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Creating Indian Giants - with technology, cement & steel

India – the world’s largest democracy, recently cruised ahead of the United Kingdom in terms of GDP, as it crossed US $3.5 trillion. China reached this economy size 15 years back, when it also crossed Germany to become the third largest economy in 2007. During the intervening period of Chinese Juggernaut running full steam, several global scale construction companies have emerged from China. In 2007, there were only 4 Chinese companies among top 20 global EPC contractors. Fifteen years later, the count for China is 15. There is no Indian company in the top 20.

As India stands today, ready to leapfrog across a few other countries to take its rightful place, it must make its choices and learn from China’s successes & mistakes. China’s investment into infrastructure can justifiably be called as one of the largest contributors to growth. It provided the backbone to manufacturing and export led economy. The preference to infrastructure investment was hardcoded into its international outreach as well through One Belt One Road (OBOR) program. All this investment is reflected in China’s Gross Capital Formation, which has consistently remained at 40-47% of GDP during last 15 years. The ability to invest was of course supported by China having large current account surplus in all these years.

The story for India could not be more different. Indian infrastructure has seen a transformation since 1998 when NHDP program was launched as first serious attempt to fix the gap. India’s Gross Capital Formation has also scaled up to levels above 30% of GDP since 2004 (except for Covid year) from mid-20% levels in earlier decade. The ability to expand further however has been hampered by its fiscal state. Apart from the Covid year 2020, Indian economy has been running current account deficit annually. This limits its ability to invest and is required to ration the resources available. As such, poor infrastructure is among the biggest hurdles that India faces to its goal of improving the nation’s manufacturing capabilities and support higher employment.

India is striving to improve its manufacturing competitiveness at a time when manufacturing powerhouse China is being forced by global political / economic reasons to shift toward consumption-led growth. China’s OBOR program has also come under severe criticism for unproductive expenditure and debt burden it has created for various countries. With its current account deficit, India cannot afford such wasteful expenditure and must ensure that its infrastructure investments are productive and efficient. India has been spending 5-8% of GDP on infrastructure last few years. By the time Indian economy reaches to a size of US $10 trillion, even by past run rate, we would have spent US $ 4-7 trillion on infrastructure itself. As such during next decade or so, India’s spending an infrastructure could be up to twice the size of current economy of India.

The massive infrastructure investment expected offers an ideal opportunity for India to create and nurture home-grown companies. The Chinese construction companies developed global scale on the back of domestic investments and international projects funded by its banks. Though some of the investment was not sustainable, it helped China in creating global scale. Having 15 Chinese companies among top 20 global EPC companies is the outcome. Having global scale allows these companies to invest into next generation technology, be competitive by developing economies of scale and manage risks by diversifying across countries. For India, splurging its way to achieve scale is not a viable option. The magnitude of its own infrastructure investment provides the right set of conditions though.

For this to happen, Indian Government would need to play an active role as almost 70% of infrastructure investment in India is done by Central and State Governments. As such, it is their policies that would drive the change, starting with re thinking their philosophy on investment, including:

L1 price is not the cost at completion – Bidding done only on the basis of price ignores the project delays and cost overrun that occur during execution. For the Central Government projects being tracked by Government of India, only 18% projects are on schedule, with the rest either delayed or not having a scheduled completion date. Current estimate of cost overrun is over 20%.

Project delays are not unavoidable – Project delays cost valuable resources and are avoidable. There are lessons to be learnt from projects completed on time. They would typically involve availability of approvals, better planning, resource availability, use of technology and well run companies to better manage & execute projects.

Small is not Beautiful – A change in mindset that the more companies bid for a project, the better it is. This has led to progressive dilution of bidding requirements, with the result that several small sized companies with inadequate resources bid aggressively to win. The result is project that is inadequately provided for on multiple counts: skilled resources, technology, funding, planning etc leading to time and cost overrun.

We are living in an age where technology is fast evolving, old systems & processes are getting revisited and climate change is offering both challenges and opportunities. Winds of change are coming to construction sector and politico-economic situation offers an opportunity for Indian EPC companies to break the existing global order. For this to happen, the Government would need to play the catalyst role. Through their investment and procurement policies, they should encourage and nudge the construction industry towards upskilling, higher R&D, increased technology adoption, sustainable construction, and zero tolerance to quality & safety. The Government should also encourage consolidation in the industry as larger companies would have the resources and ability to confront the challenges and drive global standards & efficiency.

For India, its road to sustainably higher growth and a competitive manufacturing sector goes through robust and reliable national infrastructure. We can use this mega investment to drive safety, quality, technology, digitalization, and efficiency in the sector and build Indian Giants to service the world.

It is my dream that we have at least 5 Indian companies among global top 20 EPC firms by the time India reaches the US$10 trillion landmark. What is needed is a bold vision for the industry and an integrated effort to achieve it.

This article is authored by Himanshu Chaturvedi, Chief Strategy Officer, Tata Projects Limited. Views are personal.