Home Spotlight Construction sector contracts by 50% in Q1

Construction sector contracts by 50% in Q1

What we all were fearing about has come true – India’s GDP has shrunk by 24% in the first quarter of current financial year. Within a matter of few quarters India has transformed herself from one of the fastest growing economies in the world into a fastest shrinking economy – all thanks to COVID-19. Industrial/Services GDP growth contracted by -34%/-24% led by sharp contraction in construction and trade/ hotels/transport/communication. Only saving grace is our agriculture which grew by 3.4% which was also below the expectation of 5%. Government expenditure, to an extent, was able to prevent the slide. Again, in government expenditure it was the consumption expenditure rather than project expenditure that is overwhelming which is also a worrisome factor.

Why construction underperformed?

One of the glaring underperformances came from construction sector which contracted by 50%. Almost all construction activities had come to a grinding halt when the government announced lockdown on 25th March and whole of the April it remained idle. When the government started relaxing the lockdown norms migrant workers who are the backbone of our construction sector started going back to their hometowns thus creating labour scarcity at the construction sites. Thus, even after lifting lockdown, the construction sector failed to restart immediately. Some construction activities were seen in rural areas and small towns which were not enough to show positive growth.

But industry is optimistic

However, there is no need to dishearten from this plunge in GDP and we can take consolation from the views expressed by some of the players in the industry. For example, Larsen & Toubro, the largest engineering and construction company in the country, is witnessing early signs of pick up in ordering activity in domestic as well as international market for the infra projects. The Company is seeing steady increase in availability of migrant labours and currently 190000 labours are on its sites and around 1500 new labours added on daily basis but at higher cost. However, the company feels that execution cannot be at normal level until the situation is back to normal despite the migrant labour back to construction site due to social distancing norms.

Volatility in macros will continue

Ultratech Cement, the largest cement producer in India, expects moderate pick up in cement demand post Diwali with labours going back to urban areas. According to the company, the macros will continue to remain volatile considering vertical lock downs in many states. Jamshed Naval Cooper, Managing Director, Heidelberg Cement India Limited, expects government to promote construction as infrastructure activities helps to create employment. He expects reduction in demand in urban areas due to labour unavailability while rural demand is showing improvement.

Some sectors are showing continuous improvement

On the other hand, Cera Sanitaryware Ltd’s July 2020 sales were 95% of pre-Covid level. The company’s effective capacity utilization in May 2020 was 30% and 80% in June 2020. The company’s effective operating days were only 35 out of 91 days in the quarter. It shows that trend is towards improvement and the momentum has been maintained.

According to Asian Paints, the decorative business saw improvement in demand over May & June after complete washout in April. The Company’s business achieved 80% of the base volumes in May and managed to grow by more than 14% in June-20. Berger Paints, the second largest paint maker in the country, remains optimistic with regard to recovery in business. For the Company protective coating is recovering faster than automotive coatings. The Company expects rural demand to sustain led by measures undertaken by government to uplift rural. Sheela Foam, the mattress manufacturer, expects normalcy to return by Q4FY21 or Q1FY22. The company has recovered to 80-85% of business in India in July’20.

But the economy had moved on to slow track even before COVID breakout

Even before the COVID-19 hit, the growth slowdown was already looking entrenched with consumption secularly joining the slowdown bandwagon that was front-led by languishing investment. The path has been further cyclically derailed by COVID-19 hit. More ominously, after having smartly rebounded to almost 75% of pre-Covid levels, most activity indicators are losing momentum or are stagnating at current sub-optimal utilization levels.

Sub-optimal policy response both on fiscal and monetary front would only mean the downward growth cycle could stretch further cyclically. This could be seen in most activity indicators, which after having rebounded smartly are now losing momentum or are stagnating at current low utilization levels. That may be partly due to onset of Monsoon during which period economic activities normally slowdown. But it is also true that after announcing easing of lockdown norms many states have gone back on their words and have re-introduced  local lockdowns which has brought a sense of uncertainty among the businesses. Above all, such spate of out of turn announcement of local lockdowns have hampered the free movement of goods impacting the businesses at various locations.

Most of the people we have spoken to have expressed their confidence of business revival by the fourth quarter of this year or the first quarter of next financial year. But, to that to happen the government needs to be proactive in its reform measures and also should take steps to remove the uncertainties generated by local lockdowns.

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