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Construction Sector

The Indian construction industry has been playing a vital role in overall economic development, as its contribution to GDP at current market prices went up from 5.3% in FY02 to around 7.8% during FY08. In fact, during FY02-FY08, the sector grew at a CAGR of 20.33%..


Construction industry is an integral part of the infrastructure sector and comprises commercial, residential, roadways, ports, airports, SEZs etc. According to Planning Commission estimates, the sector employs around 31 million people, and among these, the organised sector employs 1.2 million, while the unorganised sector generates the rest. Going forward, taking a cue from the Indian government’s ambitious projects lined up for the Eleventh plan period, the demand for construction is expected to grow by at least 8-9%, and 2.5 million employment opportunities per annum are expected to be generated.

Roads

Road transport accounts for over 4.5% of the country’s GDP. According to NHAI, India’s road network is the second-largest in the world, spanning across 3.3 million kilometres. Out of this spread, only 2.0% is constituted by national highways; however, these highways carry more than 40% of the total road freight traffic. Moreover, 40% of rural habitants are not connected to all-weather roads and most villagers are forced to rely on earthen tracks that are not suitable for motor traffic and for use during rains. In FY51, road transport had a 13.8% share in cargo traffic and 15.4% share in passenger traffic. However, in FY05, their shares increased to 61.3% XXV and 87.1%, respectively; this growth underlines increasing demand for road infrastructure in India. Notably, during 1951 and 2002 period, number of vehicles grew at a CAGR of around 11% while road length increased at a CAGR of 4.3%. In the national highway segment road length increased by a mere 2.1%. Going forward, road freight traffic is expected to grow at a CAGR of 9.9% per annum and passenger traffic is expected to grow by 19.8% per annum as the Indian economy is expected to grow by 9% per annum till 2012.

National Highways

A well-developed road network is a must for successful economic activities, but India’s existing road network is inadequate. Since independence, the total length of national highways has not been proportionate with the growth in road traffic. During April 1947, the total length of national highways in India was 21,440 km, which increased to 28,977 km by the end of the Fifth 5-year plan. During the Ninth Plan period, due to the tremendous development, 23,814 km was added to the NHs, while during the Tenth 5-year Period merely 9,008 km was added.

In 1998, the Indian government undertook an ambitious National Highway Development Project (NHDP) to upgrade, rehabilitate, and widen major highways in India. NHDP is implemented in four phases (Phase I, II, IIIA and V). NHDP Phase I and II are expected to be completed by Dec 2008 while NHDP Phase IIIA is scheduled to be completed by Dec 2009. In addition, 6-laning of 148 km has been awarded 6 laning is proposed under NHDP Phase V.

 

State Roads

State highways (SHs) and major district roads (MDRs) also play a significant role in the country’s road transportation system, since they are crucial linkages between NHs, district headquarters, important towns/cities, ports etc. Though SHs and MDRs constitute around 13% of the total country’s road length, they account for more than 40% of the total road traffic because they link rural and urban areas. According to the Working group of Planning Commission, poor working conditions of SHs and MDRs can be attributed to inadequate funding of this secondary system. Currently, Rs 80-100 billion per annum is being spent on the SHs and MDRs against the required minimum of Rs 160 billion per annum. Moreover, as more than 50% of SHs and MDRs network have poor riding quality, the economy is likely to suffer losses of Rs 60 billion per annum.

During the Eleventh 5-year Plan period, private investments of Rs 1,067.9 billion are expected in roads and bridges, which will constitute 34% of the total investments.


Railways

Indian Railways (IR) is one of the largest and busiest rail networks in the world, which as on March 2007 plied across 63,327 km and covered 16 railway zones. Over the last couple of years, IR has been witnessing robust growth, largely due to responsiveness of the organisation to align itself to the growing market competition and to adopt the strategy of lower unit cost and higher volumes. In FY08, it is estimated that the IR outperformed and generated surplus revenues of around Rs 225 billion1 against Rs 200 billion in FY07. According to Ministry of Railways, there has even been a noteworthy improvement in wagon turnaround time from 7.5 days in FY01 to just above 5.49 days (broad gauge) in FY07, which has attributed immensely towards this growth.


Railway freight movements increased at a CAGR of 8.9% during FY03 to FY08. In FY08, IR carried 6,678.9 million passengers, and grew by 5.2% against the previous year, while freight movements grew by 9.0% during the same period. Notably, during this period, revenue earnings grew by 14.5% to Rs 714.1 billion, of which freight earning accounted for over 65%.

Growing competition is one of the major challenges that the IR has faced over the last several years. Its market share declined sharply from 86.2% in freight business during FY51 to around 38.7% in FY05; similarly, its share in passenger traffic also dwindled from 84.6% to 12.9% in the same period. While, in the same period road traffic has gone up dramatically from 13.8% to 61.3% in terms of cargo and 15.4% to 87.1% in terms of passenger traffic. Currently, IR is primarily focussing on better reliability, availability, and reduction in transit time. According to the Planning Commission, during the Eleventh 5-year plan, freight traffic is likely to reach 1,100 MT (CAGR of 8.7%), while passenger traffic is likely to reach 8,400 million (CAGR of 5.8%). During the Eleventh 5-year plan, investments worth Rs 2,618.1 billion are envisaged for development of the IR, 19.2% of which is expected to come from the private sector.

Aviation

The Indian aviation industry is one of the fastest-growing sectors in the country. The air transport sector contributes 1% to the total cargo in volume terms and 30-35% of the merchandise trade in value terms. The demand for air transport has grown manifold over the last couple of years due to the economy’s buoyancy — driven by booming IT/ITeS, retail, real estate, manufacturing, pharmaceutical sectors. This demand has been supported by a corresponding rise in number of airline service providers, especially low cost carriers (LCC).

Combined passenger traffic, both domestic and international, grew at a CAGR of 21.7% to 116 million during FY03-FY08. India’s air passenger traffic constituted 5.6% of the world traffic in 20072. Meanwhile, Indian international passenger traffic grew at a CAGR of 15.0% as compared with a CAGR of 24.7% registered by Indian domestic passengers’ traffic, demonstrating that the domestic passengers’ traffic witnessed a higher growth during FY03-FY08. Indian air cargo traffic grew at a CAGR of about 11.8% during FY03-FY08, and this growth was primarily dominated by international freight traffic rather than domestic cargo. During FY08, the total cargo traffic grew by 10.5% y-o-y to over 1.7 million tonnes.

While passenger traffic is increasing, inadequate airport infrastructure is a stumbling block for the Indian aviation sector.

Inadequate terminal capacity/runways/parking bays coupled with inadequate X-Ray machines have added to delays at airports. In FY08, Mumbai and Delhi airports respectively handled 637 and 585 aircraft per day on an average, which intensified pressure on existing runways. Moreover, both these airports handled more than 42.6% of the country’s total passenger traffic in FY08, which put enormous pressure on their capacity. Due to the unprecedented traffic growth, there were further delays as well as irregularities in passenger/cargo clearance and aircraft flying over the airports, resulting in huge losses for the carriers.

That apart air cargo handling at Indian airports is also a cause for concern, as there is a pressing need for speedy handling of cargo and cutting down dwell time. For instance, dwell time of export has to be cut down from the current 4 days to 12 hours and for imports from 4 weeks to at least 24 hours. Besides, cargo clearance has to be on a 24-hour basis. ATF prices in India are around 65-70% higher than international prices, and this high price is eating away margins of the airlines, since ATF accounts for 35-40% of operating cost as against global average of 20-25%.


As on August 8, 2008, scheduled airlines were operating 414 aircraft. According to Airbus Industries, a leading aircraft manufacturer, there will be a demand for 1,100 additional aircraft in India in the next 25 years valued at approximately US$ 105 billion. According to AAI, passenger traffic will reach 205.4 million by FY12 from 116.9 million in FY08, while air cargo traffic will reach 2.68 million tonnes from 1.71 million tonnes during the same period.

Development of Airports in India

The government has decided to improve airport infrastructure in view of the surge in traffic at Indian airports. Accordingly, the government is modernising Delhi and Mumbai international airports through private sector participation. Investments worth Rs 400 billion are envisaged by the government for airport infrastructure improvement in the country over the next few years.


Special Economic Zones (SEZs)

The Indian government announced the Special Economic Zones (SEZs) Policy in April 2000 to provide quality infrastructure, attractive fiscal packages, and minimum regulations within one zone. The main objectives of SEZs included: generation of additional economic activities; promotion of exports of goods and services; promotion of investments from domestic and foreign sources; creation of employment opportunities; and development of infrastructure facilities in the country.

The government expects SEZs to help accelerate foreign and domestic investments in the country. In 2005, the SEZ Act was passed in the Parliament, as the state governments need to play a key role in export promotion and related infrastructure creation. Moreover, a single window SEZ approval mechanism was also established to provide clearance to matters related to Central as well as state governments.

The policy has been effective and the number of SEZs; have increased dramatically over the years. Exports too have shown great growth. In FY07, total exports from all operational SEZs grew by 92.5% at Rs 666.4 billion over the previous year. Strong performances of operational SEZs have fuelled India’s total exports.


Real Estate

The Indian Real Estate (both commercial and residential) industry is riding high on the economic prosperity and growing personal income. The booming IT/ITeS sector, retail sector, banking and financial sector have further impelled growth in the real estate sector. According to a study conducted by Assocham, the Indian real estate industry is growing at 30% (2006) per annum and is expected to grow at a CAGR of 39% to reach US$ 60 billion by 2010. Increasing number of approved/notified/in principle SEZs will also contribute to this robust growth.

The spurt in real estate activities in the country has attracted lot of foreign investments over the few years. In FY08, FDI inflow in the real estate sector including housing was US$ 2,179 million, and since April 2000 to June 2008, the total FDI in the sector reached US$ 3,946 million (cumulative). According to the Assocham study, FDI in real estate is expected to be in the range of US$ 25-28 billion by 2010.