Why is India’s Infrastructure Trailing?
Over years, the list of profit-making construction companies has been shrinking. September 2020
In India, this is especially true for the construction and real-estate sector, which is the second largest employer after agriculture, and a vital contributor to GDP growth and economic health. With this in mind, CARE Ratings has recently published a report, Indian Construction Industry: Has The Covid-19 Developed Cracks Beyond Repair for the Sector?, which seeks to examine the impact of the pandemic thus far on the building sector.
As the report points out, the Indian construction industry, which was looking forward to a positive growth trajectory on the back of a major push in government spending, is now looking at a ‘negative’ scenario—most companies, depending on their profile, are expected to experience a ‘medium’ to ‘high’ impact from the COVID 19 crisis.
The aftershock of the pandemic has been all too apparent for the sector, with the lockdown leading to execution slowdown and stoppage, and panic among construction workers. The report predicts that this will lead to an increase in working capital cycle intensity in the near to medium term and lower rollout of new order awards, with fixed costs putting pressure on cash flows and profitability. The impact of the execution slowdown in the short term, according to the analysts at CARE, would be to the extent of a 5-8 per cent hit on the revenue for FY20; in the medium-term, looking at FY21, the impact on execution could be even higher.
Significant challenges include the timely return of construction workers and the restart of operations even after the lockdown ends. This is especially true for major hotspot sub-segments of the construction industry, which are like likely to witness a greater impact, such as real estate, factory buildings and sites in metros, as well as overseas projects.
As the report explains, damage-control measures have been put in place, such as a three-month moratorium for short-term relief and compensation for workers, in cash and kind. Other mitigating factors include a decline in commodity prices owing to international economic volatility and the liquidity buffer that most top players in the construction industry have at their disposal, enabling them to restart operations on a war footing.
That said, these are sure to be testing times with the overall outlook for the sector expected to be negative. Future prospects are pinned on prompt resumption of operations following the lockdown. According to the report, the pace of recovery for players in the sector will depend on two major parameters: their liquidity buffer and site preparedness.
As CARE Ratings emphasises, construction activities are critical in nature and it is in imperative for the nation that they resume—albeit gradually—at the earliest.
To Read the complete CARE Ratings Report, Click here