Last time Finance minister Pranab Mukherjee presented the Budget, cement was in short supply. To reign in galloping prices, he chose not to tamper with some of the tax measures his predecessor P Chidambaram had put in place after the industry was accused of 'cartelisation and unfair trade practices'. These included differential rate of excise duties (cement that was priced at a retail level below Rs 190 per bag of 50 kgs were charged a specific excise duty of Rs 14.50 and those above had to pay an ad-valorem duty of 10 per cent on the maximum retail price or MRP) and withdrawal of all incentives for exporting cement or clinker.
As the FM gives finishing touch to his budget proposals this year, the situation on the ground has changed completely. The Indian cement industry - the second largest in the world (after China) - has a total capacity of 265 million tonnes and is grappling with a huge supply overhang. It is bleeding after a rush in capacity addition that increased capacity by 40 per cent at a time when demand tanked. The industry has been forced to drop its capacity utilisation by over 10 per cent (it is currently operating at 74 per cent levels from normal levels of 85 per cent) to match supply with demand. In South India, the problem is more acute. For instance, India Cements - the market leader in the region - operated at just 60 per cent of its capacity during the quarter ended December.
The industry has been urging the government to consider the changed circumstances and restore the uniform excise duty structure.
"The differential duty structure was put in place for a specific purpose of controlling prices. Today we are flooded with cement and the prices have fallen from earlier peaks. There is no reason in continuing this unusual differential duty rates,'' says A V Dharmakrishnan, ED (Finance), Madras Cements. He also points out that even under MRP-based taxation various industries are allowed abatement for post-manufacturing expenses such as transport, dealers margin etc. The cement industry has not been allowed that. This effectively raises the excise duty by about 5 per cent. "It is very unfair,'' he points out. The government has laid down policies to discourage cement exports which could solve the excess supply problem and keep plants running at optimal capacity, he adds.
People like N Srinivasan, vice-chairman and managing director of India Cements, are cynical. "Indian cement industry is an efficient low cost producer, fuels the country's economic growth, generates a huge revenue for the exchequer, employs indigenous technology and most importantly and ploughs back its profits in creating more capacity. Unfortunately, it is also an industry that has not got its due from the government."
The industry is also grappling with issues such as coal linkages, the short supply of domestic coal and the non-availability of railway rakes to ship the commodity.