Indian construction Industry: Challenges ahead

In India, construction is the second largest economic activity after agriculture. Construction accounts for nearly 65 per cent of the total investment in infrastructure and is expected to be the biggest beneficiary of the surge in infrastructure investment over the next five years. Investment in construction accounts for nearly 11 per cent of India's Gross Domestic Product (GDP).

The construction industry has been witness to a strong growth wave powered by large spends on housing, road, ports, water supply, and rail transport and airport development.

India, as the world's seventh largest country by area and second biggest by population, is one of the most dynamically growing, but largely untapped construction equipment markets. From 2014 to 2020, it is estimated to grow six times to a size of about USD25 billion, says Japnit Singh, Senior Director, Singapore and India of Spire Research and Consulting.

The Planning Commission jointly with the Indian construction industry has set up Construction Industry Development Council (CIDC) to take up activities for the development of the Indian construction industry. The Council provides the impetus and organizational infrastructure to raise quality levels across the industry.

This helps to secure wider appreciation of the interests of construction business by the government, industry and peer groups in society. CIDC is a change agent to accelerate a process of self-reform that should enable the industry to answer the challenges of the future.

While the construction sector's growth has fallen as compared to the pre-2008 period, it has picked up in the recent past. Its share as a percentage of GDP has increased considerably as compared to the last decade. To put things in perspective, the total investment in infrastructure - which in this case includes roads, railways, ports, airports, electricity, telecommunications, oil gas pipelines and irrigation - is estimated to have increased from 5.7% of GDP in 2007 to around 8 % by 2012, says Spire Research and Consulting.

Boom in construction equipment

The construction equipment sector in India has been growing at a scorching pace of 30% annually, mainly driven by the huge investments being made by the government and the private sector in infrastructure development. The growth of this sector is directly interlinked with the growth of the Indian economy and indirectly with the growth of infrastructure. 

The last few years is a phase of restructuring in the industry through acquisitions and joint ventures. This also reflects the active interest of international majors in the domestic market. Many international players have been looking for importing and selling complete equipment in India. Some international companies are looking at the prospects of enhancing their market presence based on higher investment in mining and infrastructure and also using their Indian operations to meet demand in India. 

The construction equipment-rental business in India, which currently accounts for only around 7 to 8 per cent of the size of the global industry, is another growth driver.

FDI norms to be eased

A draft note to be submitted to the Cabinet once it is finalized, is proposing to ease conditions under entry guidelines, minimum area requirement and minimum lock-in period for investments. Current FDI policy permits 100% foreign investment, including in housing, townships and construction infrastructure with several restrictions. These include a three-year lock-in period for investments in housing and townships, a minimum built-up area of 50,000 square meters and minimum capitalisation of $10 million for wholly-owned subsidiaries.

To make the sector more attractive, the Housing Ministry has proposed that the minimum lock-in period be reduced, the built-up area required be brought down to 20,000 sq. m and minimum capitalization reduced to $5 million.

Procuring capital from foreign investors for projects in India

As opportunities in the sector continue to come to the fore, foreign direct investment has been moving upwards. The real estate and construction sectors received FDI of €216.53 million in the first half of the current fiscal year.

To maintain consistent growth, foreign investment is crucial for India. The Indian Government has indicated its intention to create an environment, friendly to foreign investors by allowing foreign direct investment (FDI) up to 100 per cent in 2005 in townships, built-up housing and construction development projects with the liberalization of FDI regulations. Also, the recent decision of Indian Government of opening up retail in multi brand will not just benefit the retail industry but will also push up the demand for commercial real estate throughout the country.

According to statistics available with Department of Industrial Policy and Promotion, Construction development (including townships, housing, built-up infrastructure & construction-development projects) sector has attracted a cumulative foreign direct investment worth USD 22,007.67 million from April 2000 to February 2013. FDI flows into the construction sector for the period April 12 - February 13 stood at USD 1,260 million. The Indian Construction Industry is an integral part of the economy.

Liberalization of policies and a deliberate attempt made by the Indian Government can open several doors to the construction companies. Opening up of FDI in relation to township, housing, built-up infrastructure and construction of development projects by allowing FDI upto 100% under automatic route was the first step towards promoting the participation of the foreign investors in construction industry.

Challenges ahead:

• Poor penetration of construction equipment and a large dependence on skilled labour
• Current economic situation may have an adverse impact on construction industry
• High cost of capital coupled with a lack of options for rental equipment
• Poor transportation infrastructure to move equipment and material opportunities
• Continuous private sector housing boom will create more construction opportunities
• A hunger for technology amongst investors who are frustrated about long turnover time and project delays
• A growing demand for prefabricated construction
• Public sector projects through Public Private Partnerships will bring further opportunities
• Developing supply chain through involvement in large projects is likely to enhance the chance in construction.
• Renewable energy projects will offer opportunities to develop skills and capacity in new markets
• More flexible training delivery techniques are now available

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