A Mix Bag

A Mix Bag

The Union Budget proposals, prima facie, appear a mixed bag for the second largest cement industry in the world. With margins under pressure and production suffering from increased cost, India's cement industry had demanded respite from high VAT, simpler excise duty structure, scrapping import duty on fuel inputs, etc. However, the Budget 2011-12 presented to the parliament on 28 February 2011 is far from these short-term demands. In his Budget speech, the Finance Minister said "As a measure of relief to cement industry, I propose to replace the existing excise duty rates with composite rates having an ad valorem and specific component with some rationalisation. The basic customs duty on two critical raw materials of this industry, viz, pet coke and gypsum is proposed to be reduced to 2.5 per cent". A day after the presentation, cement prices in Mumbai were raised by Rs 10 for a 50-kg bag.

The tax proposals are likely to create implementation issues in the interim period. The Budget, within its perimeters and called to resolved tax anomaly, has consolidated the specified and ad-valorem rates, the move likely to push up effective prices. As a token, it has also halved the customs duties on petroleum coke and gypsum. While there are not many cement makers using pet coal, gypsum is used in small quantities (about five per cent of total volume) and hence, have limited benefit. Further, the budget has also imposed one per cent excise duty on coal, a new introduction. Coal India, has also decided to revise coal prices upwards, although it did not devolve the quantum but the hikes are likely to be steep while the imported coal costs continue to remain firmly high. This will add to the cement cost, adversely impacting the cement industry.

A closer look reveals a brighter side. The Budget would sustain the buoyant economic growth rate through increased spending on infrastructure creating demand for cement in the longer term. Historically, government spending on infrastructure, particularly in road sector had a positive impact on cement demand. The budget proposes to increase total government spending by 13 per cent in 2011-12 while the allocation for infrastructure sector has been stepped up by 23 per cent. Further, to boost infrastructure development it has allowed tax free bonds to be issued by Railways, NHAI, HUDCO and ports. Besides the infrastructure sectors, the Budget has provided ample stimulant to the housing sector which consumes around 70 per cent of cement supply.

Given the favourable economic conditions and government's endeavour for inclusive growth and increased spending, the cement industry will see a quick resurgence from the demand pangs. In 2011-12 production is likely to increase by over 11 per cent from the five per cent expected this year. However, cost would continue to dog the industry, higher demand would negate this impact.

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