The Indian Economy Blog

March 13, 2007

What is the Cement Story in India?

Filed under: Business — Naveen @ 4:58 am

While perusing a budget analysis article Marking time while the sun shines, this line caught my eye.

The itch to use tax policy to achieve micro goals, evident in the relief to small cars last time, was evident once again in the cute (and unwise) scheme to curb cement prices through tax rather than competition policy.

My antennae are more tuned to microeconomic policy issues and so I did a rough check and came up with this and this. The natural question that came up was this: what is the issue with prices in the cement industry and why are taxes so high there? Hence I decided to turn to the wisdom of the IEB readers. What do you think is happening here?

PS: Another reader asked for budget commentary on the IEB. In my opinion, some of the best commentary on the budget 2007 is here.

18 Comments »

  1. The high prices seem to be due to the fact that cement makers can’t open up enough factories soon enough to meet demand.
    Looking at this, this and this, we’ve increased production 50% in the last 5 years and will increase another 60% over the next four years. The cement tax policy will give a small boost to the construction industry and dampen growth in the cement industry (which may be a good thing if real estate prices start to deflate). I’m not a fan of this sort of intervention in general, but in this case I think it’s quite benign.

    Comment by Abdul Shameer — March 13, 2007 @ 8:25 am

  2. Th whole issue confounds me. How did the hike in excise duty help in controlling infaltion? it just seems to contribute to the already soaring prices.i wonder if the government is truly bothered about inflation as long they get a bigger share of the spoils…
    Since the industry has promised not to hike prices for another year, cant the government do the decent thing and reduce the duty?

    Comment by Shwetha — March 13, 2007 @ 9:21 am

  3. The CIA estimates the revenue of the Indian government at only $109 billion a year, or less than America is blowing in Iraq each year.

    Do the state and municipal governments of India get most of the tax revenue?

    Comment by alphie — March 13, 2007 @ 11:26 am

  4. In the past couple of months, the cement prices have seen a surge. Taking the metros for instance, state like Mumbai, where the demand is slightly higher than production, saw a rise in the price of Rs.5 to reach Rs.223-225. In Delhi, where the production is almost zilch, the price is ruling at Rs.208 and it is shuttling between Rs. 205 and Rs.215 in Kolkata. The main reason behind the price jump in these states is the demand-supply gap as the consumption is invariably higher than the production. Going by the data provided for the last three years, the eastern region has seen the production of 55441.93mt of cement production, whereas its demand has reached to 60535.48mt. State wise, Maharashtra from the western region is the highest consuming state in the country with 16784.42mt of demand for cement and only 11376.26mt of production.

    But states like Tamil Nadu, Andhra Pradesh, Kerala and Karnataka saw either a drop or stability in the prices, as the production rate is higher than the demand in the southern region.

    In the last three years, the highest cement-producing region in India has been the southern region with 44882.68mt of production in the year 2006, also with Andhra Pradesh as the highest cement producing state (19935.02mt), it is also the highest cement consuming state (39367.97mt), but 5514.71mt out of its production has gone unused.

    Comment by Rohit — March 13, 2007 @ 6:07 pm

  5. Raising the excise duty and expecting the cement industry to not raise prices will give governement additional money. The rise in cement prices is transferred to higher real estate costs, which are already sky high in India. This way, the FM is trying to make money from a flourishing industry without giving them the incentive to raise money and indirectly curbing inflation. Does it make sense to you people?

    Comment by Aseem Juneja — March 14, 2007 @ 12:54 am

  6. If that is so, then the next question is the reason for the lack of competition in the cement sector or are there other factors at play!

    Comment by Naveen Mandava — March 14, 2007 @ 2:56 am

  7. This dual Excise structure is absurd and impractical. In fact I firmly believe that the FM was merely trying to increase excise duty rates on Cement. He has managed to paint it as an exercise in price control. A shrewd way of raising the excise and not being blamed for the price rise.

    Prices of all commodities have sky rocketed but cement seems to be drawing most of the flak. It is probably true that the cement companies are minting money but it is also true that they were bleeding no more than 3 years ago. In fact times were so bad that many units especially the mini cement plants had shut down.

    Where was the government then? If they can talk of a Maximum retail price why does it also not ensure a minimum floor price.

    Also is rising cost of cement really the reason behind higher cement costs? Typically cement is less that 5% of the sale price for buildings if it is sold for about Rs 2000/sq feet. Thus a 100% increase in cement prices should only have a 5% impact. Housing prices have risen 20-80% over the last two years in most part of the country.

    What is the basis of arriving at the figure of 190 per bag. It is silly. It is also detrimental to the Cement Industry and will act as a disincentive for capacity creation.

    One factor to consider that despite custom duties being slashed to 0% landed costs of imported cement is still higher than locally available cement. This despite fact that local companies are paying excise. If the government is really serious about reducing prices it should cut excise and not raise it.

    Like all commodities the prices will be cyclic let the cement companies enjoy the good times because as sure as night follows day capacities will be built and prices will crash.

    Comment by Tushar — March 14, 2007 @ 1:06 pm

  8. A slowdown in production and a growing demand are the possible reasons behind the rise in cement prices and Finance Minister and Commerce Minister has come up with a prescription of putting a cap on cement prices!!!

    Here’s what the governemnt has to say –

    Supply side constraints continued to affect the cement industry, leading to slowdown in the growth in production of the crucial construction material in the first ten months of this fiscal.

    According to official figures released today, cement production grew by 9.5 per cent at 131.88 million tonnes during April-January 2006-07, against 11.4 per cent a year ago.

    Production growth in cement slowed down by more than half to 6.8 per cent in January against 15.4 per cent in the same month last year.

    In absolute terms, cement production stood at 14.5 million tonnes in January 2007 against 13.57 million tonnes in January 2006 and 11.76 million tonnes in January 2005.

    This fiscal, cement production growth slowed down in five of the ten months, figures of which are available. Besides January, growth in cement production was lower in May, June, August and December.

    Particularly in the month of August, cement production slowed to a mere 2.3 per cent against 19.3 per cent a year-ago because of the monsoon.

    Comment by Sanjay Leela Bhansali — March 14, 2007 @ 5:09 pm

  9. Government is trying to curb the inflation by trying to decrease the demand pressure rather than investing on the supply side. Cement industries are running at full capacity and increasing demand from the real estate and infrastructure projects have put pressure on its operations. This reminds me of the steps taken by the government to stop the raising sugar prices last year. Sugar companies are running in loses today and their share prices have almost bottomed out.

    Comment by Harish Babu — March 14, 2007 @ 10:04 pm

  10. I guess most posters failed to notice the implication of the dual pricing policy. It is a carrot & stick mechanism, where the companies are given carrots (low excise duty) if they keep the price below the government expectations and hit by the stick (higher duties) if they go overboard. As a policy it is fundamental to realpolitik & everywhere from giving sops to R&D and sunrise industries to incetivising small saving for individuals we see this.

    Now, the fundamental question is what price is the right price. This is not easy to answer and if you believe in capitalism should be left to free markets. But, sometimes illiquid & inelastic markets dont exactly act free and a temporary/minor government intervention in a few core sectors cannot be totally unjustified. Fuel, Cement & steel are core elements of our economy and a few percentage change in prices can snowball into a huge inflation monster and I believe that the government cannot be blamed too much for intervention.

    But, care must be taken to make sure markets remain mostly free and supply-demand laws are mostly maintained. And also, long term the industry must still have incentive to invest and grow so that India’s fundamentals are strong. I might also go an extra step of giving tax sops for additional capacity addition investments and slightly increase overall tax (excise etc) so that lazy dogs are punished and fiery movers are rewarded. Frequently this policy must be reexamined so that we dont end up the China way of overproducing everything with government fiat.

    Comment by Balaji Viswanathan — March 17, 2007 @ 12:42 pm

  11. This policy is rooted in the Nehruvian hatred for profit-making. Chidambaram and his cronies are simply displeased that businesses in a certain sector will make a lot of money.

    As Tushar points out above, cement is a very small portion of the overall prices of real estate.

    Comment by Manu — March 21, 2007 @ 12:28 pm

  12. Balaji Viwanathan says:
    “I guess most posters failed to notice the implication of the dual pricing policy.”

    It is a dual taxing policy.

    Balaji Viwanathan says:
    “But, care must be taken to make sure markets remain mostly free and supply-demand laws are mostly maintained.”

    You have confusing tax laws and yet maintain free market. Wow!
    You also maintain supply-demand laws! ha ha!

    Which country do you belong. This is a non-fiction blog, go write your fiction at some other blog!

    Comment by Anonymous Bureau — March 22, 2007 @ 3:42 pm

  13. Dear Anonymous Coward,
    I made a word mistake – pricing instead of taxation. Thanks for the nitpick.

    The law in this case is not as confusing as rest of Indian laws, and if you are having no problems in accepting them, I dont think this is going to add much to the confusion mess – keep below a price for a temporary period till capacity buildup occurs and take lower excise. The industry could lobby for a slight bump in the limit say to Rs.200 or something and maybe even try to get in some temporary sops in other aspects, like faster reforms for capacity building and better credit access for expansions.

    The government has its responsibility in controlling inflation in the core sectors and this last minute fire fighting cannot be blamed too much, though it is another point that we should kick their ass for not responding with better and less clumsy measures earlier.

    Comment by Balaji Viswanathan — March 23, 2007 @ 1:18 am

  14. What I fail to understand is the negative approach towards cement companies for controling inflation; instaed of letting free market prevail we are getting price controls through incentives. Are we truly against further growth in industries as at lower prices newer plants are unattractive; hence if prices are not controlled and are higher people will easily run towards building more plants.

    What about steel, oil and land land why no controls there if we are out to curb inflation.

    These looks like a typical Congress thing. Where they don’t get big money from they (Congress) gets them (cement companies) even.

    Comment by Aditya — March 23, 2007 @ 3:10 pm

  15. As remarked earlier by my learned friends, the Congress government though having a Super team of Chidambaram, Manmohan and Montek has failed miserably to control prices coupled with that instead of paying attention to areas where there is actual speculation like Real Estate, Food commodities, commodity goods like gold/silver etc. Where is manmohaneconomics ?
    In one hand you are increasing interest rates this wilbound to have effect on prices with companies increasing the consumer prices.
    India is growing and it needs no hurdles from the Government now….please let the market takes it own course look at China the country has changed overnight…Government should worry and make plans to grow the infrasturture and the left front.

    Comment by Shwet Agarwal — April 2, 2007 @ 3:49 pm

  16. Dear sir,
    It would be helpful if the market price of cement per bag on the following dates are indicated:

    Prevailing as on 25.06.2005, 28.10.2005,31.03.2006 and 30.04.2007 per return

    Regards

    Comment by M.L.Chatterjee — April 16, 2007 @ 1:58 pm

  17. The federal inflation team (chidambaram, montek and manmohan) needs to be aware of the next 10 yr sustained demand cycle for cement as a result of 100% FDI in realestate sector and come up with a holistic approach of dealing with it.

    half-baked measures like “taking away import-tartiffs knowing that cement wouldn’t be importable in current scenario of clogged-ports” and “bringing in price-control mechanisms knowing they will scuttle growth”…..is all politically-motivated tactics to look good when they go to public for impending federal elections.

    As we all agree, price-gouging (if exists) would have to be dealt-with penalties, but looking at the input costs and supply-demand stats, it wasn’t a price-gouging scenario. Market(cement Mfgrs) is still so fragmented even after all that acquisitions made by big cement giants (Lafarge,Holcim..etc), that it would be very difficlut too hash-out and maintain a prce-gouging scheme on a sustained basis.

    Comment by Krishna Moturi — May 29, 2007 @ 12:35 am

  18. i want to know the price trend of cement bag since june 2006 till date

    Comment by sandeep rai — June 26, 2008 @ 10:13 am

RSS feed for comments on this post. TrackBack URL

Leave a comment

Powered by WP Hashcash

Powered by WordPress