India will become the world’s third-largest Construction Market by 2025 and thereby the Infrastructure Sector is a key driver for the Indian Economy. Especially the road sector profits from the Government’s efforts and initiated policies to ensure time-bound creation of a world-class infrastructure in the country.
The Construction Industry in India is the second largest after agriculture. It accounts for about 9 % of India as GDP and contributes to the national economy also by providing employment to a large number of people. Growth drivers are consequently, in general, the estimated urban housing shortage of 34.1 Million dwelling units by 2022 and in rural India, the shortage is estimated at 40 million units in 2022. Concerning the Infrastructure in India, the present level is inadequate to meet the demand of the existing urban population. Therefore a re-generation of urban areas in existing cities and the creation of new, inclusive smart cities are needed due to an increasing population and migration from rural to urban areas. Those future cities require smart real estate and urban infrastructure. Further also the Government pushes the growth by launching a new urban development mission to help develop 500 cities, which include cities with more than 100,000 and some cities of religious and tourist importance. The mission includes the support of the use of private capital and expertise through Public-Private Partnerships (PPPs), to bolster their infrastructure and services in the next 10 years.
The Construction Industry in India is highly fragmented. There is number of unorganized players which work on the subcontracting basis and the profitability of the construction projects varies across different segments. There are mainly three segments in the construction industry in India like Real Estate Construction which includes residential and commercial construction, Infrastructure Building which includes roads, railway, power etc, and Industrial Construction that consists of oil and gas refineries, pipelines, textiles and so on.
Out of these various segments the Infrastructure Segment is a priority for the Government. India needs US $ 465 billion to be spent on infrastructure development over the next five years, with 70 percent of funds needed for power, roads and urban infrastructure segments. The Indian Construction Equipment Industry is reviving after a gap of four years and is expected to grow to US $ 5 billion by FY2019-2020 from the current size of US $ 2.8 billion. The whole Infrastructure Industry witnesses thereby a significant interest from international investors: many Spanish companies are keen on collaboration with India on infrastructure, high-speed trains, renewable energy and developing smart cities. One hundred percent FDI is permitted through automatic route in Construction-Development projects like development of townships, construction of residential/ commercial premises, road or bridges, hotels, resorts, hospitals, educational institutes, recreational facilities, city and regional level infrastructure and townships.
But along with these policy measures another driver of growth might be the reduction of costs in the Construction Industry in India by using innovative technologies. Therefore the Government conducts an in-depth study of the gaps between international and national standards to ensure reducing cost and ensure speedy completion of projects. It noted the need for use of locally available resources and materials to bring down the cost and reducing the time for completion of the project through use of prefabricated and innovative technologies. Concerning Infrastructure Industry, it contains that the Road Ministry awards project length totaling 20,000 km in next two years whereas the total target is to award road construction project of 9,000 km in FY 2016 for example. Going forward the focus will be on aligning national standards for design, construction, maintenance and operation of roads, bridges and flyovers with the global standards to bring down the cost of construction while maintaining high standards of quality through adoption of innovative technologies and materials for road construction. Further, expected softening of the interest rate and sharing of the 40 percent of the project cost under the hybrid annuity model is likely to provide some comfort to the industry players operating with a high level of debt and interest expense ratio.