Even though the demand for construction equipment for the road sector has been sluggish in 2012, there still exists tremendous potential for the construction equipment industry, given the infrastructure deficit in the country. However, unfortunately, the government has little fiscal headspace and thus, is unable to stimulate growth by undertaking investment in the infrastructure sector.
As per ICRA reports, the road sector in India continues to face multiple challenges in the form of impediments in execution, financing constraints, over-optimistic traffic estimates and stressed financial position of developers. Several projects have faced delays in execution mainly on account of delayed land acquisition, removal of encroachments, shifting of utilities, receipt of approvals, environment clearances, etc. The overall creditworthiness of road developers has deteriorated due to their leveraged balance sheet and strained profitability. Further, weak capital markets and stressed valuations have made raising equity capital extremely difficult for most developers. As a result, participation in the road projects offered by National Highways Authority of India (NHAI) over the last few months has been muted.
Then again, the government is taking steps to expedite project clearances and also clearing various bottlenecks related to environment, land acquisition, etc; however, visible results are still to be seen. Coupled with this, the high interest cost and banks/financial institutions not being too comfortable in taking on more exposure on road and power projects, adds to the woes. Mining, port activities, real estate all continue to have a negative impact on construction equipment off-take. Industry experts predict that for the next two quarters and probably for the next 15-16 months, growth in CE market is expected to remain muted. However, by the end of the calendar year 2014, the industry should be coming back on over 20 per cent growth rate and that should be sustainable for the next four years, barring any unforeseen local or global surprises. The ruling government is expected to expedite road projects at break neck speed as they are the only way of connecting with their voters and offering them reason to vote for them. This can be one reason why road projects take off all of a sudden.
Even though the road sector in India continues to face multiple challenges, a strong pipeline of projects supports long term prospects. Around $180 billion investment has been earmarked for the road sector, which is the highest ever investment for any Five Year Plan, and this should have a very positive impact on the construction equipment industry. It's high time that the government took both an active role and responsibility in clearing and ensuring speedy implementation of projects, particularly in roads, power and irrigation. This will have a positive bearing on GDP growth apart from the fact that the CE industry will also benefit, not to forget their selfish election interest.