Construction Outlook for the Next Two Quarters in India.

The construction sector in India is going through a golden period. This boom is the result of union government’s multiple programs and schemes to attract investments in India. The umbrella policy, ‘Make in India’, with its great offers to both domestic workforce and foreign investors is bringing fourfold growth in all the industries and especially the Construction industry.

Ongoing Growth Trends & Prospects

The construction sector, being the second largest employer in India after agriculture, holds potential for stepping up economic growth. Here are the current ongoing trends that promise growth over the next two quarters –

1. Infrastructure industry is seeing an ever increasing growth rate. According to various economic surveys, the gross domestic product in this financial year will be approximately INR 2200 billion from construction sector alone. The maximum output is expected to be generated in the second quarter and the third quarter of this FY 2016-17.
2. In domestic terms, the expected GDP contribution for second quarter April-June and third quarter July- August is aimed at INR 2220 billion and INR 2054 billion respectively.
3. The ongoing increase in demand in the construction of ports, bridges, roads, airports etc is aimed at increasing the overall output by 2.4 times.
4. The budget allocation for the FY 2016-17 sheds light on the improvement plans made in this sector. There are plans to enhance roads and highways by 24% as per the budget. This will definitely bring more growth.
5. The targeted construction for national highways has been set at 10,000 km for the year 2016-17. This is definitely going to channel more investment in this sector as compared to the FY 2014-15 where 4400 km of construction took place.
6. The budget allocated for the construction is approximately INR 55,000 crore to achieve new targets set for FY 2016-17. If we look at the trends, more investments are needed from the private sector. An approximate of INR 30,000 will be required to achieve the targeted constructions of the national highways.
7. The government has also announced to borrow some INR 15,000 Crore from NHAI (National Highways Authority of india India) if the expenditure to make targeted highways will not be met.
8. The construction sector is likely to be back on the road to growth by the end of the last quarter with a new Credit Rating Mechanism for infrastructure as announced in the budget. Also, there are no taxes on the dividend distribution by SPV to InVIT anymore, starting from this quarter. This is a certain respite for the road developers for the next quarters to come.
9. It has been predicted that port traffic in India will account to 943.06 MT by the end of 2017 for all major ports.
10. With the formulation of government’s national manufacturing policy, the plan of developing special zones for manufacturing and construction has come into being. For instance, the Delhi-Mumbai corridor has been developed as a NIMZ (National Investment and Manufacturing Zone). Government is continuously providing the framework for this industry, hence investors can harness this sector voraciously in the next months to come.

The challenges for the next two quarters

1. A high level of debt is piled up on the balance sheets due to delays in multiple construction projects across metro cities.
2. Various environmental issues are also delaying multiple real estate projects on Pan India level that end up being stuck for not receiving the environmental clearance.
3. An investment worth INR 14 lakh crore in over 75% of real estate projects is still under implementation due to multiple issues like lack of funds, pending project approvals, badly planned PPP models among others.
4. Real estate scenario in UP is troublesome accounting for an average delay of 35 months in over 86% of projects.

Conclusion and interpretation

Considering 100% Foreign Direct Investment in construction, the government needs to provide leverages to protect domestic builders and constructors. A study titled “Construction Industry: Contributing to Make in India” highlights the potential of Construction sector in terms of yielding outputs that will be double the size of inputs. The study has been published by The Associated Chambers of Commerce and Industry of India (ASSOCHAM) in a joint effort with Thought Arbitrage Research Institute (TARI). In fact, according to ASSOCHAM if one unit is invested in this sector it will create additional three units.

This industry is non-restrictive and vast, expanding to residential, retail, hospitality sectors. Also, the demand and supply gap is quite large. Hence, the graph of construction industry is expected to move upward in the next couple of months.