Burgeoning real estate industry, increasing coal production and mechanisation of mining operations will drive the construction equipment industry in India, says a survey.
According to a Roland Berger Strategy Consultants study, “The construction equipment market is expected to grow at 12 per cent CAGR to $ 4 billion by 2017, which will be driven by infrastructure investment of $ 1 trillion during the 12th Five-Year Plan.”
Post the 2014 general elections, a recovering economy, huge infrastructure investments by the Government and rising urbanisation will revive the construction equipment industry.
Key challengesThe study points out multiple challenges that need to be addressed in order for the Indian CE industry to achieve its expected long-term potential.
Economic downturnIndia recorded a GDP growth rate of less than 5 per cent for the second consecutive year, after witnessing spectacular growth averaging above 8 per cent over the past decade. In FY 2014, the country has witnessed extremely low annual industrial production rate. According to the study, “High inflation, sluggish investment activity and an unhealthy fiscal situation continue to strain the economic activity.”
Policy gridlock and scamsThe Roland Berger Strategy Consultants’ study observes key policy bottlenecks, scams and limited government action has impacted progress of major infrastructure projects. “Delays in obtaining environment and forest clearance and gridlock with land acquisitions hinder proposed and existing projects. Domestic mining and construction equipment demand shrivelled by 15-17 per cent in 2013 after a 13 per cent de-growth in 2012 due to continuing regulatory roadblocks. Ban on iron ore mining and scams related to coal block allocations have reduced demand from the mining sector,” it said.
According to the study, in 2013-14, the total investment in stalled projects reached an all time high of Rs 6.2 trillion. Around 521 projects were stalled of which 40 per cent were due to land acquisition issues. The largest hit was the manufacturing sector with total projects worth Rs 3.2 trillion stalled. Steel and metal sector also suffered from slow execution rate.
Capital constraints The study also said, low private participation and thin spread of government outlay; and long working capital cycles and unfavourable tax structure. “Performance of construction companies weakens on rising debt levels and weak order book execution,” it adds.
No major uptake in demand despite recent actionsUndeniably, policy gridlock and scams have severely impacted infrastructure development. Inadequate provisions for compensation, rehabilitation and resettlement in the old Land Acquisition Bill meant that major infrastructure projects were delayed or stopped due to legal issues. To address this, a new Land Acquisition Bill was introduced in 2013. “But stringent new land acquisition norms have resulted in industrial projects coming to a virtual standstill,” the study observed.
Also, many major mining and infrastructure projects are either delayed or stalled due to lack of clearance from the Ministry of Forest and Environment. The Cabinet Committee on Investment (CCI) has helped in re-starting projects worth ~4 per cent of GDP, however significant backlog remains.
Rise in illegal mining led to Supreme Court of India banning mining operations in certain states such as Karnataka, Goa and Odisha. Allocation of coal blocks without a competitive bidding process has led to a government probe, delaying the development of these blocks. In April 2014, the ban on mining was lifted in the state of Goa, but restrictions were introduced on the total output that could be mined in a year, the report said.
Future outlookThe Roland Berger Strategy Consultants study reports, present outlook on construction sector is negative due to strained liquidity, unfavourable regulatory actions and stagnating order book. However, Indian CE market has the potential to grow at 12 per cent CAGR to reach approximately 75,000 units sales by 2017 from 50,000 units in 2012.
Success mantraThe study said, to be successful in India, the construction equipment players need to take key strategic actions. It suggests, “As Indian market matures, domestic players need to improve product specification and quality. Established global players need to launch de-contented customised products for Indian market.”
Further, the study said, “construction equipment players should aim to increase level of aggregate or component localisation to achieve target costs and serve price conscious customer base.”