Construction in

Developing Countries

Adrian Castro – 12593277

Introduction to the Built Environment
Assessment Task 2 – Academic Report
Due – 6 June 2016

Table of Contents
List of Tables and Figures -------------------------------------------------------------------------------------------- 4

1 – Executive Summary --------------------------------------------------------------------------------------------- 5

2 – Introduction --------------------------------------------------------------------------------------------------------- 7
2.1 Background ------------------------------------------------------------------------------------------------------ 7

2.2 Scope --------------------------------------------------------------------------------------------------------------- 7

2.3 Objectives --------------------------------------------------------------------------------------------------------- 7

2.4 Methodology ----------------------------------------------------------------------------------------------------- 7

3 – Construction activity in BRIC countries and their impact on the

global economy ---------------------------------------------------------------------------------------------------- 8
3.1 What are the BRIC countries? ------------------------------------------------------------------------------ 8

3.2 The construction markets in BRIC countries – employment and value output ------------ 8

3.2.1 Introduction ------------------------------------------------------------------------------------------- 8

3.2.2 Employment in the BRIC construction markets -------------------------------------------- 8

3.2.3 Value output of the construction markets in the BRIC countries --------------------- 9

3.3 Reasons for the high growth in construction output in BRIC countries ---------------------- 11

3.4 Measure of GDP in BRIC countries and the impact of the BRIC construction
markets on the global economy --------------------------------------------------------------------------- 11

3.4.1 Introduction ------------------------------------------------------------------------------------------- 11

3.4.2 Changes in GDP and GDP per capita in the BRIC countries ----------------------------- 11

3.4.3 The impact of the BRIC construction markets on the global economy ------------- 13

4 – An in-depth analysis of the Indian construction market ------------------------------------ 14

4.1 Introduction ----------------------------------------------------------------------------------------------------- 14

4.2 Overview of the construction market and construction activity in India -------------------- 14

4.2.1 India’s construction industry value ------------------------------------------------------------ 14

4.2.2 Construction industry sectors ------------------------------------------------------------------- 15

4.2.3 Employment in India’s construction market ------------------------------------------------ 16

4.2.4 Construction industry workforce demographics ------------------------------------------ 16

4.2.5 The increasing mechanisation of the industry ---------------------------------------------- 17

4.2.6 The Government’s Five-Year Plans -------------------------------------------------------------- 17

4.2.7 Increasing foreign direct investment (FDI) inflows --------------------------------------- 18

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4.3 Key issues facing the Indian construction market and strategies being implemented
to address them ----------------------------------------------------------------------------------------------------- 19

4.3.1 Access to skilled resources ------------------------------------------------------------------------ 19

4.3.2 Liquidity constraints on construction companies ----------------------------------------- 19

4.3.3 Land acquisition -------------------------------------------------------------------------------------- 19

5 – Critique and evaluation of issues & strategies discussed in section 4.3 ------------ 20
5.1 Access to skilled resources ---------------------------------------------------------------------------------- 20

5.2 Liquidity constraints ------------------------------------------------------------------------------------------ 20

5.3 Land acquisition ------------------------------------------------------------------------------------------------ 20

6 – Conclusion and Recommendations --------------------------------------------------------------------- 21

6.1 Conclusion -------------------------------------------------------------------------------------------------------- 21

6.2 Recommendations --------------------------------------------------------------------------------------------- 21

6.2.1 Access to skilled resources ------------------------------------------------------------------------ 21

6.2.2 Liquidity constraints -------------------------------------------------------------------------------- 21

6.2.3 Land acquisition -------------------------------------------------------------------------------------- 22

7 – Bibliography & References ---------------------------------------------------------------------------------- 23

Appendices ------------------------------------------------------------------------------------------------------------------ 25

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List of Tables and Figures

Tables
Page 9: Table 3.1 – BRIC countries: Number employed in construction industry and percentage
of the total employed population employed in construction; 2005 v 2012

Page 10: Table 3.2 – Value output of construction in BRIC countries in terms of GDP; 2005 v
2013, and subsequent percentage increase in value output from 2005 to 2013

Page 12: Table 3.3 – BRIC countries: GDP and GDP per capita in current prices, as well as GDP
growth rate; for the years 2000, 2005 to 2014

Figures
Page 15: Figure 4.1 – Split in the construction sector between infrastructure and real estate

Page 16: Figure 4.2 – Demographics of construction workforce

Page 18: Figure 4.3 – FDI inflows into India and year-on-year percentage change in FDI inflows
from 2000 to 2012

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1 – Executive Summary
Background
The construction industries in developing countries have an important role to play in the
development of each respective country’s economy through the provision of infrastructure.
This local economic growth has a further impact on the global economy. Thus, each country’s
construction industry provides an indirect contribution to the global economy.

Similarly to all industries, the construction industry has issues which prevent it from
achieving higher productivity and these must be addressed in order to maximise the
effectiveness of the industry.

Purpose and Scope

This scope of this report includes an overview of the construction markets in developing
countries – in particular the BRIC countries. Further, the impact of these construction markets
on the global economy will be assessed. The report then takes a closer look at India’s
construction market; including some specific challenges preventing it from achieving greater
productivity and various strategies aimed at solving these challenges. The final section sees
the author provide an evaluation of the challenges facing the Indian construction markets as
well as some recommendations.

Methodology
The research methodology for this report comprised a broad literature review which
included journal articles, and reports and surveys produced by industry and governmental
departments.

Results
The main findings of this report were as follows:

- The value of the construction markets in BRIC countries has increased markedly from
2005 to 2013
- Out of the BRIC countries, India had the greatest increase in number of people
working in the construction industry over 2005 to 2012
- In addition to the increase in total number employed in the construction industry over
2005 to 2012 – each country saw an increase in the percentage of people employed in
construction as a percentage of the total employed population
- Two reasons that BRIC countries have high growth in construction output are the
increased movement of people into urban centres and the continuing transformation
of the BRIC economies
- Each BRIC country saw a large increase in nominal GDP and GDP per capita from 2005
to 2013
- The increase in nominal GDP and GDP per capita of the BRIC countries has had a flow
on impact on the global economy

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 - Drivers for India’s construction market leading into 2025 include an increasing urban
population and related urban housing shortage, construction and renewal of urban
infrastructure, and the implementation of urban development plans for over 500
cities
- The Indian construction industry has a 40/60 split in infrastructure v real estate
- Employment in India’s construction industry is expected to reach 76.6 million by 2022
- Eighty per cent of India’s construction industry is made up by unskilled workers
- Mechanisation in India’s construction industry has led to increases in productivity
- The Indian Government’s twelfth Five-Year Plan (FYP) projects an investment of US$1
trillion into the infrastructure sector over 2007 to 2012
- The Indian government has introduced easing reforms for FDI across 15 sectors with
the aim of provoking increased foreign investment
- Key issues preventing the Indian construction industry from maximising its
productivity include; a lack of access to skilled personnel, liquidity constraints, and
difficultly around land acquisition

Conclusion and Recommendations

It is evident that construction industries in developing countries have an important role not
only in their respective local economies, but also in the global economy. The ongoing
development occurring in the BRIC countries has certainly been impressive – with the
unassuming driver behind it being the construction industry. A country’s construction
industry drives the whole local economy through its provision and improvement of
infrastructure. Moreover, the construction industry provides a multiplier effect – with a
manifold increase in benefit arising from the initial investment; both in terms of economic
growth and quality of life.

As with any industry, issues arise preventing it from achieving higher productivity. Such
issues in the Indian construction industry include a lack of access to skilled, liquidity
constraints, and difficulties surrounding land acquisition. Some recommendations to address
these issues:

Access to skilled resources

- Government subsidies for the employee or employer for specific types of training
- Creation of strong links between industry and training providers
- Implementation of compulsory amounts of staff training
- Government initiatives to make the construction industry more attractive to students

Liquidity constraints

- In addition to the FDI reforms, address other issues to entice foreign investment e.g.
using examples discussed here - access to skilled resources and land acquisition

Land acquisition

- Increased amount of financial reimbursement

- Government agencies to aid any people who need to find a new place to settle, and
assistance/subsidies associated with the move

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2 – Introduction
2.1 – Background
Construction industries in developing countries have a key role to play by contributing to
each respective country’s economic progress through the provision of infrastructure. In turn,
this economic growth has a further impact on the global economy. Thus, each country’s
construction industry provides an indirect contribution to the global economy. As with all
industries, there are barriers which hinder productivity which must be overcome to
maximise the effectiveness of the industry.

2.2 – Scope
This report will provide an overview of the construction markets in developing countries –
specifically the BRIC countries. Moreover, the impact of these developing construction
markets on the global economy will be assessed. Further detail will be provided regarding the
Indian construction market, including an overview of various challenges facing the industry
and various strategies being employed to address them.

2.3 – Objectives
The objectives of this report are to:

- Provide an overview of construction activity in the BRIC construction markets

- Discuss the impact of these developing construction markets on the global economy
- Give a detailed overview of the Indian construction market
- Identify and discuss issues facing the Indian construction market, and possible
solutions
- Provide the author’s evaluation and recommendations regarding issues facing the
Indian construction market

2.4 – Methodology
The research methodology for this report comprised a broad literature review which
included journal articles, and reports and surveys produced by industry and governmental
departments.

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3 – Construction activity in BRIC countries and their
impact on the global economy
3.1 – What are the BRIC countries?
The BRIC acronym represents the countries of Brazil, Russia, India and China; and was
initially coined in a 2001 Goldman Sachs paper ‘Building Better Global Economic BRICs’.
Grouping of the countries was on the basis that all were deemed to be at a comparable stage
of newly advanced economic development (Singh 2006).

The 2001 Goldman Sachs paper explored the economic trajectory of the BRIC countries and
found that collectively, the group would play a progressively significant role in the global
economy (O’Neill 2001). This potential future growth of BRIC countries was modelled in
another Goldman Sachs paper; which predicted that the collective gross domestic product
(GDP - in US$ billions) of the BRIC countries would exceed that of the G7 nations (Canada,
France, Germany, Italy, Japan, UK & USA) sometime between 2030 and 2035 (O’Neill 2007).

As considered by the International Monetary Fund’s April 2015 ‘World Economic Outlook
Report’, the BRIC countries are all considered to be developing economies (International
Money Fund 2015).

Thus, we can use data about the respective construction markets in the BRIC countries to
analyse the increasing impact of developing construction markets on the global economy.

3.2 – The construction markets in BRIC countries – employment and

value output
3.2.1 – Introduction

This section aims to quantify the growth of BRIC construction markets in terms of the number
of people employed and the value output of each country’s construction industry.

3.2.2 – Employment in the BRIC construction markets

Table 3.1 contains data for each BRIC country regarding the total number of people employed
in the construction industry and also the percentage of the total employed population
working in the industry.

Total number of people employed

Naturally, as the population has increased in each country, so too has the total number of
people employed in their respective construction industries. Russia is an outlier of this trend
because between 2005 and 2012 its population actually decreased slightly (The World Bank
2016); but despite this, the number of people employed in its construction industry grew by
0.8 million, from 4.6 million to 5.4 million (Russian Federation Federal State Statistics Service
2015).

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From 2005 to 2012, Brazil saw its construction labour force (CLF) increase from 5.6 million
to 8.8 million (+3.2 million); India’s increased from 22.9 million to 44.6 million (+21.7
million); and China’s increased from 27.0 million to 42.7 million (+15.7 million) (Russian
Federation Federal State Statistics Service 2015) & (National Bureau of Statistics of China
2014).

Percentage of total employed population

When comparing the 2005 and 2012 figures for the number of people working in the
construction industry as a percentage of the total employed population, we see that Brazil
had an increase from 6.53% to 8.71% (+2.18%). This percentage increase also occurred in
Russia which saw an increase from 6.73% to 7.56% (+0.83%). India had the biggest
percentage increase by far, with a jump from 5.61% to 10.61% (+5.00%). And finally, China
had an increase from 3.62% to 5.57% (+1.95%) (Russian Federation Federal State Statistics
Service 2015) & (National Bureau of Statistics of China 2014).

Summary

This data shows us that in addition to BRIC countries seeing an increase in the total number
of people working in the construction industry; they have also had an increase in the
percentage of their total employed population working in construction.

Table 3.1 – BRIC countries: Number employed in construction industry and percentage of the
total employed population employed in construction; 2005 v 2012

Number employed in construction Percentage of the total employed

(million persons) population working in construction
Country
(percentage - %)

2005 2012 2005 2012

Brazil 5.6 8.8 (+3.2) 6.53 8.71 (+2.18)

Russia 4.6 5.4 (+0.8) 6.73 7.56 (+0.83)

India 22.9 44.6 (+21.7) 5.61 10.61 (+5.00)

China 27.0 42.7 (+15.7) 3.62 5.57 (+1.95)

Source – Data compiled using (Russian Federation Federal State Statistics Service 2015)
& (National Bureau of Statistics of China 2014)

3.2.3 – Value output of the construction markets in the BRIC countries

Table 3.2 shows that from 2005 to 2013, each BRIC country had an increase in the value
output of construction – Russia’s increased from RUB1,711 billion to RUB6,019 billion, India’s
increased from INR2,686 billion to INR8,184 billion, and China’s increased from RMB1,037
billion to RMB4,473 billion. Brazil’s data is slightly different and shows an increase from
BRL100 billion to BRL325 billion over the period of 2005 to 2015 (Russian Federation Federal

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State Statistics Service 2015), (Ernst & Young 2014), (PMR 2016), (EuropaProperty.com 2015),
(FIESP 2012) & (BMI Research 2016).

Further, Table 3.2 shows the percentage increase of the value output of construction for each
BRIC country. From 2005 to 2013, Russia had a 251.8% increase, India had a 204.7% increase
and China had a 331.4% increase; and from 2005 to 2015, Brazil saw a 225.0% increase
(Russian Federation Federal State Statistics Service 2015), (Ernst & Young 2014), (PMR 2016),
(EuropaProperty.com 2015), (FIESP 2012) & (BMI Research 2016).

Table 3.2 – Value output of construction in BRIC countries in terms of GDP; 2005 v 2013, and
subsequent percentage increase in value output from 2005 to 2013.

Value output of construction in

terms of GDP
Country
(current prices/respective
currencies - billion)

2005 2013 Percentage increase from 2005

to 2013 in value output of
construction (%)

Brazil 100 BRL 325 BRL* 225.0%**

Russia 1,711 RUB 6,019 RUB 251.8%

India 2,686 INR 8,184 INR 204.7%

China 1,037 RMB 4,473 RMB 331.4%

Source – Data compiled using (Russian Federation Federal State Statistics Service 2015),
(Ernst & Young 2014), (PMR 2016), (EuropaProperty.com 2015), (FIESP 2012) & (BMI
Research 2016)

*2015 data for construction value output
**2005-2015 percentage increase
Key: BRL = Brazilian Real; RUB = Russian Ruble; INR = Indian Rupee; RMB = Renminbi =
Chinese Yuan

It is clear that each BRIC country has had a large increase in their construction industry’s
value output over the period of 2005 to 2013. As will be discussed in section 3.4, this
information allows us to analyse how the BRIC construction markets have impacted on the
global economy.

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3.3 – Reasons for the high growth in construction output in BRIC
countries
Increased movement into urban centres

A major reason for the high growth in construction output is the increased migration of
people into urban centres – this is no exception for the BRIC countries which have many major
cities that continue to increase in population, some examples being Mumbai, Sao Paulo,
Shanghai and Moscow (Miller 2013).

As more people move to urban centres, there is an increased need to deliver infrastructure
related to housing, commercial services, social services and provisions for services including
potable water, electricity and sewage. Delivery of this infrastructure is critical to maintain the
quality of life in such centres with burgeoning populations (Miller 2013).

Continuing economic transformation

Another reason for the large growth in construction output in BRIC countries is their
continuation down the road of economic transformation. Over the last 30 years, BRIC
countries have achieved a dramatic structural change in their economies; overall there has
been an evolution away from low-productivity activities (such as traditional agriculture) to
higher-productivity activities (such as manufacturing and service provision) (Naude, Szirmai
& Haraguchi 2016).

This transition from low to high productivity activities has required a concurrent increase in
infrastructure in order to support the new industries; which tend to be more capital intensive
(Naude, Szirmai & Haraguchi 2016).

3.4 – Measures of GDP in BRIC countries and the impact of the BRIC
construction markets on the global economy
3.4.1 – Introduction

This section will analyse the impact of the BRIC construction markets on the global economy.
It includes information about the increases in GDP and GDP per capita of the BRIC countries
and how the construction industry relates to these increases.

3.4.2 – Changes in GDP and GDP per capita in the BRIC countries

Table 3.3 contains information about the BRIC countries regarding changes in GDP and GDP
per capita.

Changes in GDP

As can be seen from Table 3.3 there has been an increase in the GDP of all the BRIC countries
from 2005 to 2013 – Brazil’s has increased from US$892 billion to US$2,391 billion, Russia
from US$764 billion to US$2,080 billion, India from US$834 billion to US$1,875 billion, and
China from US$2,269 billion to US$9,495 billion (Russian Federation Federal State Statistics
Service 2015).

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In terms of percentage increase in GDP over 2005 to 2013 – this equates to a 168.0% increase
for Brazil, 172.3% for Russia, 124.8% for India, and 318.5% for China (Russian Federation
Federal State Statistics Service 2015). Contrastingly, during the same time period, the G7
countries had percentage increases in GDP as follows; Canada – 57.0%, USA – 28.1%, the UK
– 11.0%, France – 27.3%, Italy – 16.0%, Germany – 30.5%, and Japan – 7.6% (The World Bank
2016).

Changes in GDP per capita

Further from Table 3.3, along with the nominal rise in GDP, the BRIC countries have seen a
significant increase in per capita GDP from 2005 to 2013. Brazil’s increased from US$4,817
to US$11,892, Russia’s increased from US$5,323 to US$14,494, India’s increased from US$754
to US$1,499 and China’s increased from US$1,741 to US$6.995 (Russian Federation Federal
State Statistics Service 2015).

In terms of percentage increase in GDP per capita from 2005 to 2013, this equates to a 146.9%
increase for Brazil, 172.3% for Russia, 98.8% for India, and 301.8% for China (Russian
Federation Federal State Statistics Service 2015). Again, contrastingly, during the same time
period, the G7 countries had percentage increases in GDP per capita as follows; Canada –
44.2%, USA – 19.7%, the UK – 4.6%, France – 21.9%, Italy – 12.4%, Germany – 33.5%, and
Japan – 8.0% (The World Bank 2016).

Summary

It is evident that there has been a huge increase in nominal GDP and GDP per capita in the
BRIC countries from 2005 to 2013 – most notably from China which recorded an incredible
318.5% increase in nominal GDP and 301.8% increase in GDP per capita (Russian Federation
Federal State Statistics Service 2015). This is in stark contrast to more economically
developed countries which have shown much more restrained levels of growth in GDP and
GDP per capita (The World Bank 2016) as is consistent with more developed nations.

Table 3.3 – BRIC countries: GDP and GDP per capita in current prices for the years 2000, 2005
to 2014

Source – (Russian Federation Federal State Statistics Service 2015)

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3.4.3 – The impact of the BRIC construction markets on the global economy

In addition to construction industries being a significant contributor to GDP, there are

economic impacts of the industries that extend far beyond their nominal contribution to GDP.
The construction sector, by its nature – acts to produce and improve infrastructure; thus, it
contributes to the delivery of all public services including education, transport, defence and
healthcare, as well as contributing to activities in all other industries. Moreover, it helps to
improve business productivity by increasing the amount of capital available to the labour
force. Ultimately, the economic impact of the infrastructure created by the construction
industry extends to a country’s standard of living (Organisation for Economic Co-operation
and Development 2009); infrastructure is the ‘lifeblood of economic prosperity’ (Miller 2013).

Using the ideas expressed above, we can extrapolate that the increased activity in the
construction industry has a direct flow-on multiplier effect on the expansion of a nation’s
economy through utilisation of the infrastructure provided by the construction industry.
Thus, the large increases in construction activity in the BRIC countries over 2005 to 2013
have led to a concurrent rise in GDP and GDP per capita.

Naturally, this increased economic size of BRIC countries means they are playing an
increasingly significant role in the global economy (Naude, Szirmai & Haraguchi 2016). The
total GDP produced by BRIC countries has been increasing as a proportion of the total world
GDP. From around 10% in 2005, the BRIC share of global GDP rose roughly to 22% in 2015
(Talley 2016); a testament to their increasing importance in the global economy.

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4 – An in-depth analysis of the Indian construction
market
4.1 – Introduction
This chapter will look with detail into the Indian construction market, firstly looking at past
and ongoing market demographics and trends; and where possible, projections for the future.
Following this will be a discussion about the key issues facing the Indian construction market
and the various strategies being employed to address them.

4.2 – Overview of the construction market and construction activity in

India
As a starting point, it should be noted that the construction industry is the second largest
economy activity in India after agriculture and the second largest employer of labour in India
(Nihas, Barlish & Kashiwagi 2016). It also contributes about 78% to India’s gross capital
formation (Iyer and Jha 2006). As a contributor to capital formation the construction industry
has many interconnections with other sectors – it is linked to the growth of most other
sectors. This connection to other sectors, along with its impact on employment and
contribution to GDP make it an important factor regarding the overall prosperity of the
economy (Nihas, Barlish & Kashiwagi 2016).

4.2.1 – India’s construction industry value

As per Table 3.2, the value of India’s construction industry increased from INR2,686
billion to INR8,184 billion over the period of 2005 to 2013; equating to a percentage
increase of 204.7% (Ernst & Young 2014). In 2012, The value of India’s construction
industry accounted for about 8.2% of its GDP (KPMG 2016).

Over the period of 2015 to 2024, India’s construction industry is predicted to grow at
7-8% per annum (dmg events 2015); and by 2025, it is predicted that India will be the
world’s 3rd largest construction market (Deloitte 2014).

Main growth drivers for India’s construction market leading to 2025 (dmg events 2015):

- Increasing urban population which is expected to soon approach 40% of the total
population. This ongoing rapid urbanization will require extensive infrastructure
to support it
- Urban housing shortage is currently estimated to be 18.8 million dwellings; along with
the rural housing shortage, estimated in 2012 to be 47.4 million dwellings. The Indian
Government has already announced its vision of ‘Housing for all by 2022’ and has
begun to implement various measures to increase the provision of affordable housing
(Ernst & Young 2014)
- Construction and renewal of urban infrastructure which is becoming increasingly
inadequate to meet the needs of the population

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 - The Indian government is currently in the process of initiating a new urban
development plan which aims to help 500 cities; it includes cities with a population
greater than 100,000, as well as some cities of religious and tourist importance. These
cities will receive support from the government and be encouraged to engage private
capital and expertise via PPPs to improve their infrastructure and services over the
next 10 years

4.2.2 – Construction industry sectors

In 2012 the percentage share of infrastructure and real estate in the Indian construction
market was 40% and 60% respectively. This trend is predicted to continue until the end of
2016 (KPMG 2016).

Infrastructure construction refers to power & utility projects, transport projects and other
civil works; while real estate refers to residential, commercial and industrial & other
buildings.

Figure 4.1 – Split in the construction sector between infrastructure and real estate

Source – (KPMG 2016)

Real estate

In India, real estate is one of the largest and fastest growing sectors. In 2012-13 the sector
contributed to 4.8% of India’s total GDP. Moreover, it is predicted that the 2012-13 real estate
value of INR4,551 billion will increase to INR13,250 by 2023. Further, by 2025, the sector is
predicted to provide employment for more than 17 million people. The increasing demand
for this sector will be driven by the urban and rural housing shortage, continued expansion
of offices in Tier-II and Tier-III cities and increased demand in the retail, hospital and tourism
sectors (KPMG 2016).

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Infrastructure

By 2017 the Infrastructure segment is predicted to be worth over INR4,774 billion; further
increasing to INR8,674 billion by 2023. There are currently over 1,000 PPPs in the pipeline
(public private partnerships) valued altogether around US$97 billion – thus the
infrastructure sector is set for increasing growth in the coming years (KPMG 2016).

4.2.3 – Employment in India’s construction market

As per Table 3.1; from 2005 to 2012, India saw its construction labour force (CLF) increase
from 22.9 million to 44.6 million (+21.7 million). Moreover, as a percentage of total employed
population working in the construction industry, India had a percentage increase from 5.61%
to 10.61% (+5.00%) (Russian Federation Federal State Statistics Service 2015).

The number employed in the construction industry is expected to increase further to 59.4
million in 2017 and 76.6 million by 2022 (KPMG 2016).

4.2.4 – Construction industry workforce demographics

The Indian construction industry is the second largest employers of seasonal workers after
agriculture. As shown by Figure 4.1, in 2011 more than 80% of those employed in the sector
were minimally skilled, with the remaining 20% accounting for Engineers, Clerical Workers,
Technicians/Foremen and Skilled Labour. Worryingly, only around a third of all construction
workers are legally registered contractors (KPMG 2016).

Figure 4.2 – Demographics of construction workforce

Source – (KPMG 2016)

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4.2.5 – The increasing mechanisation of the industry

The construction industry is undergoing a ‘paradigm shift’ in response to the increased rate
of mechanisation. As a result of demand for fast track completion, construction projects are
demanding increasing levels of mechanisation. As more machinery is employed, the
productivity of the workforce increases; to the point where, at the present time, due to the
use of pre-fabricated structures – the construction of a half million square feet requires only
about 200 labourers, when in 2002 it would have required 700-800 (KPMG 2016).

4.2.6 – The Government’s Five-Year Plans

The Indian government has been using Five-Year Plans (FYPs) since 1947 as a way to plan
allocation of their resources in alignment with their particular goals at the time. Examples of
targets included in FYPs; a certain percentage of GDP growth, percentage reduction in
poverty, total increase in renewable energy output (Planning Commission 2015).

The planning commission has projected an investment of US$1 trillion into the infrastructure
sector for the Twelfth FYP (2012-2017). This has increased from previous FYPs – the Eleventh
FYP had an investment of US$450 billion in infrastructure, and the preceding Tenth FYP had
an investment of US$250 billion (KPMG 2014).

The investments from the tenth and eleventh FYPs were spread across many infrastructure
sectors; including roads and highways, airports, telecom, ports, power, oil and gas, and
railways – all of which have contributed to the Indian economy attaining an improved growth
trajectory in the last ten years leading to 2012.

The large increase in investment for infrastructure between the various FYPs is largely
accounted for in the increasing percentage of the investment sourced from the private sector.
In the tenth FYP, the private sector accounted for 22% of investment while the eleventh FYP
had 37% of private sector investment. The twelfth FYP is predicted to be made up of 48%
private investment (Ernst & Young 2014).

The government’s increased projected investment for the twelfth FYP shows their
commitment to developing the country’s infrastructure and confirms that they recognise its
important role in the continued economic progress of the country (Deloitte 2014).

In equivalent terms, the value of the twelfth FYP is INR56.31 trillion. This amounts to a
construction opportunity of around INR26.7 trillion (Ernst & Young 2014). Appendix A shows
the value of the infrastructure investment and the respective construction opportunity for
each sector.

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4.2.7 – Increasing foreign direct investment (FDI) inflows

Figure 4.2 shows us the value of the FDI inflows into India and also the year-on-year
percentage change in FDI inflows from from 2000 to 2012. The figure shows a relatively
consistent and subdued level of FDI from the early to mid 2000s, which then increased
markedly from 2006 onwards to a higher average level. In 2005 we see that the FDI into India
was about US$8 billion. A peak was reached during 2011 with about US$45 billion FDI,
decreasing to around US$35 billion the following year in 2012. The variable value of the FDI
inflows results in a wavering year-on-year percentage change (Deloitte 2014).

In order to attract the huge investment needed to reach the twelfth FYP US$1 trillion
investment projection; the Indian government has introduced easing reforms for FDI across
15 sectors. A few of these sectors include construction, defence, banking, single brand retail,
broadcasting and civil aviation. These reforms were implemented quite recently in late 2015
with the aim of increasing the foreign investment into the country (Arun 2015).

The FDI reforms are expected to increase the attractiveness of foreign investment in India,
and if successful, by 2020 it is expected that FDI inflow will be around US$180 billion (KPMG
2016).

Figure 4.3 – FDI inflows into India and year-on-year percentage change in FDI inflows from
2000 to 2012

Source – (Deloitte 2014)

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4.3 Key issues facing the Indian construction market and strategies
being implemented to address them
4.3.1 – Access to skilled resources

As discussed in 4.2.4, the majority of the Indian construction workforce is unskilled and also
unregistered. This poses challenges for India in terms of quality management. Moreover,
there is a scarcity of skilled labour which only represents about 9% of the total construction
workforce (KPMG 2016). A lack of senior oversight leads to many Indian construction teams
taking short-cuts on safety and quality. Thus, a lack of expertise can be severely detrimental
to the project’s success (Gale 2012).

Moreover, a large proportion of the construction workforce are seasonal in nature; seeking
employment in the construction industry on an infrequent basis. This leads to a need for
repeat training each time the worker re-enters the industry; with skills previously learnt
having to be re-taught (KPMG 2016).

The Indian government, at both central and state levels are actively implementing skills
development programs in order increase the number of skilled personnel (Deloitte 2014).

To combat the issue, some contractors have taken their own initiative by putting newly hired
employees through project management and engineering training courses in order to upskill
them before the project even begins (Gale 2012).

4.3.2 – Liquidity constraints on construction companies

As a result of financial institutions tightening their funding flows – many construction majors
are experiencing liquidity constraints (Deloitte 2014).

The Indian government has taken various steps in order to increase the ease of access to
funding for infrastructure and construction (Deloitte 2014):

Permission for FDI up to 100% has been implemented in many sectors, meaning that prior
approval through the government or reserve bank is not needed to access foreign capital.

The central government has also set up the India Infrastructure Finance Company Ltd.
(IIFCL), which specifically lends money to the construction sector.

Also, a range of infrastructure bodies and financial organisations have been permitted to issue
long term infrastructure bonds.

4.3.3 – Land acquisition

Disagreements over ‘land rights’ and ‘eminent domain’ can set back a project for years and a
huge proportion of infrastructure projects end up being delayed as a result. It often takes the
average PPP project five years to receive approval (Miller 2013).

The Indian government introduced the land acquisition bill at the start of 2014. Their
intention was to speed up the process for acquiring land for developers whilst also attempting
to maintain the interests of the landowners. Unfortunately, the bill has done little to improve
the situation and has actually added an additional layer of bureaucracy and negotiation.
Moreover, it has increased the transaction costs of land acquisition (Hixon 2014).

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5 - Critique and evaluation of issues & strategies
discussed in section 4.3
5.1 – Access to skilled resources
The availability of a skilled workforce is one of the most important considerations when one
thinks about starting a construction project. A competent construction team ensures that the
project is more likely to run on time, to cost and meet the required quality standards. This
makes it difficult to run a successful construction project in India, as the majority of the
construction workers are unskilled. Moreover, the seasonal nature of the industry is a
problem, as extra training is required to get a returning worker back up to speed. The
government appears to be addressing the issue by implementing skills development
programs, but there are always more ways to address the problem as I will discuss below in
recommendations.

5.2 – Liquidity constraints

Access to a suitable amount of liquidity is vital to the operations of a construction company.
Lack of cash flow hinders a company’s ability to pay subcontractors and order supplies, plant
and equipment; thus, threatening the viability of the construction project. Accordingly, it
appears that the government has recognised this importance and implemented various
measures to provide construction companies easier access to capital. Various capital sources
have been made accessible, including foreign sources, a central government company, and
various construction and financial bodies (through the provision of long term bonds). This
appears to be a fairly adequate response to the issue.

5.3 – Land acquisition

This issue is difficult to address because it may involve displacing people who may not
necessarily wish to relocate. Unfortunately, it is a reality of the construction industry,
especially concerning infrastructure that necessitates passing through a certain area e.g. road
and rail. As a result of the personal nature of this issue, many people will fight for their right
to continue residing or owning the land, thus causing huge delays for developers and
construction companies. The bill introduced by the government appears to have been totally
unsuccessful in improving the situation, and a new approach needs to be taken.

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6 – Conclusions & Recommendations
6.1 – Conclusion
It is clear that the construction industries in developing countries have a huge role to play;
not only in their respective local economies, but also in the global economy. The ongoing
economic development occurring in the BRIC countries is nothing short of astonishing in
terms of the speed of progress – with the unassuming driver behind it all being the
construction industry. We have seen how the activity in the construction industry drives the
whole economy through its provision and improvement of infrastructure. We note that the
industry also possesses a multiplier effect – where there is a manifold increase in benefit
arising from the initial investment; both in terms of economic growth and quality of life. This
local economic progress then has a further flow on effect to the rest of the global economy.

Though, like any industry, there are issues which prevent it from performing at its maximum
productivity. In this case, the discussion has been in regards to India’s construction industry
problems around inadequate access to skilled workers, liquidity constraints and land
acquisition. Each issue hinders the productivity of the construction industry in a different
way and each has different solutions. The Indian government and industry have implemented
some strategies to address each issue; with some being more successful than others.
Ultimately, the solutions to these and other problems facing the construction industry are key
to a more productive industry.

6.2 – Recommendations
6.2.1 – Access to skilled resources

There are various options to increase access to skilled resources:

- Government subsidies could be implemented to cover the cost on behalf of the

employee or employer for specific types of training
- Industry should create and maintain strong relationships with training providers
- Implementation of compulsory training for all staff
- Government could make the construction industry more appealing to younger people
so that they are more inclined to pursue it as a career

6.2.2 – Liquidity constraints

One way to build on the FDI reforms is to make it even more enticing for foreigners to consider
investing by working on improving other issues. For example, a case could be made with the
examples discussed in this report; if the construction industry had better access to skilled
workers and an easier process for land acquisition foreign investors would find the prospect
of investing more enticing.

Adrian Castro Page 21

6.2.3 – Land acquisition

Some ideas for dealing with difficult land acquisition include:

• A slightly higher amount of financial reimbursement

• In the case of displacing people from homes – government agencies set up to aid
people in finding a new place to settle, and assistance plus subsidies associated with
the move

Adrian Castro Page 22

7 – Bibliography & References
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KPMG 2015, Human Resource and Skill Requirements in the Building Construction and Real
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Appendices

Appendix A

Source – (Ernst & Young 2014)

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