norms are not compromised
  • Clarity on entry and exit norms of FDI and reduce the lock-in period
  • Digitize all land records
  • Confidence-boosting measures to put more money in people’s hands in order to bring back the sales to pre-demonetisation levels

Budget Announcements:

  • 64,000 crore allocated for highways
  • A total allocation of Rs. 39,61,354 crore has been made for infrastructure
  • ‘Infrastructure’ status for Affordable housing aligned with the government’s agenda of ‘Housing for All by 2022’
  • PM Awas Yojana allocation raised from Rs. 15,000 crore to Rs. 23,000 crore
  • 27,000 crore on to be spent on PMGSY; 1 crore houses to be completed by 2017-18 for homeless
  • PM Kaushal Kendras will be extended to 600 districts; 100 international skill centers to be opened to help people get jobs abroad
  • National Housing Bank will refinance individual loans worth Rs 20,000 crore in 2017-18
  • Dispute resolution in infrastructure projects in PPP mode will be institutionalized
  • Trade Infrastructure Export Scheme to be launched in 2017-18; total allocation for infra at record Rs 3.96 lakh crore
  • Holding period for immovable assets reduced from 3 years to 2 years and indexation to be shifted from 1.4.1981 to 1.4.2001
  • Abolition of Foreign Investment Promotion Board (FIPB)
  • Dairy processing infrastructure fund to be set up

Trends after Announcements:

  • The BSE Realty index gained 4.7%, the highest among sectoral indices for the day.
  • Realty stocks such as Godrej Properties Ltd, Housing Development and Infrastructure Ltd and Prestige Estates Projects Ltd rose by around 6% on easier access to low-cost funds.
  • DLF rose by 6.7%, although it has little exposure to the affordable housing category.
  • Construction firms with a greater exposure to roads, such as IRB Infrastructure Developers Ltd, rose by 2.5%.
  • GMR Infrastructure Ltd gained due to the sops for roads and airports.
  • Larsen and Toubro Ltd gained as it is the largest player in infrastructure.


Overall, it was a positive budget for the sector and the government has done well to create awareness for the need to increase tax compliance. Demonetisation was a temporary setback and the economy must bounce back. In particular, we look forward to the gains once GST is rolled out later this year.


By Abhishek Kwatra


  • Increased allocation from the budget spending towards the textile sector.
  • Budgetary allocation towards Amended Technology Upgradation Fund Scheme (ATUFS) was expected to increase.Under ATUFS, the garment manufacturing units get a subsidy of 25% for capital expenditures which was increased from 15% in Jan ’17 recently. Its budget allocation was reduced to Rs. 2013 Cr. from Rs. 2610 Cr.
  • An export incentive scheme reducing duty costs, specifically for cotton products as cotton makes up for 90% of export demand.

Budget announcements

  • Allocation to textile sector decreased marginally. It was reduced from Rs 6290 Cr. in 2016-17 to 6230 Cr. in 2017-18. Most of the spending on any other components of the budget was reduced due to overall lesser allocation of the budget which went against the industry expectation. This could be attributed to Rs. 6000 Cr. special package announced for textile sector in June ’16.
  • Tax rate for SMEs (of annual turnover up to Rs 50 Cr. in 2015-16) has been reduced from 30 to 25%. Since more than 60% of the sector is unorganized, this will help improve the bottom line of the companies.
  • The provision for textile infrastructure has been increased to Rs 1,860 Cr. in 2017-18 from Rs 506 Cr. in FY17. It will give a major boost to textile infrastructure by increasing the allocation for building textile parks, incubation facilities, processing and development centers.
  • Lesser allocation of the budget towards Amended Technology Upgradation Fund Scheme(ATUFS). The allocation was reduced to Rs. 2013 Cr. in 2017-18 from Rs. 2610 Cr in 2016-17. This has been one of the major government schemes helping the manufacturing units to remain competitive upgrading their production facilities.
  • Sharp reduction in allocation to price support scheme (Rs 0.01 Cr. in 2017-18 as against Rs 610 Cr. in 2016-17) under the Cotton Corporation of India (CCI) It may lead to greater volatility in cotton prices in next fiscal for the domestic companies. Cotton prices increased 66.6% in July’16 which forced many firms to reduce production. Firms have maintained a need for higher subsidies for cotton from CCI. This would greatly impact the bottom line of the companies.
  • announced plans to launch a scheme for labor-intensive leather and footwear industry to boost employment generation. This announcement was in line with the special package of 6000 Cr. announced for textile sector in June’16 with an aim of increasing exports by $30 billion and help attract investment worth 74,000 Cr.  in three years.
  • Basic Custom Duty on Nylon mono filament yarn (for use in long line system for Tuna fishing only) reduced to 5% (from earlier 7.5%)
  • The objective of doubling farmers’ income, skilling of youth, and development of Infrastructure. This would provide end to end solution by integrating rail, road, air and sea which in turn would greatly benefit the textile industry that is spread across the nation.

Market movement:

Companies have more or less maintained their price on Feb 3 since the announcement of budget on Feb 1. Companies such as Page industries, Arvind Ltd. and Raymonds Ltd. Were some of these. However, Vardhman Textiles defied the trend as it rallied by about 5% of its value.


The budget did not meet the expectations of the textile industry. It ignored many important issues such as an export incentive scheme and raw material subsidies, specifically Cotton.

With already strong competition from Bangladesh and Vietnam, an export incentive scheme was the push that the sector needed as many firms had been able to cover their losses from domestic market owing to demonetization only due to stable export demand. Though the domestic demand would improve eventually, GST implementation needs to be implemented as soon as possible bringing in cost savings (outbound taxes) from the supply chain.

Feasibility Of Export Led Growth In Time Of Global Slow-Down

By- Apoorv Srivastav

The engine of the global economy has started to stagnate. One of the biggest arguments that favors this statement is that the export led growth is no more feasible. The export led growth pioneered by Germany and Japan in 50’s and 60’s was further adopted by the Four Asian Tigers: Hong Kong, Singapore, South Korea and Taiwan, before finally getting implemented by China in early 90’s. The export-led growth rose to eminence in the late 70s, replacing the import-substitution model and was a prominent global economic factor for the following four decades.

The fall of export led growth

Currently, US economy is debt saturated and still struggling to recover from the crash of 2008, and Europe is also constrained by fiscal austerity and Brexit. Export has lost its feasibility as buyers themselves are struggling. And the impact of which can be seen from Bank of Japan adopting negative interest rates & European Central Bank (ECB) implementing Quantitative Easing (QE) to increase the domestic consumption by reducing its lending rate 10 basis points to -0.4%.

Secondly, Emerging Market (EM) economies have become a larger share of the global economy, increasing from 39.1 percent in 1980 to 57 percent in 2014 and their collective export is not letting the industrialized economies recover, leading to the economic tension between EM and Industrialized nations.

For EM country, export led growth would have been a safe bet, but the recessionary condition of the US and Euro market is making hard to find buyers. This proves export led model is critically dependent on the global economy, and any global crisis will affect the economy directly.

The competition has increased with many EM countries following the same model. One of such methods is ‘Currency devaluation’ which countries like China and Japan are using to boost their exports and seeking trade advantage over other countries.

Though export led growth proved to be a sound strategy for Asian countries, but it was not the case everywhere. Mexico, whose GDP growth was 6.4% during 1950-80, reducing to 2.6% for 1980-2008 and finally 1.1% in 2013 because of export led growth model.

To conclude, we can say that the export led economy has lost its feasibility for EM and is posing a risk to the global economy. Countries need to recalibrate and shift from the export led growth to the demand led growth, with a greater role of domestic and regional demand.


By Shulin V K Satoskar

Edited by Madhu Veeraraghavan


China’s devaluation of Yuan, last week, represented the largest depreciation of the currency for 20 years and sent tremors down the Dalal Street. The “Kiss of the Dragon” was felt across already subdued economic conditions throughout the world. Notably, Nobel Laureate and renowned economist Paul Krugman described the decision as “the first bite of the cherry” envisaging that more could follow. The World’s largest economy could be weaker than the 7% a year growth that official figures suggest.

In my attempt to explain the slowdown in Chinese economy and a great opportunity for India to bank upon, I have used the concept of business cycles and its impact on economies.

Business Cycle

A business cycle is defined by the fluctuations in an economic activity over a period and covers expansion/recession in any economy. An expansion phase is marked by rising indicators like income, employment, industrial output.

Cyclical fluctuations in economic activity are features of most economies. One of the reasons why nations fail to achieve a sustainable economic growth rate is because the policy makers underestimate economic cycles. Hence, an improved understanding of the economic cycles and policies interaction is imperative in formulating forward looking monetary policy.

Economists are often puzzled by the Growth-Inflation paradox. Most agree

that sustained growth rate cannot be achieved above a threshold rate of inflation; there are no models that accurately estimate on what constitutes the “Threshold”. Figure 1 captures an economic cycle in Indian economy from 2005-10. Inflation rate (depicted by the Green line) and Business Cycle (depicted by blue) further help identify the counter-cyclical nature of Growth-Inflation tradeoff with inflation rate almost mirroring the business cycle at identical turning points. Such an economic cycle (typically over a period of 6 years) is known as a Juglar Cycle or J-Cycle. Indian economy currently finds itself at its peak as indicated by the rising trend of the Juglar cycle in 2015, with lower inflation levels, tailor made for a super normal growth stage. However, Juglar peaks are often short lived (1-2 year, see period 2005-07 and 2009-10) and troughs are relatively lengthier (2-3 years, 2010-13).


There is also a pattern of symmetry around which the cyclical trend oscillates over a period. This is termed as Kondratieff cycle or K-Cycle and usually extends over a period of 42 years. Hence, a K-Cycle typically has 7 J-Cycles. Figure 2 captures a K- cycle in the Indian economy and the breakout started around 1974. A rising trend is indicated by the green trendline below. Such a trend is typical of a robust economy.


Chinese economy, on the contrary, has experienced a slowdown in consumption in the recent years. The J-cycle from 2010 to 2015 accurately captures this falling trend in Figure 3. Chinese economic cycle has not picked up significantly, in spite of recording a lower inflation rate. Recent RMB devaluation and interest rate cuts further confirm the ineffectiveness of policies introduced during the ‘troughs’. Also, the ‘trough’ looks abnormally extended with little signs of recovery.


Summary of Findings

From the CRISIL research reports and World Bank data, it can be inferred that:

• Domestic investment in China has shown signs of saturation and there is little room for stimulus (Investment accounted for 47.2% of GDP in 2010 and 46% in 2014). India has huge room for public investment and can absorb trillions of dollars in infrastructure alone.

• A very popular argument among economists is that China has an ageing population which is expected to drive the labor costs up further by 2020.

• Going by IMF figures of 2013, consumption expenditure 70.4% of GDP in India compared to that of 49.6% in China.

• Chinese debts have risen to alarming levels (101% from 2007 to 2014). India on the contrary is relatively safe at 5% increase.

• With a subdued demand across the world, China can rely on export driven growth strategy at its own peril. India’s consumption driven strategy leaves a good headroom from potential upside.

• Pressures of the property bubble are already felt in China as real estate prices are on a decline.


The Road Ahead

India is now one of the strongest growing economies and remains better positioned compared to its peers. Our country with a stable political environment recorded a sharp decline in inflation and managed to reduce Current Account Deficit (CAD) significantly. prime minister’s foreign visits have managed to win the foreign investor’s confidence yet again indicated by rising FII/FDI inflows. A combination of tactical measures like  the mobilization of NRI deposits, RBI’s success in building forex reserves, restriction on gold imports and slowdown in imports augur well for maintaining sustained growth rate. Currency devaluation war, how- ever, is one major external shock that remains a cause for concern. However, global sentiment still remains bullish on Indian economy on account of the following factors:

• RBI Governor, Mr. Raghuram Rajan has succeeded in building a strong monetary policy discipline that focusses on inflation targeting which in turn strength- ens the rupee.

• With the Land Acquisition Bill, FDIs and GST reforms round the corner, Indian growth story is expected to continue.

• India Inc’s earnings are expected to be 7% this year. Estimated reduction in corporate taxes and GST replacing state taxes will push the earnings upwards.

Major Challenges

• Currency devaluation war is one major external shock that remains a cause for concern

• Subdued global demand can hit India’s exports further impacting the economy

• Impending decision by the US Fed to raise interest rates has the potential to cause volatility in capital and forex markets

          Going by the business cycles and the empirical data on macroeconomic variables, Indian economy certainly is in a good shape compared to its northern neighbour. However, the onus lies on the government to bank on a great opportunity that the ‘peak’ of economic cycle has to offer.


  • CRISIL Research Reports on Indian Economy
  • Science of Monetary Policy: Some perspectives on Indian Economy by M J Manohar Rao
  •  www.worldbank.com

IMG_7666About the author:

The author was a Banking and Financial Service student of batch 2014-16. He is currently Management Trainee at CRISIL Research. His area of interest is economic research,  capital market, stock picking, and fund management. You can contact him at shulin.kamat@gmail.com.


By Priyanka Modi

Edited by Sachit Modi

Executive Summary

The purpose of this paper is to analyze the impact of the slowdown in the economic growth of China on India. I will analyze the repercussions of Chinese economic crisis on the global economy. India being well-integrated with the global economy cannot be alienated from the effects of the slowdown. I will discuss both the benefits and the negative implications for the Indian economy. In the midst of this crisis, there is also an opportunity for India. I will consider the steps that can be taken by the Indian government to reduce the degree of the negative impacts of the weakening Chinese economy and leverage the opportunities at hand.

Ever since the economic growth of China, India’s largest trading partner in goods started slowing down, concerns have been raised over its possible impact on the Indian economy. The steep fall in value of the Chinese currency, Yuan, in recent times has once again emboldened the naysayers. While it will be erroneous to argue that India will not be impacted by the economic churning happening in China, it will be equally irresponsible to suggest that India will be completely doomed if China falters. In value terms, China accounts for approximately one-tenth of India’s merchandise trade, and bulk of it comes from imports of goods to India. India’s trade deficit with China stood at $51.86 billion, with a bilateral trade of $71.22 billion in 2015. During this period, India’s exports to China came in at $9.68 billion while imports stood at $61.54 billion. With respect to 12 major product groups largely manufactured by MSMEs, imports from China grew at a higher rate than respective imports from all other countries combined during the period negative impact of a Chinese slowdown as trade flows slow down. At the same time, it should also explore the positive side and leverage the opportunities it has.

Implications of Chinese slowdown on the Global Economy

China used to have the fastest growing economy with growth rates averaging 10% over the past 30 years, according to the International Monetary Fund. They account for close to half of the global consumption of copper, aluminium and steel, and more than 10% of the crude oil. China has driven global growth, which has averaged a paltry 3% a year since 2008. So, the Chinese economy slowdown would impact different regions of the world in different ways depending on their exposure. In countries like Australia, Brazil, Canada and Indonesia, which are dependent on the commodity exports, the slowdown could have a negative impact on their GDP. However, the inevitable fall in the commodity prices could be beneficial for the countries that consume the commodities, such as the United States. Either way, the slowdown will require some adjustment on the part of the global economy. As per IMF, the country was the single largest contributor to the global economic growth, contributing 31% on average between 2010 and 2014. In this scenario, slower Chinese GDP growth would definitely have global repercussions. A fall in exports to China will impact countries such as South Korea, Japan, Brazil and Australia as exports to China are ~20-30% of total exports for these countries. India too won’t be spared as the overall global growth falters.

Positive Impact on India

Lower commodity prices: The first and an overwhelmingly positive impact of a slowdown in China’s commodities demand on India would be through lower commodity prices. India imported $139 billion worth crude and petroleum products in the FY 2015, and as a rough rule of thumb, every $1 drop in crude prices results in a $1 billion drop in the country’s oil import bill.

Attract foreign capital: Though India cannot do much about the currency, the rupee is expected to remain strong as oil prices tumble and markets remain flush with foreign money. While the impact of China is negative for exports, it may provide a good opportunity for Indian debt and equity markets. The Chinese devaluation has scared foreign investors who may flock to India to look for better returns. A depreciated currency shrinks the dollar value of investments at the time of repatriation. Given that other large emerging markets such as Brazil, Russia and South Africa are going through their own economic issues, India currently is the best-placed country among the top developing nations to attract these flocking investors.

Lower cost of infrastructure: China is the world’s largest copper consumer, accounting for 40% of the global consumption. The Chinese slowdown has resulted in the fall in prices of the hard commodities, especially copper and aluminum. These commodities constitute the largest portion of the infrastructure bills. Thus, the fall in prices could be beneficial for India, whose major focus at this time is building a strong infrastructure network for the country. This fall would help India to reduce the cost of constructing new infrastructure and would act as a supporting element to initiatives such as the Smart City Mission.

Control deficit and inflation: Oil prices were already tumbling down because of the global slowdown and the possible US-Iran deal. The Chinese economic slowdown further plummeted the prices. Low oil prices help India to control its deficit and keeps inflation under check.

Higher profits for Indian corporates: Over the past few years, due to the depressed domestic demand, many of the Indian corporates had been struggling with their pricing power and were unable to pass on the increased cost to the end consumer. Cheap global crude and commodity prices mean lower input costs, translating into higher profit margins for them. This will act as a major respite for them.

Negative Impact on India

India’s export growth: India’s exporters will lose out on currency competitiveness in the segments where it competes directly with China, particularly textiles, apparels, chemicals and project exports. If the Chinese demand slows down, its raw material requirement will go down, and India’s exports to that country may decrease to such an extent that it may not be able to take advantage of the Yuan devaluation to earn more dollars. The fact that India’s exports to China declined 19.5 percent to $11.9 billion in 2014-15 from $14.8 billion a year ago illustrates this. India’s trade deficit with China has almost doubled from $25 billion in 2008-09 to $50 billion in 2014-15. And China’s share of India’s total trade deficit is up from just under 20% in 2009-10 to 35% in 2014-15. Thus, there is a chance that India may lose out in the race.

Indian metal producers: China accounts for nearly half of the world’s steel production and as construction and investment slows down, the decline in demand for commodities will hurt the Indian metal producers. Steel companies and Aluminium manufacturers may start facing losses. Hindalco and Balco, for instance, are increasingly relying on costlier captive coal. Steel manufacturers like JSW Steel and Tata Steel were forced to lower their prices and face the fear of dumping from across the border. Also, companies like Tata Steel and SAIL, which have their own mines, will suffer the most as they will not be able to benefit from the lower iron ore and coal prices. Metal producers like JSW, who buy coal and iron ore from the open market, would be the least affected.

Tyre industry: As demand slows down in their home market, Chinese tyre makers might start exporting tyres at very competitive rates to the rest of the world. A Chinese tyre is around 30-40 per cent cheaper as compared to the domestic prices. Thus, the commercial vehicle tyre segment will be negatively impacted as most of the consumers are more concerned about the value rather than the brand.

Automobile industry: China had the potential of becoming the fastest growing market for the automobile exporters and manufacturers. As the demand in their market goes down, companies like JLR, who were investing in that market, will have to look for alternate options.

How should India react?

India’s GDP has expanded by 7.3 percent in the last quarter of 2015 whereas China’s GDP slipped to 6.8 percent in the same period. India will be the fastest-growing major economy in 2016-17 growing at 7.5%, ahead of China, at a time when global growth is facing increasing downside risks, as per the World Economic Outlook released by the IMF in April 2016.

Since we are already growing, now is the right time to leverage the Chinese slowdown to our advantage. India can surely benefit from the opportunities it has by focusing on the following-

Make in India: With the government of India giving a lot of weight to the ‘Make in India’ campaign, this may be the time to provide impetus to manufacturing and invite Chinese companies to set up a manufacturing base in India.

Growth center to invest: A slowdown in the Chinese economy would also mean that the global finance and capital market would look for new growth centers to invest in. The government should invest in infrastructure like roads, railways etc. and introduce reforms to improve business conditions in India. By providing an attractive alternative to China, India can have a much bigger pie of the global capital, which in any case it needs to fund its huge infrastructure capital requirement.


Stem the rupee’s fall: A bigger concern that arises from the Chinese devaluation is for the Reserve Bank. RBI governor, Raghuram Rajan, who had been giving warning against the “beggar thy neighbor” policies, may have to alter rate decisions in order to keep up with the global environment. The Reserve Bank of India could sell dollars in the market to increase the rupee’s value. There are several other measures possible that range from floating a sovereign bond to raise money from NRIs to making the import of luxury goods costlier by imposing duties on them.

Anti-dumping duty: The steel industry and the government, both are worried over dumping from China. So far, there have been 322 anti-dumping cases in 2015, of which 177 cases involve China. The Finance Ministry has imposed antidumping duties on the import of hot-rolled stainless steel (HR SS) flats of grade 304 originating from China, Malaysia and South Korea. The anti-dumping duties will be effective for a period of five years starting 2015. India consumes about 1 million ton of this type of stainless steel and more than 40 percent of that is imported, mainly from China. The anti-dumping duty can also be extended to the 200 grade stainless steel as it commands a market share of more than 50 percent in India.


The impact of China’s slowdown on India would depend on many factors such as lower input prices, intensity of competition from cheaper imports and the pace of global growth. The speed at which we go ahead with the reforms is very important. It is not a matter of global economy slowing down, but how India speeds up its reforms. India will have to come to grips with the fact that in an integrated world, much is beyond its control and it needs to focus on the things it can change – boosting investments and generating jobs.


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About the author:

She is a PGDM finance student of batch 2015-17 at TAPMI. Her area of interest includes economic research and risk management. You can contact her at priyankam.17@tapmi.edu.in