Initiatives to Revive Construction Sector

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Construction sector has an important place in the Indian economy. It is the second largest contributor to economic activity accounting for about 8% of GDP; accounts for the second highest inflow of FDI after the services sector; generates the highest level of direct and indirect jobs employing about 40 million people and creating 2.7 new jobs indirectly for every Rs. 1.00 lakh invested.

The sector has major forward (infrastructure, real estate, manufacturing) and backward (steel, cement, etc.) linkages, implying a high multiplier effect on economic growth, almost two times.

Major construction activity originates in the infrastructure, industrial and real estate sectors, where infrastructure sector accounts for almost half of the demand.

However, of late, the construction sector has been showing signs of stress. Revenue growth and profit before tax (PBT) margins have declined significantly. Most companies are barely able to cover interest costs from earnings. Increasing debt levels remain a critical issue affecting financial stability and borrowings.

Several factors have contributed to this stress e.g. in stalled assets in infrastructure sector and high levels of receivables especially from the government entities, slowdown in real estate sector leading to stretched liquidity and limited resources.

The Cabinet Committee on Economic Affairs has approved a series of initiatives to revive the Construction Sector. These initiatives include:

(i) PSUs/Departments may seek the consent of the contractors/ concessionaires to transfer the arbitration cases initiated under the pre-amended Arbitration Act to the amended Arbitration Act, wherever possible;

(ii) In case of claims where the PSU/ Department has challenged the Arbitral Award, 75% of the award amount may be paid by the PSU to the contractor/ concessionaire against margin free Bank Guarantee;

(iii) All PSUs/ Departments issuing public contracts may consider setting up Conciliation Committees/ Councils comprising of independent subject experts in order to ensure speedy disposal of pending or new cases;

(iv) Item-rate contracts, may be substituted by EPC (turnkey) contracts, and PSUs/ Departments may adopt the Model EPC contracts for construction works; and

(v) Department of Financial Services, in consultation with Reserve Bank of India, may evolve a suitable one-time scheme for addressing stressed bank loans in the construction sector.

These initiatives are expected to help in improving the liquidity in the short run and reform the contracting regime in the long run.

Given the significant multiplier effect the construction sector has on the economy, these measures are expected to give a major boost to economic growth.

As the sector provides the largest segment of direct and indirect employment, the revival of the sector would also help in significant employment generation.

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