Construction has resumed at various projects across India, but challenges such as shortage of labour, the onset of monsoon and liquidity crunch have dampened ramp-up of activities. Most projects that have resumed are government-fund and slowly privately funded large township projects are also restarting work with limited labour available onsite.
In India, construction sector consumes close to 60pc of the steel produced in the country. Both infrastructure and real estate construction have derailed due to the COVID-19 pandemic. Indian Steel Association had revised the country’s steel demand forecast to 93.7mn mt, down by 12.2pc, in case of a 40-day lockdown. Now the lockdown has been partially extended beyond 60 days. Major steel mills in India are locking around 50-60pc utilization rates, while smaller steel producers are running at 30pc capacity, mostly in line with weak demand from construction and automobile sectors. With the onset of monsoon, demand for construction steel is expected to lower further.
COVID-19 is an unprecedented situation and it is impossible to predict when and even if the Indian construction sector will regain its previous momentum. There are too many uncertainties and entirely new variables involved. Much depends on whether or not a cure/vaccine is developed, and on the policy responses to the current situation, said Prashant Thakur, Head of Research at Anarock Property Consultants in an interview to Davis Index.
A major challenge faced by the construction sector includes the return of construction workers to their home states. Without sufficient labour, the potential of the construction sector is limited. Currently, real estate and infrastructure projects only have whatever local labour is available at their disposal. Apart from that, the costs of construction materials have spiked, said Thakur.
Financial measures such as the moratorium on housing EMI’s and deferment of interest payments will give a lot of relief to consumers as they can now rearrange their finances. RBI’s repo cut of 40 basis points to 4pc is also a welcome move. With the cost of funds coming down for banks, borrowers will stand to gain as the EMIs on home loans are expected to fall. This is another big announcement which will ease liquidity for developers. However, the quick transmission will be key to the huge liquidity infused by RBI. All these measures augur well for the real estate sector during such trying times, said Surendra Hiranandani, CMD of House of Hiranandani.
On the liquidity front, even with state-funded projects, many contractors have stalled work as government agencies are yet to clear their long-pending dues. Real estate developers have difficulty getting access to credit due to the risk aversion nature of financial institutions to the infrastructure sector. The extension of the moratorium on loan repayment until August 31 could ease some liquidity pressure and the extension of RERA deadlines will aid smaller local developers.
Due to supply disruption and the resultant increase in input costs the price of construction materials such as cement and steel have increased steeply. The price of rebar have gained as prices of semi-finished steel (ingots and billet) rose amid short supply of ferrous scrap and increase in sponge iron prices.
The Davis Index for rebar (TMT) has appreciated 8pc from Rs32,800/mt on March 9 (pre-lockdown) to Rs35,700/mt ex-work Raipur producer on May 27. In cities like Mumbai, demand for construction steel has slumped and will take a long time to revive compared to other parts of the country. This has reduced steel mills ability to increase the price of rebar despite pressure on their margins.
Indian economy is expected to contract 40pc in the June quarter or the first quarter of fiscal 2020 (Q1FY2021) but Q2 could witness a recovery with 7.1pc GDP, according to SBI Research. India’s Q1 GDP number is estimated at (-6.8pc). For Q4FY20, GDP growth is estimated at 1.2pc, with full year GDP at 4.2pc.
Top 10 states of India which account for 75pc of the country’s total GDP have the largest number of confirmed virus cases. The economic outlook is discouraging given that COVID-19 cases are expected to rise fast and reach an alarming rate by the last week of June. Construction contributes about 5pc to India’s GDP, while 2pc is the contribution of the steel industry.