Is India’s construction sector bouncing back from pandemic-hit downturn?

The construction industry has been one of the hardest hits by the Covid-19 pandemic. While the general lockdown and slowdown in the economy affected it from a business perspective, the sector had another problem at hand—workers—as it heavily depended on migrant labourers.

With the pause in all business activities, outside of essential services, workers in the industry who travel across the country, especially from poorer states, particularly in the eastern side of the country, were forced to pack their bags and head home to their villages.

Before vaccination picked up and these workers headed back to workplaces there was a lag in construction activity. But it was not the only thing impacting the construction activity, as the flow of government tenders and awards of those projects had taken a big hit even before the industry bore the brunt of the lockdowns.

Tenders floated or announced

If we look at sizeable chunks of projects having value of Rs 250 crore or more, the overall value of all tenders floated across all divisions in the construction space grew 11% year on year in FY22 to Rs 8.9 lakh crore. This shows the impetus by the central and state governments in increasing the order inflow during the pandemic-hit season. 

This surpassed the previous peak of Rs 8.45 lakh crore in the year ended March 31, 2018. The total flow of tenders had shrunk for two straight years thereafter. Total tenders floated had shrunk 11% in FY19, a year prior to the pandemic. This exacerbated in the following year heading to the pandemic. 

This could be due to project tenders getting bunched up closer to the end of the financial year and the concerns related to the Covid spread had started affecting business sentiments and decision-making was getting stretched. 

If we look at sectors and subsectors where construction projects are floated, we see a distinct shift happening over the last five years. This also captures the changing dynamics of business for different engineering, procurement and construction (EPC) companies in the short to medium term. 

Out of the overall tenders floated, roads, irrigation and other real estate segments (including hospitals and hotels) on a combined basis contributed around 78% to the overall tenders floated.

Other than these segments, there were incremental tender inflows from railways, power and other industrial (includes gas and oil, basic chemicals and telecom) segments, although they contributed only 18% to the overall tenders floated, according to credit rating firm Ind-Ra. 

Road tenders have increased but, having taken a big hit, they still comprise less of the total that they did in FY19, accounting for just over half of the total. 

Among others, buildings have been one of the big gainers leading into the pandemic. While the proportion of tenders floated for buildings shrunk last year, it remains higher than the contribution in FY18.

States at the forefront

One can also shortlist a set of EPC companies, based on which states and regions they are more dominant. Uttar Pradesh and Maharashtra, in particular, announced a major chunk of tenders in FY22, accounting for Rs 88,800 crore and Rs 87,200 crore, respectively. The tenders announced from both the states contributed a fifth of the overall tenders (10% each) floated across the country in FY22.

The orders floated are majorly from Bharatmala Expressway projects and Swachh Bharat Mission schemes. Rajasthan and Madhya Pradesh followed next with a share of 7% and 6%, respectively. 

Projects awarded

Floating tenders is one thing and giving actual orders or awarding contracts is quite another. We also looked at how the projects were awarded and which sectors have performed better on that front.

The value of total projects awarded had taken a big hit in FY20 but this bounced back in FY21 itself, showing how the government departments did not shy away from giving a fiscal push to the economy. In FY22, this moved even higher to almost Rs 3.5 lakh crore, up 10%.

Tenders awarded for road projects, which had taken a hit, have bounced back strongly. Railways had seen a sharp dip in tenders right ahead of the pandemic but seems to be coming out of the hiatus. Even though the value of tenders floated in railways dipped last year, it was still way above the previous periods. This indicates that EPC companies that focus on railway tenders have their hands full.

On the flip side, power sector project tenders have been a big loser. Mining projects, which had shot up in the first year under the pandemic to become the second-largest segment, also lost most of the momentum last year. 

Building projects, too, have taken a hit and indeed have shrunk for two straight years now. This is despite the positive trend with respect to tenders floated for such projects.