International Construction Regional Report: India - Time for Action

A series of corruption scandals in India in 2010 and 2011 caused near paralysis to the Indian political and economic system last year. Having enjoyed economic growth of +8% or more for many years, the rate fell to just +4.5% last year, according to the International Monetary Fund (IMF) – a worse slowdown than the country saw in the depths of the global recession in 2009.

IMF forecasts say growth this year will rebound to +5.9% and further to +6.4% in 2014, but as far as the construction industry is concerned, there is likely to be a new problem to face by then.

A general election is due by the middle of 2014. The last ballot was held in April and May 2014 and under the Indian democratic system, elections to the Lok Sabha (552-seat lower house) have to be held every five years. However it is not a fixed interval, so elections can be called at any point during the term. They could be held at the end of 2013, although some time in the first half of 2014 seems more likely.

Under rules laid out by the Election Commission of India, the government has to abide by a code of conduct that effectively suspends all new public construction work for two months or more.

Once the election is announced, restrictions designed to stop the incumbent party from influencing the electorate include a ban on starting projects of any kind and a moratorium on awarding contracts on public infrastructure schemes such as roads and water networks.

And the election process is a lengthy one. In 2009, the election announcement was made on 2 March, with polls finally closing on 13 May. Although on that occasion a government was formed within a few days of the count, it still meant more than ten weeks when no new public construction work was awarded or got underway.

But despite the prospect of the current lull in activity being followed by another one in a year or so, those involved in the Indian construction market tend to be up-beat. The reason is the often quoted figure of US$ 1 trillion that the government wants to invest in infrastructure as part of the country’s 12th five-year plan for 2012 – 2017.

Using the rule of thumb that construction accounts for about 10% of GDP, India’s construction market is currently worth US$ 200 billion per year, and it already has a fairly heavy focus on infrastructure. However, the five year plan clearly implies a significant increase in infrastructure spending.

Confidence

A good barometer of this confidence is the construction equipment market, where historical statistics certainly paint a picture of last year’s dip. According to consultant Off-Highway Research, the market fell some -9% last year from 2011’s record high of 72,162 machines to 66,000 units.

In volume terms, this makes India the world’s third largest equipment market, behind China and the US, and ahead of large and advanced economies like Germany and Japan. However, the Indian market has a curious composition.

Backhoe loaders are enormously popular, accounting for between 40% and 50% of the construction equipment market by volume. JCB enjoys a remarkable market share of somewhere in the region of 80%, thanks to a presence in India that stretches back in one way or another to 1979.

Another high volume product is the pick & carry crane, a decidedly home-made looking type of construction equipment, with a tractor-style body fitted with a fixed angle telescopic boom at the front. About 14,500 such machines were sold in India last year according to Off-Highway Research.

But more conventional machines like crawler excavators are also popular in India. So are wheeled loaders, although they sell in smaller numbers than excavators.

Off-Highway Research’s forecasts for India are that equipment sales will rise to well over 100,000 units per year over the next three years or so, with the volume of crawler excavators rising to match that of backhoe loaders by about 2016, as the market matures and opts for bigger and more productive machines.

Equipment manufacturers share in Off-Highway Research’s bullishness about the market, and this extends beyond the earthmoving equipment sector.

Tough two years

Anand Sundaresan, managing director of concrete equipment manufacturer Schwing Stetter India confirmed that the last year or two had been tough. “The first half of 2011 was great and 2011 as a whole was the best year we’ve had, but 2012 was down about -19%. The infrastructure sector depends on the government and in the last year there really haven’t been many contracts awarded.”

However, he continued, “The sector has not yet picked up, but because of the election in 2014 the government is keen to show some progress on the ground in road building. We can see some green shoots and expect it to take off in the second half of the year. We think it will happen quite fast.”

The most significant road building projects in India come under the National Highways Development Project (NHDP), which is administered by the National Highways Authority of India (NHAI). The project began in the late 1990s with the Golden Quadrilateral scheme to link the metropolises of Delhi, Mumbai, Bangalore, Kolkata and Chennai with a 5,580 km diamond-shaped network.

Since then, additional phases have been added as well as several strategic projects to connect ports to the network to take the total NHDP to some 49,260 km. According to the NHAI, as of the end of last year, 19,239 km of this work had been completed, with 13,697 km under implementation and a further 16,324 km to be awarded.

The work is a combination of new road construction as well as increasing the capacity of single-carriageway routes to dual 4- and 6-lane roads.

February’s budget provided some more cheer in this department. “Generally the budget was as expected. There are no big surprises. The positive points which directly affect our industry are, giving a push for the three freight corridor projects, Delhi-Mumbai, Chennai-Bangalore and Bangalore-Mumbai, where the government has committed to top-up investments, if necessary. The commitment to finalise contracts for 3000 km of road projects in the first six months of the 2013-14 financial year is a welcome decision,” said Mr Sundaresan.

So while there is optimism in the Indian market, and the
long-term prospects look good, there will be a bump in the road in a year or so due to the election. Beyond that, more needs to be done to tackle the bureaucratic and financial obstacles that have hampered development in the past.