The recovery in the CE industry largely depends on the infra push by the government, capital expenditure by the states and easy availability of financing.

Sandeep Singh, President, ICEMA; and Managing Director, Tata Hitachi

What are the key continuing challenges which you foresee impacting the economy as a whole, and the CE sector on the demand side and capacity utilization side (whole CE industry) post easing out of lockdown in stages?

Post implementation of one of the strictest lockdowns in the world, the Indian economy has been gradually recovering over the last 2 months. However, the pace of recovery remains slow and is also dependent on the control of the spread of Covid-19. The government, through various economic reforms and relief packages, has been actively trying to mitigate the impact of Covid-19. But the Indian economy continues to face demand and supply side challenges.Both private consumption and investment have remained subdued. In Q1, FY21, private consumption declined by 27% YoY and private investments fell by 47% YoY. With a decline in discretionary spending, private consumption as well as investment is expected to remain weak in the current fiscal.

With respect to the CE Industry, it may be noted that the industry was already facing a slowdown pre-Covid and was down by >20% in FY19-20. The financial crisis in the aftermath of the ILFS default had already impacted the CE industry especially because of its heavy dependence on NBFC funding. Covid-19 further aggravated the slowdown and the lockdown and its immediate aftermath almost brought a complete halt to business. Factories were largely shut, movement of finished goods and inputs were affected and on the demand side, work at project sites was impacted because of migration of labour and restriction of movements. In Q1, FY21 Industry volumes plummeted >60% YoY.

Q2, FY 21 has shown encouraging signs of a pick-up in the CE industry mainly driven by increased infrastructure spending by the government in the past few months and good rural demand. The low base effect of the same quarter in the previous year also helped. Industry capacity utilization levels have gradually improved to ~70% andin H1, FY21 de-growth has moderated to (-)24% YoY. It is expected that this recovery in the CE industry will continue into H2, FY21 as well, although the full year growth rate may still remain negative for the sector.

The recovery in the CE industry will largely depend on the infra push by the government, capital expenditure by the states and easy availability of financing.

Post the gradual opening up what has been the impact of the same on the supply chain?

The Covid-19 lockdown caused major supply chain disruptions across sectors, including in the CE sector. Supply chain costs arising due to restrictions in movement of goods (inter and intra state), non-availability of drivers, lack of staff at ports, imposition of high container detention charges by shipping lines, etc. had to be absorbed by the industry during the lockdown.

Post the lockdown, industry supply chains have been gradually recovering as the government has allowed inter and intra state movement of goods and cargo. The supply chain in the CE industry also includes many vendors in the MSME category. The sudden shutdown of business and drying up of revenues severely impacted many of them. With the picking up of demand in the second quarter, these vendors are slowly getting back to some semblance of financial health. But problems such as labour shortages and inadequate cash flows continue to confront them as they seek to ramp up capacities to meet the uptick in demand. We hope that by the end of the fiscal year they will be back on track.

What are the major growth drivers expected to be?

The USD 1.4 trillion National Infrastructure Pipeline (NIP) is the key demand driver for the CE industry. The NIP includes construction projects across various sectors such as road transport, railways, irrigation, water resources, airports, and so on. With the launch of the India Investment Grid (IIG) portal, the government has provided greater transparency w.r.t the status of NIP projects and it is expected that infrastructure spending by the government will continue to remain robust in the coming years.

The government's focus on infrastructure development is evident from the fact that highway construction project awards in H1, FY21 have increased by 140% YoY. Moreover, 23expressways have been announced with target completion dates between Mar 2023 and Mar 2025.The lockdown caused by the pandemic caused severe disruption at project sites but the situation is fast returning to near normal. However, problems of land acquisition and financing through new models have still not been fully addressed.

What further measures should be undertaken by the states / central government?

Delayed project implementation / execution and low adoption of mechanization remain key demand related challenges for the CE industry. The government may consider creating stronger project monitoring mechanisms and setting up of a government - industry task force to identify best practices in project implementation and improving mechanization.

Another key challenge includes long term finance availability in infrastructure. India has sector specific financing institutions that invest in infrastructure projects, viz. Indian Railway Finance Corporation, Power Finance Corporate, Rural Electrification Corporation, etc., however, there is no infrastructure focused bank. It would be good to consider creation of an Infrastructure focussed financial institution/bank that could boost the industry.

Setting up a technology development platform with incentives and encouragement for investment in R& D plus nurturing a vibrant workforce will help propel the industry further.

What is your take on the government's move encouraging the financial institutions as eligible bidders for the infrastructure projects and bringing down the eligibility criteria of bidders to encourage more players in the road sector?

Infrastructure projects typically require long term financing and involve high investment risks. Key challenges such as delayed project execution, cost overruns and land acquisition issues make financiers averse to funding large infrastructure projects in India. To overcome this challenge, the government has been contemplating setting up a new Development Finance Institution for providing long-term-finance for social and economic infrastructure sector projects. Needless to say, this is a step in the right direction and will help remove funding related bottlenecks w.r.t infrastructure projects.

The government has relaxed the financial and technical parameters for bidders in road and tunnel construction projects .This is aimed at increasing the participation of local companies, as a part of Aatma Nirbhar Bharat initiative, in bidding for projects. This is also important from the point of view of the large number of infrastructure projects being planned in the country and a few large infra firms taking the bulk of the work currently. This will enable development of a wide pool of very accomplished contractors.

Post pandemic era how do you envision the transformation of manufacturing processes, marketing and supply chain management, especially with the advent of disruptive technologies?

Covid-19 has brought about key changes in business functions across industries globally and in India. The manufacturing sector in the country, including the CE industry, has adopted smart manufacturing processes such as Industry 4.0 with the objective of automating processes and increasing resource efficiency.

Marketing activities have successfully integrated digital platforms in their customer and dealer interface. During the period of lockdown and even thereafter, there has been a constant interaction with all the stakeholders in the value chain. Online training programmes and webinars were also conducted. While physical interactions with customers has partially resumed (in alignment with the safety protocols)we believe that there will also be continuous engagement through online platforms and portals.

As a part of AatmaNirbhar Bharat initiative, the CE industry has been focussing on increasing localization levels. It may be noted that 90% of construction equipment volumes are more than 50% localized already (the level of localization may vary from manufacturer to manufacturer). Only certain high precision components such as valves, hydraulic motors, electrical sensors and undercarriage assemblies need to be imported on account of low domestic volumes/demand and high capex requirement for setting up manufacturing in the country.

The CE industry is willing to further increase its localization level and seeks government support in attracting investment from global precision component manufacturers to set up manufacturing of mother technologies in the country.

What is the current scenario in terms of R&D and skill upgradation in CE sector?

There has already been a considerable degree of penetration of technology in the CE sector. The pandemic has only emphasized the need for increased adoption of these technologies.

One example is the extensive usage of telematics in construction equipment. ICT enablement helps generate data pertaining to equipment usage hours, efficiency of usage, location, alarms for system malfunction and so on. These reports help in preventive maintenance, better utilization and monitoring of assets, and geofencing. Another example would be the use of fleet management systems for optimal utilization of assets at project sites. In mining applications, there is increased use of autonomous drives and higher usage of technology in safety systems.

Trained and skilled machine operators are essential not only for completion of projects on time and within the desired quality parameters but also from the point of view of safety as most construction and mining equipment are operated in a hazardous environment where adherence to safety norms/standards is imperative. Moreover, with state-of-the-art technology being developed in the CE industry at a fast pace, the demand for trained and skilled operators is expected to increase rapidly in the near future.

Tell us about ICEMA's initiatives to make the CE sector globally competitive?

ICEMA, as a part of its submissions to the government, has also emphasised the need to incentivize manufacture of high precision components in the country by way of higher infrastructure spending and export incentives and easing  inherent common manufacturing disabilities such as cumbersome land acquisition process, cost of capital and logistics, etc. These will make the CE Industry cost-competitive.

At present there exists no regulatory requirement for certified operators of construction equipment.  ICEMA, on behalf of the CE industry, has submitted to the government that project tenders may specifically mention the criteria of employment of certified mechanics and operators. This is essential from a safety and productivity point of view.

What is the bearing on the working capital with rising inventories and higher input costs?

CE industry volumes declined by > (-)60% in Q1, FY21 on account of disruptions caused by Covid-19 pandemic. Needless to say, working capital has remained stressed with lack of demand and higher input costs (especially steel). Moreover, supply chain and logistics challenges have only added to the woes of the Industry. However, the situation has gradually improved in Q2, FY21 with the relaxation of the lockdown across the country and increased government spending in infrastructure.

The CE industry welcomes the recent changes made to the public procurement order in line with Aatma Nirbhar Bharat initiative. The Indian CE industry has the potential to become the manufacturing hub for the world and is fully capable of meeting domestic as well as export requirements as a large base of vendors, mostly MSME, already exists in the country. Export incentivization schemes and sustained infra spending by the government will enable the Indian CE industry to become more cost competitive.

What is the impact on job creation / loss from the CE sector?

The CE industry saw huge shortage (~40-45%) of migrant labour during the Covid-19 pandemic with labourers returning to their home towns / villages. However, the situation has gradually improved post the lockdown most migrant labourers have now returned in most areas. However, gaps still exist and government support in reassuring the workers and enabling their quick return will help the industry ramp up its operations at a faster pace. The Indian Infrastructure Equipment Skill Council(IESC), an affiliate of ICEMA, has been working with all the members in scaling up skilling efforts. IESC has empanelled 61 training partners, more than 400 trainers and 5 assessment bodies in rolling out these skilling programmes.

There was a move from ICEMA requesting the government to defer the roll out of the ‘new emission standards'. Could you throw some light on the current status?

The CE industry has been very proactive and has been continuously engaging with the government as well as the regulators in jointly working out suitable and appropriate regulations to make the industry safer as well as attain world class standards.

The implementation of BS (CEV) IV emission norms for construction vehicles that ply on roads was to have been implemented on 1 October 2020. However, the Covid-19 lockdowns adversely impacted the CE industry's road map of meeting the emission norms as factories were shut, supply chains disrupted and testing facilities not operational.

ICEMA's interacted with the government on behalf of the CE industry to highlight these challenges and the timeline for BS (CEV) IV emission norms has been extended by 6 months (till 1st Apr 2021) by the government. This will definitely help the industry reboot the supply chain and also work with testing agencies to stabilize the manufacturing program for new products.

Delayed project implementation / execution and low adoption of mechanization remain
key demand related challenges for the CE industry.

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