After three years of booming growth, the construction equipment industry could be approaching turbulent times. But the industry's strengths should help it overcome the problems, writes J.P. Nayak, President, Machinery & Industrial Products, Larsen & Toubro Ltd.

Ever since the sub-prime crisis hit USA, financial markets the world over are going through convulsions. Since the beginning of 2008, major financial institutions are reporting substantial write-downs. Equity markets have slid over 30 per cent. Bullion prices have gone up. Oil prices have shot through the roof. Currency markets are charting unexpected paths causing untold losses even on non-speculative hedges. Funds are getting diverted to safer commodity markets, making their demand and price shoot up. Inflation, consequently, is speeding up everywhere in the world. The US economy seems to definitely head towards a recession with growth slowing to near zero rates. Europe and other developed markets seem to be following USA in the slowing of GDP. Even emerging economies are witnessing a reduction in their growth rates. Thus, world economy appears to be slowing from the high 5 per cent seen only last year. What does this hold for Indian Infrastructure and, consequently, Indian construction equipment industry?
The boom seen in the Indian economy, fortunately, is not heading towards gloom. The Indian juggernaut is moving ahead, but at a slower pace. While there is evidently a reduction in the GDP growth rate from the highs of over 9 per cent for the last three financial years to about 8.7 per cent in the just-concluded financial year 2007-08, and over 8 per cent expected in 2008-09. In fact, OECD forecasts an outlook of moderate downturn for India (see chart).
This moderate deceleration is bound to have its impact on the industry. However, the hit is expected to be of a different nature.
The extreme increases seen in the commodity space is affecting the steel markets too. Steel prices have gone up by over 25 per cent. Steel is one of the major inputs for all construction equipment and their aggregate inputs. Hence there is a major impact of input cost increase for all Indian construction equipment manufacturers. The rupee till recently was hardening against world majors. The recent loss in strength of the rupee has also made inputs of construction equipment costlier.
Increasing costs of inputs like steel and cement are also affecting infrastructure building. Many of the NHDP work may get adversely affected and delayed. Fresh investments in infrastructure could also get priced out.

Capacity build-up
Indian construction equipment industry has gone ahead and built up big capacities looking into the boom in infrastructure. Thanks to the liberalised policy regime, the domestic competition is well serving the customers enabling them fair deals. Reduced demand will accentuate competitive pressures on prices. Recession/slowdown in developed markets will lead to reduction in demand for construction equipment. Resultant shift of focus of foreign players to emerging markets will thereby cause more acute import competition in the Indian markets. This would exert further pressure on margins. The domestic industry will have to manage pressures on margins by further improving operational efficiencies.
While the resilience of the predominantly domestic-demand driven Indian economy is expected to remain robust, the impact of global financial meltdown could be strong enough to derail the growth if adequate steps are not taken to address the issues. Government of India has already initiated several steps for arresting the inflation spiral and support growth. For instance, import duties on steel are being reduced or eliminated. Export of steel is being discouraged so as to improve steel availability for domestic consumption. Many more steps need to be taken.
Unshackling the commodity markets is one of highest priorities. Steel price increases are to a great extent on account of input non-availability and cost increases. Iron ore and coal availability needs to be improved by liberalising mining industry and increasing domestic output. This would also have the effect of increasing demand for mining equipment. Free flow of funds for investment needs to be ensured. This could be done by bringing down interest rates for investment. Infrastructural bottlenecks continue to dog growth. Enabling environment for increased FDI in infrastructure is vital.
After three years of booming growth, the Indian construction equipment industry could be on the threshold of turbulent times. The strengths which the industry achieved in the recent past should help it overcome the problems.
Increasing inflation worries of the government and the RBI has already resulted in blowing away expectations of reduction in interest rates. RBI has presently not increased interest rates. However, liquidity has been tightened by increased CRR and this would have an effect of reducing funds available for not only consumption but also investment. This would adversely affect demand for construction equipment. It has already affected demand for smaller equipment like backhoe loaders.