Builders need builders: India’s growing construction industry

Amit Patel | December 6, 2022

After agriculture, the labour-intensive construction industry is the largest employment generator in India and serves as a crucial economic barometer.With linkages to industries in over 250 other sub-sectors including cement, steel, chemicals, paints, tiles, etc. The construction industry in India also has a strong connection to the real estate sector which is expected to reach $1 Tn by 2030 and will contribute 13% to India’s GDP.

After agriculture, the labour-intensive construction industry is the largest employment generator in India and serves as a crucial economic barometer.

We have witnessed the upswing in construction activity post the pandemic. Further, with the country having the potential to become the third largest construction market globally in terms of size by 2023 , the industry has been high on the government’s reforms and development agenda. In addition to the government’s large focus on infrastructure development, more than 950 million sq. ft. of built environment is being added to Indian cities every year.

Although the construction sector continues to recover from pandemic-related challenges, the resulting impact over the past two years has altered many of the typical approaches that were used earlier to manage construction practices. With construction output expected to grow at 7.1% year on year, timely resource availability is still a major contributing factor to delays.

Despite a substantial increase in the number of projects under development, the demand for contractors and skilled workers still exceeds supply by a large margin. Data from government and industry reports suggest that projects in India suffer from 20 to 25 percent time and cost overruns. 

We know that COVID-19-induced lockdown restrictions and the resultant migration led to a dramatic dip in the labour pool. That dip has been reversed in 2022 and overall employment in the sector is on track to return to pre-pandemic levels. In order to retain skilled workers amid the current labour shortage, many employers increased wages, benefits and incentives. In Q3 2022, as a result, average hiring costs for skilled, semi-skilled, and unskilled labour increased by about 8 to 10% nationwide.

Table 1: Labour wage overview as of Q3 2022

While the costs and procurement timelines for key construction materials are expected to stabilise, the same is not true of construction labour. Construction companies in India today struggle with labour shortages amidst a ready supply of over 74 million workers. Moreover construction workers lose up to 40% of their income for lack of direct access to opportunities. 

Skilled labour is leaving the workforce

For informal construction workers today, wage and payment delays are not uncommon, and get worse during downturns. Recourse for non-payment is non-existent. Most of these informal workers are not registered with the labour department, and accept wages in cash at sometimes lower than minimum wage for lack of access to other opportunities.

Beyond this, workers do not have any health or retirement benefits and typically do not have enforceable employment contracts. They do not have a record of their work history or income potential and lack access to credit.  Wage workers typically earn the same wage irrespective of their expertise and work experience, which there is no way to validate today. 

Skill development, financial literacy, healthcare, credit and access to the digital economy are all out of reach to informal construction workers and obviously cannot be solved for by their fractional employer on record.

Contractor woes

Cashflows – all roads lead to this magical place. The success of any contractor depends on the pace of billing and the ability to keep overheads low. This in turn depends on the productivity or output the site can deliver as a function of time. A shortfall of any one of these – workers, materials or cashflows; can directly impact a contractor’s bottom line.

A contractor able to pay his workers irrespective of the timing of his collections, is always able to maintain a predictable workforce and project pace. A contractor unable to pay workers if billing and collections are delayed, is almost always likely to face attrition. In both cases there is a value erosion to the contractors bottom line.

Additionally, most tier 1 contractors have up to 20% of their total billing on hold by developers or project management consultants for non submission of labour compliance data. Because labour compliance is complex and offline, leading contractors in the country have an entire administrative set up to manage and file labour compliances. This is not possible for smaller contractors.

The future is digital

As the construction industry grows, it is beginning to lean more into digital technologies supporting a more efficient and productive workforce.  The construction sector proved to be a huge job creator during the infrastructure boom of the recent past. It can be a boon for unskilled and semi-skilled workers. As the sector sees another upswing, we will witness large-scale employment creation, albeit informal.

Platforms like Bettamint are already working towards bridging the gap between labour supply and demand. Providing tools to contractors to hire, manage and pay their informal workforce while helping build an authenticated public record and a steady income stream for construction workers.