Cement may get 5-year tax break in India

Govt May Set Rider That Units Must Start Production Within Three Years

UNABLE to put pressure on manufacturers to slash cement prices, government is now planning to offer them a five-year tax holiday to set up more capacity to end the current demand-supply mismatch and consequently soften prices. According to a DIPP (department of industrial policy and promotion) source, the government may give a five-year tax holiday to cement units announced on or after April 1 with a caveat that they have to commence production within three years. Cement makers and government have been slugging it out over prices, which have risen by over 40% to a peak of Rs 255 per 50-kg bag in the last 12 months. Manufacturers have so far not paid heed to government’s call to roll back prices, but have promised not to increase it further for a year. Official sources believe that as of now cement manufacturers are in a commanding position, as far as prices are concerned, due to a major demand-supply gap. Various infrastructure and real estate projects have seen construction activity growing at an unprecedented pace, and this has led to growing demand for cement. It is understood that the proposed policy move is also aimed at incentivising participation of many new companies. Indian cement industry’s current capacity is 165 mtpa and the capacity utilisation has been 92% so far this year. Cement production — 127 mt during April-January (2006-07) — has seen a growth of almost 10%. Industry players welcome the proposed move, but also point out loopholes in it. “Such short-term incentives may leave a trail of winners and losers. It would lead to bunching of capacity and the plants that commence production after these three years, would lose out,” says Cement Manufacturers Association vice-president and Shree Cements CMD HM Bangur.

BUILDING TENSION

40% Cement price hike in last 12 months

92% Capacity utilisation so far this year

10% Growth in output during April-January

Cement capacity expansion will be difficult

IT, HOWEVER, may not be easy for manufacturers to take advantage of the proposed incentives. “Equipment supply is a major constraint and cement makers will have to work very hard to finish projects on time,” points out Grasim Industries director DD Rathi. Equipment suppliers’ order book is already full and with increasing demand from India and the Middle East, equipment delivery time has almost doubled from the usual six months. The industry has announced the addition of 42 million tonnes in the next two years. Given the past trend, not all of them are expected to materialise. In 2006-07, manufacturers had announced the addition of 13 million tonnes, but only five million tonnes came up. The fact that cement makers enjoy high margins due to supplydemand mismatch is one reason cited by analysts for slow addition of new capacities.

Courtesy: EconomicTimes

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