BackConstruction slump may have hit job creation
Sharp deceleration amid a faltering economy may have substantially reduced the creation of new jobs in the last two years
Premium
New Delhi/Mumbai/Bangalore: A sharp deceleration in construction activity amid a faltering economy may have substantially reduced the creation of new jobs in the last two years of the United Progressive Alliance (UPA) government, adding to the discontent against an administration marred by charges of graft and policy indecisiveness ahead of the general election.
The construction sector, India’s second largest employer, is projected to grow at a meagre 1.4% average in 2012-13 and 2013-14, data released by the statistics department on Friday showed. During 2009-10 and 2011-12, the sector added 6.2 million jobs when it was growing at an average 7.7% a year.
The construction sector, which includes real estate development and the building of roads and highways, is estimated to have grown at a paltry 0.6% in the fiscal third quarter ended 31 December, data released by the statistics department on Friday showed.
Lower growth in the construction sector must be hitting job creation in the economy badly, according to Pronab Sen, chairman of the National Statistical Commission.
“In terms of labour absorption, the construction sector is only second after agriculture," Sen said. “If agriculture is not absorbing labour, the principle responsibility is on the construction sector."
Agricultural employment as a share of the total fell by 8.6 percentage points to 64% between 2004-05 and 2011-12, with a rural construction boom weaning many workers away from farms. The share of employment in construction rose by 6 percentage points to 11% in the same period in rural India, while in urban India, its share of employment rose only by 1.3 percentage points to 9.3%.
The lower job creation in the construction sector may impact public sentiment towards the incumbent government ahead of the national election due by May, said Santosh Mehrotra, director general at the Institute of Applied Manpower Research.
“It is not surprising that job creation would have fallen as growth slows down. Construction has the highest employment elasticity after agriculture, meaning a dip in growth will significantly impact job creation in the sector," Mehrotra said. “A significant part of the poverty reduction in the economy after 2004-05 was on account of jobs being created in the construction sector, which absorbed most of the unskilled labourers leaving the agriculture sector. This higher absorption of labour by the construction sector also sustained wage growth across the economy in the lower end of skill distribution."
Sen said road construction this year has not picked up. “I suspect the projects that had been awarded earlier have come to an end and no new projects have taken off," he said. “The residential sector is not doing great either due to high interest rates and uncertainty surrounding land acquisitions."
The construction sector is facing a series of issues in terms of project approvals, land clearances and environment clearances, according to S.N. Subrahmanyan, member of the board of Larsen and Toubro Ltd (L&T), India’s largest engineering and construction company.
“Land acquisition and high interest rates are adversely affecting both commercial and residence properties. It is a tough time for everybody," Subrahmanyan said, adding that the next three-six months would be tougher owing to slowdown in decision-making during the general election.
Clients are facing trouble in raising funds and it is having repercussions in paying contractors, Subrahmanyan said.
Last month, India Ratings and Research Pvt. Ltd said it maintained an overall negative outlook for India’s infrastructure sector in 2014-15, considering that most companies’ projects continued to have weak credit profiles.
The rating firm cited key issues for infrastructure as prolonged construction schedules, poor traffic estimates, high interest rates, slowing economy, policy issues and unavailability of capital including sluggish equity markets.
India Ratings said the toll road industry is still grappling with completion-related risks. Delays are predominately due to the issues revolved around handing over of encumbrance-free land and right of way by concession grantors and authorities to projects and late receipt of approvals from railway authorities for planned rail over-bridges.
“Prolonged delays in project completion result in cost overrun and also reduce the already low moratorium period available for the principal repayment," the agency said.
While announcing fiscal third quarter results in January, R. Shankar Raman, chief financial officer at L&T, said considering the country has entered election mode, the investment climate is dull and public-private partnerships are on a virtual holiday.
“The company may end the year with a 15% growth in the order inflow compared to the earlier guidance of 20%," Raman had said.
India Ratings in another report last month said the credit metrics of real estate companies, another key component of the construction industry, will continue to deteriorate in 2014-15 as high residential prices will continue to affect sales, even while rising bank credit to the sector indicates an increase in inventory.
Last fiscal year began with a frozen sales market, compounded by high interest rates, escalating home and land prices and weak investor demand, analysts and developers said.
The availability of relatively cheaper funds to the residential real estate sector was also impacted as the Reserve Bank of India (RBI) barred schemes such as 80:20 offered by banks, which enabled builders to access loans at an individual buyer’s home loan rates. Under such schemes, banks would disburse the entire home loans to the builder at once and the interest during the construction period would be paid by the builder rather than the flat buyer.
India’s largest developer DLF Ltd, in a presentation after its December quarter results, said its targeted milestones will shift by at least 2-4 quarters given the slow pace of sales due to adverse economic conditions and the high interest regime despite meeting all other leasing and divestment parameters.
“Home sales are not happening in certain markets and investor sentiment is poor. Interest rates have largely remained steep and affordability remains a big issue," said Ajit Krishnan, tax partner and leader, real estate practice, at EY, a consultancy earlier known as Ernst and Young.
Despite being a festive and seasonally strong quarter in terms of sales, many realty firms barring a few Bangalore developers reported a decline in revenues owing to weak pre-sales, analyst Sandipan Pal of Motilal Oswal Securities Ltd said in a report.
Margins of developers also failed to recover due to persistent inflation and their inability to pass on the rising costs to customers due to weak demand, Pal said.
India Ratings also said that the application last year of India’s new land acquisition law will delay acquisitions and increase related costs.
While the purpose of the land acquisition law is holistic and good, it would make the process of purchasing land time consuming, leading to projects getting delayed and escalating costs, said Anil Sharma, chairman and managing director of realty firm Amrapali Group.
Bharat Heavy Electricals Ltd (Bhel), a large engineering and equipment manufacturer, has been struggling as orders from project developers have slowed. Slowing growth, high borrowing costs and delays in securing regulatory approvals have hit many infrastructure projects in India, hurting the ability of their promoters to repay creditors and vendors.
The capital goods sector is the first to be affected when the economy dips and is the last to revive when the economy improves, said B. Prasada Rao, Bhel’s chairman and managing director.
“That’s the classic trend. There is a lag between the economic revival and demand picking up in the capital goods sector," Rao said. “For this gap to be reduce, there is a need for policy interventions. Some solutions need to be found."
The hope of a stable government after the election and the fact that information technology-led office demand has already started picking up are indicators the sector should start looking healthier in the second half of 2014-15, said Anuj Puri, chairman and country head at Jones Lang LaSalle India, a property advisory.
L&T’s Subrahmanyan concurred with the view, holding that the industry will function normally after a new government is formed.
Mehrotra of the Institute of Applied Manpower Research said the construction sector will rebound as economic growth picks up again, probably from the September quarter of the next financial year.
“Public investment has been approved in significant quantity, but it will take a few more months for it to begin to show in private investment growing," Mehrotra said. “And it is only when private investment grows hand in hand with public investment that jobs will grow."
Utpal Bhaskar contributed to this story.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
