India’s 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.

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.

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. 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 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 created 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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