Price decontrol has been the key accelerator of capacity expansion in cement. This is a truism. But it now seems the rapid growth of cement production stemmed from tax incentives as well. This fact has come into the open with the state governments deciding to withdraw sales tax exemption (granted for seven years) or deferral (allowed for 14 years) next year. At 12-16 per cent, the sales tax concessions yielded a straightforward subsidy in the first case, and a sizable contribution to cash flow and interest-saving in the second. The reckoning is for a Rs 400-crore investment in a million-tonne cement plant, with a debt-equity of 70:30, the interest cost is Rs 450 per tonne; this is paid for, broadly speaking, by sales tax concessions. New capacity creation has thus been tax subsidy-driven, not market-driven. The result is capacity creation in excess of demand in certain states, including some facing a severe power shortage.
The prospective withdrawal of the tax-subsidy spells a sharp slowdown in newcement capacity creation. The slowdown will not, however, surface immediately. Cement plants which have come into operation will enjoy the subsidy in the remaining period of the committed term. This will give them some manoevring room for new expansion. Even so, they will think twice before rushing ahead, and try to figure out prospective demand for cement and the price it is likely to command. As of now, cement is riding high on tax concessions to housing.
The scenario will remain optimistic if a boom in construction accompanies the current revival of industrial production. But if growth weakens - indeed before that happens -- the states should bring down the sales tax on cement to a really low level.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.