India’s Housing Sector Booms: Government and Corporate Investments Drive Growth

India’s housing sector is in the midst of a large growth phase, with a compound annual growth rate (CAGR) of 10% in volumes expected over the next 3-5 years, according to a Jefferies report.

Government and Corporate Investments

The government’s capital expenditure (capex) has seen a threefold increase over the past five years, but this growth may be reaching its peak. As the government steps back, the private corporate sector is set to take the lead. With strong corporate balance sheets and direct government incentives, companies are ramping up their investments, further fueling the capex cycle.

Economic Growth and Investment

India’s economic growth over the past three years has been driven by a robust capex cycle, and the outlook remains positive as this investment cycle still has room to grow in the coming years. The investment landscape in the country is currently divided across three key areas: corporate capex (35%), housing (40%), and government spending (25%).

Equity Markets and Domestic Investors

India’s equity markets have benefitted from a surge in domestic investor flows, with participation reaching all-time highs. Domestic investors are contributing more than USD 7 billion per month to the markets, both through mutual funds and individual stock purchases. This participation now accounts for approximately 25% of financial savings in India, marking a shift towards financial asset ownership.

While the pace of domestic inflows could slow down in the near term due to their already elevated levels, the long-term outlook remains positive. The financialisation of Indian savings and relatively low asset allocation in equities suggests that domestic flows will continue to be a structural growth story in the years to come.

Foreign Investment and Market Valuations

Despite strong domestic support, Indian equity markets are currently trading at elevated valuation levels, limiting foreign investor flows. Over the past three years, India’s weight in emerging market (EM) benchmarks has doubled, reflecting the country’s robust market performance. However, foreign portfolio investors (FPIs) have yet to fully adjust their positions. Many FPIs are currently underweight (UWT) in India, compared to the traditional 2-3 percentage point overweight (OWT) positions typically held.

With India’s fundamentals remaining strong, including a projected earnings growth CAGR of 15%, any significant dips in the market could attract renewed foreign investment, providing a cushion for the markets and limiting downside risks.

Future Economic Outlook

India is set to maintain its position as the fastest-growing large economy in the world, with the International Monetary Fund (IMF) projecting a GDP growth rate of 6.3% for the 2024-28 period. This growth is underpinned by favourable demographic trends, as the country’s working-age population continues to rise, with an estimated 175 million workers expected to enter the workforce over the next 20 years.

Inflation, a major concern in many global economies, has been structurally controlled in India. The Reserve Bank of India’s (RBI) inflation targeting policy, which aims for a 4% Consumer Price Index (CPI), alongside proactive government measures, has successfully contained inflationary pressures.

On the external front, India’s current account deficit (CAD) is projected to be a manageable 1.2% of GDP in FY25, comfortably covered by foreign exchange flows. Additionally, record foreign exchange reserves, providing around 12 months of import cover, make the Indian Rupee one of the most stable currencies globally over the past two years.