Green Shoots of Recovery

Construction sector shows better performance

The infrastructure sector, which accounts for over half the demand for construction activities, is receiving the much-needed push from the government, which is planning to spend $60 billion on infrastructure in the current fiscal year. Although recent moves such as demonetisation and the introduction of the goods and services tax (GST) resulted in a dent in economic growth, the long-run outcome seems to be positive, as a result of a healthy project pipeline and continued policy support.

There has been a little improvement in the financing scenario for the construction sector. Bank credit to the industry has been on the rise for the past couple of years. The relaxation of foreign direct investment norms for the sector and the government’s efforts towards improving the ease of doing business in the country have attracted foreign investors as well. The emergence of alternative financing instruments such as infrastructure investment trusts is providing a platform to developers to offload operational and stressed projects to deleverage their balance sheets and focus on core operations. The trend of asset monetisation has been prominent in the road and power sectors.

Overall growth

The construction sector is one of the major contributors to economic growth, accounting for about 8 per cent of the country’s GDP. After a steep pickup in the growth rate of gross value addition (GVA) (at 2011-12 prices) in 2013-14, the sector showed a sustained, though flattish, growth till 2016-17 (official estimates by the Department of Industrial Policy and Promotion). In recent months, the sector has shown some uptick after the brief disruption caused by demonetisation, although the share of the sector in total GVA of all economic activities has been falling since 2012-13. Quarter-wise growth of GVA for construction showed a mixed trend in 2016-17. Growth declined steeply to become negative in the fourth quarter of the year, mirroring the impact of demonetisation on construction activities.

Improving financial performance

A number of construction players are well placed in terms of their order books with a major push coming from sectors such as roads, metro rail and urban infrastructure. At present, the order book position of most construction companies stands at over three times their last reported annual revenues (March 2017). Players such as KNR Construction, PNC Infratech and IRB Infrastructure are seeing an improvement in their balance sheets and order inflow.

Though many infrastructure players are still struggling with highly leveraged balance sheets, construction companies with exposure to the airport and highway sectors have started witnessing an improvement in their operational and financial performance. The gradual recovery in the financial position of construction players that kicked off in 2015-16 is continuing on the back of factors such as increased government spending on infrastructure, better cash flows resulting from quicker execution cycles, debt restructuring initiatives, asset sales (leading to capital recycling), fresh order inflows and general business optimism. This was despite the disruption owing to demonetisation that was believed to have choked off construction works, indicating the resilience of the organised segment of the construction industry.

Strong government support

The sector is slated to benefit from a slew of policy measures announced by the government. One of the most awaited significant policy changes has been the step by state-owned companies and government departments to establish conciliation councils. These councils will have independent experts to ensure the speedy disposal of pending arbitration cases as well as new ones. Public sector undertakings and government departments can seek the consent of contractors/concessionaires to transfer the arbitration cases initiated under the pre-amended Arbitration Act to the amended Arbitration Act, wherever possible. Government agencies and public bodies have been mandated to pay 75 per cent of the project cost to contractors against a margin-free bank guarantee in the case of a dispute, to clear liabilities and to ensure project completion.

The introduction of new formats such as the hybrid annuity model for the road sector and the emphasis on addressing challenges related to the public-private partnership model (through the Kelkar Committee’s recommendations) are some of the noteworthy efforts. The introduction of the draft National Steel Policy, 2017, and the National Capital Goods Policy, 2016, is also expected to supplement growth in the construction space. Besides, mega initiatives and programmes such as Make in India, the Pradhan Mantri Awas Yojana and the Smart Cities Mission also led to optimism with respect to the sector’s outlook.

Equipment and material market

During the period 2010-14, the market size of India’s construction equipment industry increased at a compound annual growth rate (CAGR) of 20.72 per cent (as per Off Highway Research data). Based on this CAGR, it is estimated that in 2016, the market size of the construction equipment industry was close to Rs 450 billion. For the first time in five years, in 2016, the earthmoving and construction equipment industry grew after the much-required push from the government in terms of budget allocations and resumption of stalled projects, especially in the road sector. However, the recovery levels are yet to mirror those witnessed prior to 2011.

The emerging trends in the construction equipment segment include a growing focus on precast technology, slow growth in the adoption of technically advanced equipment and an increasing focus of equipment manufacturers on enhancing the customer experience to retain their market share. While there are issues pertaining to stiff competition from cheaper imported equipment and the non-availability of spare parts, these are being addressed by the players, albeit at a slow pace.

With respect to construction materials, the cement industry, for instance, produced 280 million tonnes (mt) in 2016-17, registering a decline of 1.2 per cent over the previous year. On the consumption side, cement consumption remained stagnant at around 270 mt in 2016-17 (269 mt in 2015-16). The demand for cement was affected by the liquidity crunch in the market on account of demonetisation and muted demand from the real estate sector.

For steel, production and consumption stood at 100.74 mt and 83.65 mt respectively. Production growth was backed by strong government measures such as the minimum import price to rein in cheaper imports and higher budgetary allocation towards the infrastructure sector. In the past five years, consumption growth has been sluggish due to slow industrial growth and dismal project execution in the infrastructure space.


The construction sector is on the path to recovery aided by large order inflows and improved pace of project execution, particularly in the road sector. The higher allocation to infrastructure in Union Budget 2017-18, the government’s Rs 7 trillion highway construction plan (Bharatmala project), granting of infrastructure status to affordable housing projects, and big-ticket programmes are expected to reinvigorate construction activities, which witnessed a slowdown in the past three-four years.

Based on the project pipeline in each of the infrastructure sectors tracked by India Infrastructure Research, there exists construction opportunity to the tune of about Rs 20 trillion in the coming four-five years (taking into account various construction intensities across sectors). The outlook for material suppliers is fairly optimistic, given the strong array of projects yet to be taken up for execution. Cement players can expect sustained high levels of demand emanating from sectors such as housing, metro rail, roads, etc. Steel suppliers can look at areas such as railway track development, construction of bridges and tunnels, erection and installation of power transmission lines, etc. In the case of material markets too, equipment suppliers can pin their hopes on greater demand as the pace of project execution picks up. By 2022, the projected sales for construction equipment is over 98,000 units (62,065 units during 2016).

Amidst a strong project pipeline coupled with government support, the demand for construction activity is expected to rise, resulting in a positive outlook for the next three-five years. By 2022-23, the GDP is expected to reach $3 trillion-$4 trillion. Taking an average contribution of the construction industry of about 8 per cent to the country’s GDP, the industry is expected to reach $240 billion-$320 billion. However, while there are a number of factors that bode well for this growth, much will depend on how risks are mitigated. Correct policies and their timely implementation will hold the key to a higher growth trajectory. Further, the impact of demonetisation will gradually wane with construction activities picking up, and the roll-out of GST is expected to resolve the tax anomalies prevailing in the construction industry.


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