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Opportunities in the Construction Industry in India

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Dr JC Edison

 

Dr. J.C. Edison
Professor and Dean of School of General Management at National Institute of Construction Management and Research (NICMAR), Pune

 

Introduction

Infrastructure development in an economy leads to investment, employment generation, poverty alleviation, acceleration of economic growth and raising the standard of living of the people. Acceleration of economic growth requires massive investment in quality infrastructural services. According to the World Bank, India requires $526 trillion in infrastructure investment until 2040. As per Global Infrastructure Outlook (Oxford Economics), population growth in India is expected to drive significant demand for infrastructure in India over the next 25 years. The study further estimates that India will be required to invest $3.9 trillion under current trends, increasing to $4.5 trillion under the investment need scenario, as India develops. The role of construction activities in the area of development of quality infrastructural services is very large. The investment in construction activities has a direct and immediate positive impact on employment generation, poverty alleviation and acceleration of economic growth. Firms in the construction sector are having a greater role to play in the creation of such quality infrastructural services. According to the Ministry of Commerce and Industry Government of India, nearly 9 per cent of India’s GDP is spent on Infrastructure services. Indian construction industry’s total sales were growing at an annual average of 4.28 per cent during 2015 – 18 and are expected to grow at 4.52 per cent between 2019 and 2025. Therefore, this paper analyses the present scenario of firms, their return and the requirement of investment in construction until the year 2025.

Present Scenario Of The Construction Industry

It is well recognized that the influence of the construction industry spans across numerous sub-sectors of the economy and as well as in infrastructure development, such as industrial and mining infrastructure, highways, roads, ports, railways, air­ports, power systems, irrigation and agriculture systems, tele­communication systems, hospitals, schools, townships, offices, houses and other buildings; urban infrastructure, including water supply, sewerage, and drainage, and rural infrastructure. The major two current initiatives of Government of India, i.e., Housing for All and Smart Cities Mission aims to reduce the problem of habitat and infrastructure bottlenecks to an extent.

Project Investment

Centre for Monitoring Indian Economy (CMIE) reports that the share of private proposals shot up to an all-time high of 67.5 per cent in 2018-19. However, there is a somewhat of a bizarre twist to this record. One-fifths of the private sector’s investment proposals made in 2018-19 is already stalled. There is a fall in new investment proposals during the first quarter of 2019-20 across public and private sectors. The fall, though, was a bit greater on private sector investment proposals. New investment proposals by the public sector were down to Rs.184 billion during the quarter. This was just 16.5 per cent of the proposals made a year ago or 20 per cent of the average proposals per quarter made during the preceding four quarters. The new investment scenario will be clear from figures 1 to 4.

 

CMIE data reveals that the profitability of the firms has been declining steadily. Figure 5 shows that the profitability of the firms is diminishing and at the same time direct tax incidence is rising (year-on-year percentage change). The rise in taxation and fall in profit margins have adversely affected the returns of the construction industry. Figure 1 reveals that the new investment project announcement had declined considerably compared to the new investment project announcement made in 2017-18. This is the fourth successive year of a decline in new investment announcements. The sharp dropping of projects is also visible from figure 1. Diminishing returns of the construction industry, declining new investment and dropping of projects together is leading to a deplorable situation.

Figure 5 Profitability of construction industry and percentage increase in direct taxes
Figure 5 Profitability of construction industry and percentage increase in direct taxes

 

 

 

 

 

 

Methodology

The construction industry is an essen­tial contributor to the economic development process. Besides creating substan­tial employment, the construction industry provides a growth momentum to other sectors through backward and forward or direct and indirect linkages. It is, essen­tial therefore, that, this fundamental activity is nurtured for the healthy growth of the economy. The construction industry in India consists of about 5000 listed firms, (including construction and real estate industry, electricity generation industry, crude oil and natural gas industry and irrigation).

Data has been collected from CMIE online database resources. Twenty-two year’s data of sales was collected for forecasting the projected investment in construction from CMIE database (Table 1). A linear regression model was developed from sales data from 1996-97 to 2017-18. The data have been forecasted up to 2024-25. Since the construction industry’s sales can give a real representation of investment in construction, sales are considered by the study as an investment in construction.
Ratios were arrived at from the report of the working group on construction for the 11th Five Year Plan for finding the requirement of resources in the construction sector for the period 2019-20 to 2024-25.

Table 1 Sales of Firms in Construction Electricity Generation Crude Oil & Natural Gas and Irrigation Industries
Table 1 Sales of Firms in Construction Electricity Generation Crude Oil & Natural Gas and Irrigation Industries

 

 

 

 

 

 

 

Regression Analysis – Summary Statement

Estimated model = (-103714245.591756) + ( 51880.2998306011) x (Time, i.e., Year)
The equation of the straight-line relating to ‘Sales and Time (Year)’ is estimated as: Sales = (-103714245.59) + (51880.30) Year using the 22 observations in this dataset. The y-intercept, the estimated value of Sales when Year is zero, is -103714245.59 with a standard error of 5428329.65. The slope, the estimated change in Sales per unit change in Year, is 51880.30 with a standard error of 2704.01. The value of R-Squared, the proportion of the variation in Sales that can be accounted for by variation in Year, is 0.9485. The correlation between Sales and Year is 0.9739.

A significance test that the slope is zero resulted in at-value of 19.19. The significance level of this t-test is 0.00. Since 0.00 < 0.05, the hypothesis that the slope is zero is rejected.
The estimated slope is 51880.30. The lower limit of the 95 per cent confidence interval for the slope is 46239.83 and the upper limit is 57520.77. The estimated intercept is -103714245.59. The lower limit of the 95 per cent confidence interval for the intercept is -115037542.82 and the upper limit is -92390948.36.

TABLE 2 Predicted Total Sales of Construction Industry and Prediction Limits 1996-97 to 2024-25
TABLE 2 Predicted Total Sales of Construction Industry and Prediction Limits 1996-97 to 2024-25

 

 

 

 

 

 

 

 

Results of the Analysis

The requirement of resources in the construction sector was worked out for three scenarios, average, lower and upper. Results of the average scenario reveal that there will be 5.3 per cent growth (y-o-y) in investment in construction in 2018-19 and the growth will reduce to 5.0 per cent in 2019-20 and will moderate to 4.0 per cent by 2024-25 at the current rate of infrastructure spending. Investment in construction in 2018-19 will be Rs. 10,32,079.77 crores and it will reach Rs. 13,43,361.57 crores in 2024-25 (Table 2). If we consider the next six-year period, i.e., from 2019 to 2025, the investment will range from Rs. 61.33 trillion to Rs. 84.31 trillion, average scenario Rs. 72.82 trillion, lower scenario (LCL) Rs. 61.33 trillion and upper scenario (UCL) Rs. 84.31 trillion (Refer Figure 6).

 

The requirement of resources in the construction sector was worked out for all the three scenarios (Table 3). The monetary requirement of resources for the next six-year period, i.e., from 2019 to 2025, in the average scenario, reveals that India requires construction materials to the tune of Rs. 24.86 trillion, construction Equipment worth Rs. 9.04 trillion and manpower Rs. 5.42 trillion (Figure 7). The details are presented in Table 3.

Table 3 Requirement of Resources in the Construction Sector for the Period 2019-20 TO 2024-25
Table 3 Requirement of Resources in the Construction Sector for the Period 2019-20 TO 2024-25

 

 

 

 

Discussion

Many reports and data of CMIE reveal that almost all the parameters of economic growth are reducing which is a symptom of economic slowdown. Returns in the corporate sector are showing a diminishing trend. Propensities to invest are reducing. Of course, investments doesn’t follow normal curve.
Sectors badly affected are automobiles, real estate and NBFCs. Off these, the real estate sector already was in a standstill. This is simply because prices are still very high. One of the reasons for this is the prevailent higher registration charges which is almost equivalent to four years rent of the property. Secondly, fixed investment is very high in this business and the FSI is limited. The limited FSI is preventing businesses from optimising the cost of production because the fixed cost, i.e., land cost, cannot be reduced.

Indian economy has a few positives. Firstly, informal sector is not in a very miserable shape. It gives a ray of hope for faster recovery. Secondly, oil prices are at reasonable levels. A cheaper diesel, by reducing tax, can stimulate the industry. Moreover, a cheaper diesel, through its linkage, has the capability to stimulate almost all the sectors. Along with a reduction in petroleum products, look at reducing tax, wherever possible, so that industries can at least continue to exist. Government also should clear the dues of contracting firms so that their capacity to take up new projects may improve.

Further reduction in interest rates may not stimulate investment since business depends on future expectations. As long as steps are not taken to stimulate the demand, investments scenario cannot improve. A further reduction in interest rates can reduce receipt of deposits in banks, which is the base of lending, thereby a reduction in capacity of the banks to lend. Instead Reserve Bank can carry out open market operations for increasing liquidity in the system.

A further measure is increasing deficit financing with an objective of increasing the capital expenditure. This measure will be able to bring back growth in the employment market. Rural infrastructure development projects will ultimately lead to generation of rural employment and thereby stimulation of demand.

Conclusion

The economy can grow only when the industry grows. Therefore, there is a relationship between economic growth and the returns on investment. The investment projections made here are based on sales and time. Therefore, if we can strengthen the CAPEX, along with all the other measures discussed above, time will cure the economic slowdown. ?

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