The Indian construction industry has grown consistently in the recent past. The overall gross value addition (at current prices) has been around 8.04 per cent and around 26.87 per cent of the overall industry sector´s contribution.
As depicted in the figure below, each segment is regulated and implemented by different apex bodies. The construction sector is a major job creator in both skilled and unskilled categories. Low entry barriers in terms of technology and capital have made this industry highly fragmented. The sector is beset with high working capital and requirement of adequate execution skills to counter various project risks in terms of labour, material and approvals.
The industry has been facing certain challenges in recent times:
However, there have been a slew of measures to improve the overall scenario of the construction sector in the country.
The real-estate sector in India consists of the residential, retail, commercial and hospitality segments. The performance of this sector is dependent primarily on the residential and business environment that triggers demand for office premises as well as urban and semi-urban accommodations. The Government of India has initiated numerous steps to nurture growth in the sector. The Smart City Project, with the ambitious aim of developing 100 smart cities, is a major opportunity for corporates in this sector. Further, the government has initiated the process to implement its æHousing for All´ scheme by 2022, and eased regulatory requirements to enable FDI to flow into the construction development sector more easily. The Securities and Exchange Board of India (SEBI) has also prepared and notified a structured framework to regulate the functioning of real-estate investment trusts (REITs) and infrastructure investment trusts. This will facilitate access to liquidity and credit for developers active in these areas, and create a completely new investment avenue that will widen participation in these sectors.
Key expectations from Budget 2016
Announcements to create opportunities
The recent Railway Budget 2016-17 pegged capex at Rs 1.21 lakh crore; and proposed to implement rail connectivity under PPP for Nargol and Hazira ports, redevelop 400 stations through PPP, electrify 1,600 km of railways this year and 2,000 km in the next financial year, and much more. Such initiatives will add to demand for construction in the country.
With ´Infrastructure Focus´ being one of the nine pillars on which Budget 2016 is built on, here are the key announcements in the Budget:
Among the Tax Proposals, the following are relevant for the real-estate and construction or infra sectors:
The Budget announced a slew of measures to revitalise and encourage private-sector participation with greater allocation to roads and railways and efforts to put stuck projects back on track. The initiatives taken in the real-estate sector shall consequently drive demand for other sectors like cement and steel, thereby boosting overall construction activity.
How does 2016-17 look for the building, construction and infrastructure sectors?
The growth of the infrastructure sector is expected to pick up with significant allocation to the roads, irrigation, waterways and urban infra sectors. This could lead to an increase in construction activity, though we can expect more of this to come through in the second-half of the year, as there is time between the announcement and tenders being awarded. Further, the monsoon (June to September) is typically a slower period of construction activity that provides ample opportunity for government agencies to undertake pre-tendering work across Q1 and Q2 and enable on-ground works to start by September-October.
With enactment of laws and policies pertaining to PPP concessions, the sector could see stressed assets and projects stuck midway being revived, leading to the resumption of construction in these projects. This could allow companies with those orders on their books to realise their revenues versus greenfield projects. Again, however, the timeliness of enactment of these would be critical to ascertain how rapid the impact on the market would be.
The tax benefit on housing is a welcome move and must be seen not only in light of the tax breaks themselves, but an increase in other disposable income of citizens that could be channelled into the housing sector, as the direct tax burden on consumers has not been increased otherwise. Smaller housing segments (LIG, MIG) may be greater beneficiaries as the tax breaks are on smaller dwelling units and houses of value up to Rs 50 lakh. The push for low-cost housing is a plus for companies and is aligned with the government´s intent to take care of the needs of the economically challenged strata by incentivising developers to drive this segment.
However, concerns about the financial ability of the government to provide budgetary funds for infrastructure development abound as the fiscal deficit is capped and the global financial situation is not conducive for increased capital flows. The infra cess on cars to provide funds is a positive for the infra sector, but will dampen the auto sector. Also, the Land Acquisition Bill is not being discussed, which brings execution challenges to the fore and questions on what models public agencies will utilise to provide land for infrastructure. Further, with no time-bound execution of the Real Estate Bill, the much-needed transparency in the real-estate sector, which will have prompted foreign investors to enhance their allocations in India, still remains elusive.
Push for Infrastructure Growth
The Central Government is also pushing for infrastructure growth in the country with a spending proposal worth $1 trillion. This encompasses initiatives such as:
About the author:
Sameer Bhatnagar, Director, KPMG, plays a leadership role in the company´s Infrastructure and Government-Strategy & Operations practice. With over 15 years of experience, he brings to the table a wealth of advisory experience in the infrastructure sector with expertise in strategic planning, industry analysis and financial advisory.
(With inputs from Neha Saraf and Abhijit Kirtunia, Senior Consultants, KPMG)
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