The government has reiterated its focus on infrastructure development time and again. The Union Budget 2021-22 has been hailed as growth oriented, with a focus on trying to revitalise the infrastructure sector. It has allocated Rs 5.54 trillion for infrastructure development for 2021-22, which is a 35 per cent increase over the previous year’s budget estimate. Sector-wise, railways and roads account for Rs 2.25 trillion, two major sub heads for non-defence sectors.
While the demand side of construction activities is replete with a strong pipeline of projects, the actual progress on ground will hinge on crucial factors such as effective and timely execution of projects, better financing arrangements, credit metrics of the construction players, and the viability of projects.
Nevertheless, with a robust line-up of projects across various infrastructure sectors, the outlook for the construction industry holds significant promise. While the outbreak of the Covid-19 pandemic has had a bearing on construction activities, the government is optimistic that the Rs 5.54 trillion capex for 2021-22 is unlikely to be derailed by the second wave of the pandemic.
Setting the stage
Value addition, material and equipment numbers
After a steep uptick in the growth rate of gross value addition at 2011-12 prices in 2013-14, the sector started showing a sustained, albeit flattish, growth till 2016-17 (as per official estimates by the Department of Industrial Policy and Promotion). The sector received a major blow due to the outbreak of the Covid-19 pandemic resulting in stoppage of construction activities for a couple of months. Although the sector showed some growth during 2019-20 as compared to 2018-19, its share in total gross value added of all economic activities has remained almost the same for the past three years (7.7-8 per cent).
As for production of materials, cement production has remained consistent from 2015-16 till 2020-21, with an intermediate peak during 2018-19. Production of finished steel stood at 94.1 mt during 2020-21, registering a decline of 8 per cent as compared to 2019-20, primarily due to the Covid-induced lockdown and subsequent demand contraction in the construction sector. Bitumen production also declined during 2020-21 from 2019-20 levels. Production fell as state-controlled refiners upgraded units to prepare for the implementation of the Euro VI gasoline standards.
According to industry reports, the construction equipment market in India is estimated at around $6.5 billion in calendar year 2020. This is due to a 10-12 per cent contraction in 2020, dragged down primarily by the 39 per cent decline in the first half of 2020 owing to the pandemic-induced slowdown.
Investments envisaged under NIP
The construction sector faces burgeoning demand, in line with the launch of the ambitious National Infrastructure Pipeline (NIP) and the government’s aim to make India a $5 trillion economy by 2024. The NIP has projected a capital expenditure of Rs 111 trillion, to be spent over the period 2019-20 to 2024-25. Over 70 per cent of this amount has been allocated for four infrastructure sectors – energy (24 per cent), roads (19 per cent), urban infrastructure (16 per cent) and railways (13 per cent).
Sector-wise, the power sector would require an investment of about Rs 14.1 trillion during 2020-25. Additionally, an estimated capital expenditure of Rs 1.5 trillion will be incurred on nuclear power generation projects in the period 2020-25 by the Nuclear Power Corporation of India. The planned capex on renewable energy projects is Rs 9.3 trillion.
The road sector offers huge opportunities under the Bharatmala programme with a completion target of 35,000 km by 2024-25. The investment envisaged for the sector under the NIP stands at about Rs 20.34 trillion. Railways is next in line, with a planned capital investment of over Rs 13.67 trillion by 2024-25. Indian Railways plans to complete over 17,000 km of new line, doubling and gauge conversion works by 2023-24. The upcoming dedicated freight corridors and high speed rail corridors also highlight substantial construction opportunities.
In the metro rail segment, a capital investment target of Rs 5.73 trillion till 2025 has been set for the sector. Airport development is another big opportunity area for the construction industry, with the government planning to operationalise 100 additional airports by 2023-24. The report of the task force on the NIP has identified airport projects worth Rs 1.43 trillion, highlighting plenty of investment opportunities. For the maritime sector, the central government aims to develop ports and waterways infrastructure with a focus on reducing the logistics time and cost for foreign and domestic trade, as per the Sagarmala National Perspective Plan 2016. It also aims to ensure 100 mt of cargo handling at each major port.
The construction segment continues to struggle with the issues of inadequate investigation, geological complexities, shifting of utilities and mismanaged contracts. Projects have also been stalled or surrendered due to contractual issues. The Covid-19 outbreak only exacerbated the situation. Contractors faced shortages of raw materials, equipment and labour, and idling plants and machineries.
While project execution has improved over the years, the heightened level of activity in the construction sector has highlighted the need for more efficient contracting practices, adoption of new and innovative materials, and deployment of cost-effective construction techniques and state-of-the-art equipment.
Dealing with the pandemic
While the first wave of the Covid-19 pandemic has had serious repercussions for the construction sector, the impact of the second wave has been mostly moderate. In fact, the credit profiles of construction firms are expected to be resilient despite disruptions. While the overall construction activity has been impacted, the performance of most mid- and large-sized construction companies is not expected to be materially altered due to their heavy presence in non-urban infrastructure segments.
Projects located within urban areas, such as metro rail projects and building construction, are likely to feel a greater impact due to localised restrictions and reverse migration of labour. In any case, strong construction activity in roads, ports, metros and airports will aid demand in the post-pandemic world. Nonetheless, volatility in demand is likely.
The pandemic has also led to an increase in the prices of steel, cement and bitumen. Steel prices are estimated to have gone up to Rs 65,600 per tonne in 2021 from Rs 35,000 in 2020, while the price of cement has gone up to Rs 420 a bag from Rs 280. As a result, construction costs for infrastructure projects have gone up by at least 4-5 per cent. High export realisations and a low risk of imports over the near term are likely to keep prices high. Besides, with the second wave, partial lockdowns across states have led to disruptions in construction activity. With this, volatility in material prices is expected to continue, at least in the short to medium term.
In a nutshell, rising prices of construction materials (steel and cement), global factors affecting the steel price surge (since steel is a globally traded commodity), domestic steel prices lagging behind (as compared to international prices), and an anticipated increase in steel consumption, have been the key pain points for the construction industry during the second wave of the pandemic.
According to credit rating agency ICRA, a pick-up in construction activities is expected mostly in the third quarter of 2021-22, with the second quarter being more focused on non-construction-based capex. Very recently, ICRA revised the outlook for the construction equipment industry to stable from negative. A heightened focus on the infrastructure spend, particularly in the road infrastructure segment, has led to a sharp scale-up in volumes since July 2020, resulting in an over 20 per cent year-on-year growth during July-January 2021.
In order to augment the country’s infrastructure, the NIP has been expanded to include 7,400 projects. The government is committed to achieving the NIP targets over the coming years, and has proposed steps to meet the funding requirements. Further, according to India Infrastructure Research, 2,467 projects, involving an investment of at least Rs 33 trillion, are to be awarded over the next four to five years.
Going forward, both technology and sustainability will play significant roles in the construction sector. The industry is shifting its focus to digitalisation to automate processes across design, construction and operations. The industry is expected to adopt advanced solutions such as cloud-based collaboration, digital twins, artificial intelligence, augmented reality, machine learning and building information modelling.