Real Estate News - India

Any slowdown in housing will have a cascading effect on about 100 dependent industries. — Mr Anand Gupta, Chairman, Builders’ Association of India, Mumbai Centre

Mr Anand Gupta

Increasing demand for buildings and infrastructure may have resulted in a construction boom. But it has also created new challenges for the sector in terms of raw material and labour, says Mr Anand Gupta, Chairman, Builders’ Association of India, Mumbai Centre , an all-India body of civil engineering construction companies, including infrastructure and real-estate players. Apart from striving to raise the Indian construction industry to international standards, the Association seeks to improve transparency and accountability in the sector. In an interview with Business Line, Mr Gupta discusses the issues that confront the sector.

Excerpts from the interview:

Do you think construction companies in India are geared to meet the huge surge in demand for buildings ?

Yes. Construction companies have built up capacities in the last five years, evident from the fact that many real-estate developers are developing massive township projects. There is a boom in housing in all the cities.

Do builders usually have a price escalation clause to ensure that increased raw material costs are passed on to the client?

By and large, all big contracts have a price variation clause. The reimbursement of increases in labour charges is linked to the Consumer Price Index whereas escalation in material prices is linked to the Wholesale Price Index.

What is your view on the raw material situation, especially with regard to steel and cement?

Our country is blessed with huge iron ore deposits, one of the principal raw materials. The international body tracking the steel manufacturing sector, “Steel Dynamics”, states that the cost of manufacturing steel is cheapest in India.

However, the price of steel bars/rods is very high. The steel industry’s view is that with the Indian economy getting integrated with the global one, steel prices (as a commodity) would be governed by global trends.

However, given the huge availability of raw material and the low manufacturing cost, the construction industry feels that the high prices may be unjustified. The industry, therefore, feels there is a need for a Regulatory Authority for steel. India is the biggest cement producer after China. The price of cement has increased from Rs 150 per bag at the beginning of 2006 to Rs 260 in June 2007, without any increase in excise duty, royalty on limestone, sales tax or increase in the cost of coal. It is pertinent to note that even today 66 per cent of the coal requirement of the cement industry is met at a regulated price.

The construction industry feels the price increase is not driven by a demand/supply mismatch, but by an informal pricing arrangement amongst producers. We feel there is a strong necessity for a Cement Regulatory Authority.

How would you compare the Asian construction industry with ours?

Indian companies do not dominate the global markets in terms of construction activity. But India alone accounts for 12 per cent of the global (potential) construction market. However, Asian companies are increasing their presence in the global markets. In 2000, among the top 225 global players, there were 12 companies from Japan, eight from China and four from Korea.

A year later, in 2001, China had over-taken Japan. There were 18 companies from China against 16 from Japan. The number of companies from Korea had also increased to five. There was still no Indian company in the list.

Out of the 18 Chinese companies, 10 had a turnover in excess of $1.2 billion, as did four out of the five Korean companies and one each from Egypt, Brazil and South Africa. In 2005, the number of Chinese companies in the top 225 had increased to 49 with 25 having turnover of over $1 billion. In contrast, the turnover of most large Indian construction companies would still have been less than $1 billion.

Given that there have been strong moves by the Government (and the RBI) to curb unrealistic growth in the realty sector, are there real concerns about property prices?

The Government and the Reserve Bank of India seem to have had the opinion that the price boom in the property market would lead to a bubble. They have, therefore, made a series of interest rate hikes on housing loans. This had the effect of slowing down the sale of flats from March 2007.

‘Housing’ has backward linkages with 100 other dependent industries such as cement, steel, sanitary ware, tiles and so on. Any slowdown in housing would, therefore, have a cascading effect on the dependent industries.

This is why the RBI chose this sector — with a view to quickly curb overall inflation. Banking studies show that 85 per cent of flat purchasers availing bank credit are first-time purchasers. The Builders’ Association of India, therefore, feels the RBI’s concerns are misplaced. The present boom is consumer-driven and not investor-driven.

Quality of labour has always been a key issue of contention. How does the industry train labour?

By and large, there is no regular training for labourers. Companies such as Larsen & Toubro, Hindustan Construction and Jaiprakash Associates have their in-house training arrangements. Industrial Training Institutes do not have a regular course for carpenter, mason or bar-binder. However, the Builders’ Association of India (BAI) very recently started the “National Council for Construction Education & Training (NCCET)”. To start with, we have launched the “Industry Route Certificate,” valid for three years, to be made permanent after candidates pass the required tests, to be conducted by the BAI.

However, compared to the US or Europe, the productivity of labour in India is much lower and the country has a long way to go before it can reach those standards.

Article by: Vidya Bala - www.thehindubusinessline.com