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<span style="font-weight: bold;">Samir Bansal, General Manager - India, Off-Highway Research</span>, explains the current market trend for Indian construction equipment and the outlook till 2021.&nbsp; <br /><br />Strong domestic demand generated by ongoing infrastructure development projects resulted in the construction equipment market rising to an all-time high of 72,197 units in 2011. Then, with no major initiatives by the government to further speed up infrastructure development, the construction equipment market declined for three consecutive years to a low of 47,889 units. <br /><br />Nevertheless, after declining, the trend reversed and the market grew by two per cent in 2015. The policy and administrative decisions of the new government to speed up infrastructure development showed positive results in 2016, and sales of construction equipment increased by 36 per cent to 66,613 units. Major contributors to this growth were crawler excavators, backhoe loaders and compaction equipment.<br /><br /><span style="font-weight: bold;">Key market observations</span><br />The domestic market is dominated by six equipment types: backhoe loaders, crawler excavators, mobile cranes, mobile compressors, compaction equipment and wheeled loaders. These equipment types together accounted for 93 to 96 per cent of the total construction equipment market during 2011-2016. These six equipment types will account for 94 per cent of the market in 2017.<br /><br />Backhoe loaders would account for 43 per cent share and crawler excavators 25 per cent of the total market in 2017, while the share of mobile cranes would be 9 per cent and mobile compressors 6 per cent. Compaction equipment would account for 6 per cent and wheeled loaders 4 per cent of the total market in 2017. <br /><br />The share of motor graders, asphalt finishers, mini excavators and skid-steer loaders would individually account for one per cent of the total market, but crawler dozers and rigid dump truck sales would decline further below one per cent due to a slowdown in mining equipment demand in 2017. All other equipment, including rough terrain lift trucks (RTLTs), crawler loaders, wheeled excavators and articulated dump trucks would continue to be sold in small numbers, although sales of RTLTs would grow in 2017.<br /><br />Infrastructure development is a key economic driver and enjoys an intense government focus that should accelerate demand for construction equipment in the country. India needs an estimated investment of Rs 31 trillion over the next five years to keep pace with its growth targets, of which over 70 per cent would be needed for power, roads and urban infrastructure segments that should boost demand for construction equipment in the country. <br /><br />In Budget 2017, the government had increased the total allocation in the infrastructure sector by over 10 per cent, from Rs 3,586.34 billion in 2016 to Rs 3,961.35 billion in 2017. The total expenditure on transportation including rail, road and shipping was increased by 11 per cent from Rs 2,169.03 billion (revised estimate) in 2016 to Rs 2,413.87 billion in 2017. <br /><br />The government is monitoring all the infrastructure projects at the highest level and obstacles are being removed for quick execution. It is taking continuous initiatives to reform procedures and policies such as environment and forest clearances, and land acquisition issues more efficiently. <br /><br />Various innovative ways of financing infrastructure projects are also being worked out. A hybrid annuity model, rescheduling of premium payments, funding of distressed projects and exit options for private contractors in road sector are examples of such initiatives. The government has also proposed a National Infrastructure and Investment Fund (NIIF) and tax-free bonds for various infrastructure projects. Apart from sourcing funds from the World Bank and the Asian Development Bank, the New Development Bank (NDB) or the BRICS Bank will also support infrastructure investment in future. The World Bank has been supporting the India Infrastructure Finance Company Ltd (IIFCL) by financing PPP in infrastructure. Issuance of Rupee-denominated bonds in foreign capital markets is another alternative for mobilising resources for financing infrastructure projects. The government is also trying to attract foreign investors to this sector.<br /><br /><span style="font-weight: bold;">Economic scenario</span><br />The current macroeconomic scenario in the country is very stable as inflation is expected to remain below targeted four per cent, foreign exchange reserves are over $400 billion for the first time, fiscal deficit target of 3.2 per cent is expected to be achieved and current account deficit is under two per cent. <br /><br />The government investments are also targeted towards infrastructure development and it is taking forward the reforms agenda at a brisk pace. However, demonetisation and GST will bring about changes in business practices, leading to turmoil during the change period, but would be very good in the long term for the industry. These have had a temporary adverse impact on GDP growth and jobs in the unorganised sector that was not regulated earlier. Further, huge NPAs of the banks, especially public sector banks, have adversely impacted the credit growth.<br /><br />In view of the above, the government has recently announced a stimulus package of Rs 9 trillion that includes the following:<br /><br /><ul><li>Rs 6.92 trillion highways package for development of 83,677 km of roads by 2022, which is expected to generate jobs for 142 million man-days over next five years.</li><li>The package includes construction of 34,800 km under Bharatmala scheme </li><li>(Rs 5.35 trillion). This would be financed through Rs 2.09 trillion market borrowings, </li><li>Rs 1.06 trillion private investment, Rs 2.19 trillion from Central Road Fund </li><li>and Toll-Operate-Transfer (TOT) model.</li><li>Balance 48,877 km will be developed concurrently under other current schemes with an investment of Rs 1.57 trillion. This will be financed by Rs 970 billion through Central Road Fund and Rs 590 billion through gross budgetary support.</li><li>In addition, central and state governments will spend Rs 882 billion in the next three years for construction of rural roads under PMGSY.</li><li>Recapitalisation plan of Rs 2.11 trillion for public sector banks over current and next fiscal year (until March 2019). This would be funded by Rs 1.35 trillion from bonds, Rs 180 billion from budgetary support and remaining Rs 580 billion from share sale.</li></ul><br />Both announcements will help in spurring construction and economic activity in the country, which will result in higher GDP and job growth. These, along with other ongoing schemes, will help in sustaining the growth momentum of construction equipment during the next few years. The simple truth is that there is a massive amount of work still to be done in the infrastructure sector, and this will call for large volumes of equipment to complete it. How great those volumes will completely depend on the government's effectiveness in facilitating project execution and addressing the key impediments. The demand for construction equipment has remained subdued in the last few years on account of the slowdown in infrastructure development activities, but several initiatives taken by the present government have unlocked its growth potential to a great extent. Recent reduction of GST rate for construction equipment from 28 to 18 per cent will also boost sales in the future, although it will have a marginal effect in the short term.<br /><br /><span style="font-weight: bold;">Future prospects</span><br />Off-Highway Research is bullish about the future prospects for the sector and forecasts the market to grow by nine per cent to 72,745 units in 2017 and a further nine per cent in 2018 to 78,970 units. Due to the general elections scheduled in 2019, demand is expected to increase marginally, but is predicted to grow by eight per cent in 2020 and a further five per cent in 2021 to over 90,000 units.<br /><br /><br /><br /><br />