For last few days, an undeclared war was going on among business media, cement manufacturers and commerce ministry and obviously first two parties belonged to same side. Whole thing started with finance minister’s proposal to apply an excess amount of excise tax on cement if they fail to keep the price low. How much ever ridiculous the proposal might be, it fueled the question of rising price of cement and its contribution towards on going inflation.
Following the tax proposal, cement plant owners did increase the price further by Rs. 12/- and that aggravated the issue. Suddenly, tax proposal issue and its possible implication on latest price raise, preoccupied the market. Government’s ego got tempered and commerce minister Mr. Kamal Nath started bailing out statement regarding possible application of regulatory cap on cement price; he even threatened to ban the cement export. And after few days, today cement manufacturers’ association decided not hike cement price for complete one year. Following this decision Mr. Kamal Nath declared, something in line of a payback cheque, that they are considering possibility of rolling back of the proposed excess tax duty.
The funniest part of the whole drama lies here – weightage for cement in WPI is only 1.73. Cement price is increasing, and it increased at 14.2% rate for the week with 6.73 inflation. But effective contribution was much less to the inflation. Cement price in India increased for few things like, increased transportation cost, sudden seasonal mismatch in demand and supply and increased cost of inputs.
If we segregate Indian Cement plants, they are of two types – north Indian and south Indian. Combinedly, current capacity utilization is almost at 90%, with an installed capacity of 165 Mt. India is going through a massive infrastructural development phase. It’s fueling the cement demand. It will last for coming 3-4 years. As capacity addition process takes long gestation period, cement manufacturers often increase price to match the demand mismatch. It’s common market practice. Besides, high input price also compels them to hike price. And there is no illegality in it.
Cement is no essential commodity, lesser or no daily consumption of cement doesn’t kill people. It’s just another construction item. Increased price of cement makes the project costly, but that no way create day-to-day penury for common people. Again construction jobs can be of different types – ranging from bridge and roads to luxurious entertainment center and villas. Their necessities/essentialities are different, and off course road is more essential to luxurious villas. Increased cement price will make both of the projects costly. That will again raise those projects’ prices and demand for less essential commodities will shrink down to some extent. This will again adjust the demand for cement and some price correction will be experienced in short term. This whole process is basic nature of market economy. And this way market clears out any demand –supply mismatch. If such mismatch persists for quite a long time manufactures go for capacity expansion and as capacity increases better supply lower the prices.
Market economy in its purest form is hardly followed in any country. Statutory bodies often interfere with the market mechanism to implement their social obligations. And such inference reaches extreme point when government follows arm-twisting to regulate price and try to impose some exogenous price on the industry players. This has happened in case of Indian cement companies. Government could have done much better by following less regulatory but more effective policies like, cutting import tariff, lowering transport cost and facilitating more rail transports etc. Policies meant for better supply would have solved the problem in smoother way but putting cap on the price will definitely aggravate the scarcity, as we have seen in license era. Even, government regulation can potentially weaken investors’ sentiment and huge capex plan for the industry may suffer fund shortage in coming days. Time will ultimately show what’s in it but this anti-reformist practice from government side will definitely have lasting effect – both politically and economically; reformist Finance Minister and Prime Minister just can’t deny the charge.
