Infrastructure Construction Will Be Key to India’s Economic Revival post Covid19

The near-complete shutdown of all economic activity in many major economies worldwide earlier in the year not only invited this recession but with the health crisis due to the pandemic refusing to go away, all signs point towards a slower, prolonged and likely painful economic recovery.

The ongoing pandemic has forced nearly every economy in the world into a recession. The International Monetary Fund (IMF) has even forecasted it to be the worst global recession after the Great Depression of the 1930s. The near-complete shutdown of all economic activity in many a major economies worldwide earlier in the year not only invited this recession but with the health crisis due to the pandemic refusing to go away, all signs point towards a slower, prolonged and a likely painful economic recovery. For India, the prognosis is bleaker on account of the economic slowdown that was hurting us even prior to the pandemic. For policymakers searching for answers, an important question worth asking is: can a renewed central government commitment to infrastructure projects hasten India’s economic revival?

Historically, when faced with an economic recession, most countries have bolstered their public spending in the form of fiscal stimulus to accelerate economic activity. A significant proportion of this ‘pump-priming’ investment typically goes into building new infrastructure. For example, the New Deal of 1933 not only gave the United States its famous highways; but also led to the construction of thousands of new dams, bridges, airports, schools, hospitals and stadiums. Over the next six years, the US government funded the construction of more than 34,000 projects across the country, which directly reduced unemployment and went a far way in setting the country on a path to recovery.

In the aftermath of the 2008 global recession, IMF had recommended all countries to provide fiscal stimulus equalling two percent of their respective GDPs. In one of its reports added that “the length and severity of the downturn justify greater weight on public investment in projects that typically have long lags but bring substantial long-term benefits.” China and Japan notably stood out for exceeding IMF’s recommendation and mounting stimulus packages amounting to roughly seven and three percent of their GDPs. In the case of China, the stimulus package was directed mainly at infrastructure construction for railways, subways, airports and public housing.

The imminent recession in the wake of COVID-19 pandemic undoubtedly necessitates policy on similar lines on the part of India’s policymakers. What makes this policy more critical for India is the already existing severe shortage of critical national infrastructure, which is often touted as a significant obstacle for economic growth. Last year’s Economic Survey noted that India needs to almost double its annual spending on infrastructure, from $100-110 billion currently to at least $200 billion, to achieve the aspiration of being a $10 trillion economy size by 2032. This level of spend corresponds to around seven to eight per cent of India’s current GDP.

In this background, the vision of being Atma-Nirbhar Bharat, and the announcement of 102 lakh crore national infrastructure pipeline projects, assumes significant importance. Together with the special economic package worth 20 Lakh Crore, that was announced a few weeks ago, the Indian Government is aiming for self-reliant and long term structural reform in the economy. New airports, railway stations, metro rail network, roads and highways will provide and impetus to infrastructure growth and shall be a moving force behind realization of India’s growth aspirations.

Many compelling reasons support the need for increasing infrastructure spending in India. The construction sector contributes over 7% to India’s GDP, which is a significant contribution. It is also labour-intensive and thus the second largest employer after agriculture. According to a recent projection, the construction industry would employ more than 75 million people by 2022, which merits attention and continued investment. 

Increased public spending on new construction projects will not only mitigate unemployment that seems inevitable after a prolonged nationwide lockdown and ongoing pandemic, but it will also have a multiplier effect on the GDP’s growth. Besides core construction, the allied industries such as steel, cement, real estate, transportation and electrical fittings, among others will directly gain from increased public spending on construction, and further impact the economic revival positively.

For the construction industry, this recession is a golden opportunity to accelerate its digital transformation, which has proven its worth globally in making the sector more efficient and profitable. The sector has always been seen to be a productivity-laggard. As per McKinsey, the annual productivity growth in the Engineering & Construction industry has averaged just 1% over the past two decades, compared with a 3.6% and 2.8% growth rate for the manufacturing sector and the global economy respectively. Another research in the US revealed that for all construction projects, 10% of materials are wasted; 30% of all construction reworks, and 40% of jobsite work is unproductive. As a result, 40% of projects are over budget, and 90% of projects are late and the figures are not very different for India.

Using modern technological advances like constructible BIM for reduced wastage and rework, cloud-based collaboration that allows onsite and offsite teams to connect and exchange info in real time that minimizes errors, and mixed reality for safer construction, the sector can turn the challenges into a huge competitive advantage. Full-scale digitalization in global non-residential construction alone could lead to annual savings of between $700 Billion and $1.2 Trillion, or about a tenth of the aggregate annual global construction spends. The resultant savings will not only act as oxygen to the already beleaguered industry but can even be passed on to construction workers in the form of higher wages. In many ways, increased digitalization can provide an additional multiplier effect.

Further, given that construction companies also need to adhere to strict social distancing norms even as their work on unfinished projects resumes; use of cutting-edge technologies such as robots on-site and drones for day to day monitoring and execution support will become more valuable than ever. These modern innovations will help ensure companies to ensure enhanced worker safety, besides boosting productivity in the long run. 

What appears to be early steps to resume normalcy in the sector must transform into massive strides once the pandemic’s threat is finally over. Before this year ends, India will need to fire up its infrastructure construction engine to lift itself out of the economic recession. The resultant gains will continue to be realised over a more extended period; a prognosis worth looking forward to.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house