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Development Economics Social Sciences
Constructing the Palace of Illusions: Lofty Goals and the Structural Problems in Construction
September 20, 2016
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Construction is one of the most underrated sectors in the economy. We come across construction projects on a daily basis. On seeing a construction project, we immediately think about the activity associated with the structure, for example the construction of an apartment building is related with housing or the metro construction projects are always related with metro expansion. But what we fail to notice is that construction is one of the most important sectors of the economy. We tend to associate infrastructure with some abstract services rather than actual construction activity.

Again, the importance of construction cannot be overemphasized. It is imperative for the development of any economy. We need basic housing, transport, commercial facilities, entertainment hubs and power generation infrastructure for socio-economic development. The construction activities are broadly divided into two groups. The first comprises of infrastructure which includes transport, sewage and water treatment (facilities) and electricity generation systems. The second comprises of commercial centres, housing, industries and entertainment complexes. The Indian construction sector has a net worth of US $ 126 billion. The growth rates for some time have been in the vicinity of 5-6%, the sector experiences seasonal slowdowns but they are short lived. The construction output growth rate for June 2016 was 5.2% and the contribution to GDP for the first quarter of 2016 was US $ 34 billion. It employs about 35 million people.

Construction sector faces a lot of problems which have started to hamper its growth. Historic double digit growth rates seem like distant dreams. Construction in India remains a labour intensive activity. It employs a large number of unskilled and semi-skilled workers. This however leads to a paradox. Unskilled and semi-skilled farm workers migrate to urban centres in search for work and more often than not, they find employment in construction. It has a glut of cheap labour but it faces an acute shortage of skilled personnel, especially in housing, which is evident by the poor quality of construction projects. It also faces acute shortages of building material like sand.

Another problem is construction delays. Lags in construction cost both developers as well as buyers. Unsold units are yet another burden. Large, unplanned construction projects also lead to loss of lives and resources in the absence of safety norms and practices. Monopolies and corruption pose problems for the government as well as small developers who cannot compete with deep pocketed construction behemoths. A great example would be Gurgaon in the National Capital Region, where in the initial phase of development, more than half the projects were granted to DLF and Unitech. The scenario has changed but they still have the first movers’ advantage with latent capacities.

Small scale developers and builders suffer the most in this sector. They have to coordinate with a large number of groups including owners, potential buyers, laborers and local municipal bodies. Their emphasis, often is on low cost from the beginning. When delays in the project push up the costs, it becomes a cause of concern. Credit is not easily available. This lead to two problems, one, payment of hefty interest rates. Second, inability to purchase building materials in bulk and subsequent fluctuations in the prices of the same.

Coming down to the policy framework. This sector favors the policy makers. It kills not just two but multiple birds with a single stone. It adds to the infrastructure, solves the housing problem and also provides jobs to a large number of people. However, most legislations and regulations in the sector favour the big players. For example, 100% FDI would only bring investment in large housing, township and commercial projects. Investor protection norms are redundant for the small developers because there are no investors to speak of.

There are many policies which have been introduced and they many yet to be introduced. Some of the important ones are:

The Smart Cities Project. Existing urban centres will be selected for investment and new cities will be planes. These cities will be developed with world-class urban facilities and with the ability to accommodate the rapidly increasing urban population. There are 20 cities which have been short-listed and 80 cities which are to be selected. Clearly, this mission would give a huge boost to construction. But the scales would still be tipped in the favour of large developers as small developers would not have the know-how or the funds to produce the desired quality of projects.

The Delhi Mumbai Industrial Corridor. It’s a stretch of 1,483 km consisting of nine mega industrial centres between Delhi and Mumbai. It will be financed by the government and foreign investment. The plan is to construct industrial centres, ports, airports and road networks.

Pradhan Mantri Awas Yojana-Urban. A scheme initiated by the Modi government to provide housing to the urban poor. 305 cities and towns have been identified for construction of housing and the scheme will work in four ways. It will initiate rehabilitation of slum dwellers, credit linked subsidy for construction of houses for the weaker sections of the society. The housing goal will be achieved through public private partnership and subsidies will also be given for individual housing contracts. This is a bold step to combat the shortage of housing in urban areas. Financial assistance of US $ 30 billion has been sanctioned for the same.

Pradhan Mantri Awas Yojana-Gramin. Another scheme which seeks to achieve universal housing but in rural areas. With this scheme, the government aims to construct 1 crore houses in rural areas. It has an estimated budget of US $ 12.2 billion.

Gujarat International Finance Tec-City. It is a huge central business district near Ahmedabad and Gandhinagar which is currently under construction. It is one of the biggest business districts in the world with an area of 8.5 million square metre.

There are many other programs which would boost construction once implemented.

There is huge potential in this sector. India needs infrastructure, housing and commercial construction projects. Construction is a labour intensive activity and can absorb a large number of people. But it faces a lot of problems which need to be addressed for achieving rapid growth. It has received attention from policy makers but assistance has not been given to small producers. Also, ease of doing business and timing lags are problem areas.

NITI Aayog is set to introduce policies to promote growth in construction. It would be targeted at debt ridden companies and would help construction in getting access to credit.

I read an interesting piece on planning of cities, which called them unchanging cages for human beings. This, I felt resonated with the current scenario of construction in India. The author stated that instead of being cages fashioned in the latest trends, cities should be like ecosystems, changing and growing with time. A philosophical change is required in conjunction with policy measures to help this sector in realizing its potential.

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