India is on the verge of witnessing a sustained investment phase in infrastructure buildup. With a slew of announcements in housing, road, port and airport development, we are seemingly on a path of sustained higher economic growth on the back of improvement in infrastructure construction in the country. From a policy perspective, there has been a growing consensus that a private-public partnership is required to remove difficulties concerning the development of infrastructure in the country. A substantial chunk of the abovementioned investment target is likely to come from the private sector.
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Industry wish list

Builders' Association of India

• Alter existing customs duty structure on imported steel bars and rods - fix the duty at 5% without levy of special additional duty and countervailing duty
• Extend existing structure of import duty, countervailing duty and special duty on cement for another year, to discourage domestic manufacturers from hiking prices
• Project exporters who have executed projects abroad to be allowed to import equipment purchased abroad at 5% duty instead of current 50%
• Scrap 2% TDS on construction companies as margins are wafer thin at 4-5%. Allow companies to pay advance tax instead

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Budget over the years

Budget 2005-2006

• Grant of Rs 14 bn for the National Highway Development Programme (NHDP) III towards developing four-lane road of 4,000 kms.
• Rs. 4.5 bn allocated for the development of roads in the North-Eastern region.
• Establishment of SPV to finance infrastructure projects in specified sectors.
• Provision of Rs 15 bn for 'viability gap' funding for infrastructure projects.
• Outlay of Rs 55 bn for the National Urban Renewal Mission, including a grant component of Rs 16.5 bn.

Budget 2006-2007

• Increase in allocations for National Highway Development Programme (NHDP) from Rs 93.2 bn in FY06 to Rs 99.5 bn in FY07.
• 54% hike in the budgetary support to the Bharat Nirman Programme, amounting to Rs 187 bn.
• Increase in corpus of the Rural Infrastructure Development Fund to Rs 100 bn.
• Grant of Rs 46 bn for the National Urban Renewal Mission.
• Exemption under Section 10 (23G) of the Income Tax Act removed. The section exempted income by way of dividend, interest and long-term capital gains arising out of investments made in an enterprise engaged in the business of developing, maintaining and operating an infrastructure facility.
• Plan allocation for Department of Shipping increased by 37% to Rs 7.4 bn to facilitate investment in National Maritime Development Programme (NMDP).

Budget 2007-2008

• Allocation towards Bharat Nirman increased by 32% to Rs 246 bn
• Increase in provision for National Highway Development Programme (NHDP) by 7.2% to Rs 107 bn
• Enhanced allocation for Jawaharlal Nehru National Urban Renewal Mission (JNNURM) to Rs 499 bn, an increase of 9%
• Corpus of Rural Infrastructure Development Fund�XIII (RIDF) for FY08 raised to Rs 120 bn
• Separate window for rural roads under RIDF-XIII to be continued in FY08 with a corpus of Rs 40 bn
• Utilisation of foreign reserves towards infrastructure development
• Tax on dividend distributed by companies to be hiked from 12.5% to 15%
• Additional education cess of 1% to fund secondary and higher education

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Key positives

Government spending on infrastructure: Government spending on infrastructure is the most important demand driver for the construction industry. Since adequate infrastructure is essential for sustained economic growth, construction activities have gained significant importance over the past few years. Though infrastructure development will be across sectors, the key drivers would be roads, water supply & sanitation and irrigation. Infrastructure construction investments, with a share of 25% in total construction investments are expected to grow at a CAGR of 9% over the next three years (Source: CRIS INFAC).

Growth in real estate construction: Real estate investments account for about 60% of the total construction investments. Demand-supply gap for residential housing, favourable demographics, rising affordability levels, availability of financing options as well as fiscal benefits available on availing of home loan are the key drivers supporting the demand for residential construction. In addition to this, demand for office space from IT/BPO segment is expected to continue due to emergence of India as a preferred outsourcing destination. Also, boom in organized retail is expected to result in huge demand for real estate construction.

Industrial construction to witness strong growth: With India Inc. on major expansion drive, the demand for industrial construction is expected to remain strong over the next few years.  According to CRIS INFAC, industrial construction (accounts for 10% of the total construction investments) is expected to grow at a CAGR of 33%, mainly propelled by the investments in oil & gas and metals.

Key negatives

Execution risks: Increased investments in infrastructure and huge capacity addition plans by manufacturing companies have resulted in huge order books for construction companies. We believe that the people problem faced by the construction industry will make it difficult for them to execute large projects on a timely basis. 

Payment issues: Construction companies involved in infrastructure development activities have to rely on government agencies for payments in case of cash contracts and annuity based projects. Delay in payments for projects can have adverse impact on profitability of companies.