The Hindu Business Line : Cement worries

Worried by the "abnormal" increase in cement prices — not commensurate with the rise in input costs — the Centre has asked manufacturers to rein in prices within a week. The Centre is obviously under pressure from a section of consumers, especially the powerful builders' lobby, to step in. In a cyclical industry where price and distribution controls were removed in 1989 and the industry de-licensed in 1991, it is a moot point whether the Government should persuade itself to intervene only when prices are going up. There was no such stirring within the Government when the cement industry was struggling for more than two years with low prices. Some of the large regional players even had to get their debt restructured. The industry can very well turn around and ask the Government why it did not intervene then. An intervention will be justified only when the Government has evidence of cartelisation or of a monopoly situation emerging.

The Indian cement industry is fragmented, with the top five players accounting for nearly 50 per cent of the installed capacity of about 160 million tonnes and with small, regional players holding the balance. By all accounts, the current price increase is a result of the demand-supply mismatch, a consequence of the construction boom in the major cities, which has also caused runaway increases in the price of land, steel and other materials. The industry may argue that cement accounts for hardly 5 per cent of the construction cost in building projects, if the land price is also included. It is not that the Centre should sit back and watch. Creating an enlargement in supplies is an obvious answer. The 2006-07 Budget reduced the Customs duty on cement to 12.5 per cent, but this is not likely to be good enough to cause a surge in imports, as the infrastructure at the ports is inadequate to handle large arrivals.

The Centre would do well first to ensure that various bottlenecks such as inefficient transportation infrastructure are looked into. The industry has evolved in recent years to match global standards with some of the top international majors coming into the country. Prices too match global trends. The industry is in the throes of consolidation, and the existing players are looking to expand capacities. There has also been a demand to curb exports of cement. At 6 million tonnes, these are just about 4 per cent of the total production of 141 million tonnes in 2005-06. Curbing that may have but a marginal impact on prices, but leave a deep scar on an industry that has just begun to adjust to market forces. Would it not make better sense for the Government to go lighter on the tax burden — excise and sales tax add up to almost Rs 50 a bag?