Project cost escalation, as measured by the composite ERIL Index of Project Costs in terms of wholesale price index (WPI) of relevant capital goods, was up by 6.8 per cent in 2007-08, speeding from 6.1-6.2 per cent in the preceding two years. Fiscal 2004-05 had double-digit cost escalation. The WPI of iron and steel, which decelerated to 1.7 per cent after skyrocketing to 26-28 per cent in 2003-04 and 2004-05, resumed its uptrend in 2007-08 with 9 per cent escalation; March 2008 saw 24 per cent rise which incidentally came over 16 per cent during the month a year ago.
The project cost rise has outpaced for the fifth consecutive year the overall WPI-based inflation or the rise in manufactured product prices, which technically sets the pace for project investment. The ERIL Index had hovered around 2 per cent between1997-98 to 2002-03, barring a spurt to 5.1 per cent in 2000-01. ERIL Index is a key indicator developed by Economic Research India Ltd to monitor trends in project costs on a week-by-week basis in respect of 147 inputs that go into project construction as also capital goods that cater to projects investment.
The YoY rise in the composite index for cost of projects declined from around 8 per cent till mid-June to 4 per cent by mid-January, but started shooting thereafter and peaked at 11 per cent by March 2008, largely on the back of steep price hikes (some say they were covered with a time-lag).
Apart from domestic capital investment demand, exports and import of engineering goods and base metals through their global price impact have contributed significantly to project cost index in recent years. Thus, exports of engineering goods were up by 20 per cent to $23 billion in the first nine months of 2007-08, over 40 per cent in the comparable period a year ago. Similarly, the domestic supply of investment goods was augmented by 21 per cent rise in machinery imports to $22 billion (43 per cent a year ago). The domestic capital goods production slowed from 18.2 per cent to 16.5 per cent during 2007-08. Finished steel (carbon) production rose 5.1 per cent (13.1 per cent) and cement 8.1 per cent (9.1 per cent).

Trends in major inputs
Machinery and machinery tools: The overall WPI for the sub-group speeded to 7.1 per cent, from 5.6 per cent in 2006-07 and 5.1 per cent in 2005-06. The prices had remained firm in the first half and weakened in the second half with the last month recording 3.9 per cent, half of 8.9 per cent in July last year. Electrical machinery prices ruled at twice the pace in non-electrical machinery. Among the individual capital equipment:
u The WPI of wires and cables shot up 31 per cent, over 23 per cent the preceding year and 11 per cent two years back.
u ACSR conductor prices were up by 33 per cent, over twice of 14 per cent in 2006-07.
u Switchgears maintained the pace of around 8 per cent in prices for the second consecutive year; switchgear components fared relatively much better in 2007-08.
u Jelly filled telephone cables have been enjoying sellers market for quite some time. Thus, their WPI shot up 30 per cent in 2007-08, over 22 per cent in the preceding year with the average over past four years working out to a robust 20 per cent.
u Dry and wet batteries improved prices realisations by 12 per cent, over 14 per cent in 2006-07. The earlier two years had seen eroding prices.
u Electric motor prices rose 11 per cent and switchgear components (13 per cent).
u TV sets, picture tubes, GLS bulbs, fluorescent tubes were among the items that found their prices erode further, though ceiling fan prices witnessed 6 per cent rise, after three years of decline.
u In non-electrical machinery, hydraulic machine manufactures stepped up their prices by 26 per cent and boilers, parts and accessories and cranes saw price hikes of 9-10 per cent in 2007-08 and 18 per cent average over past four years.
Transport equipment: The WPI of the sub-group inched up by 2.7 per cent during 200-08, improving marginally from 1.6 per cent in 2006-07. Transport equipment & parts production increased by 2.8 per cent in 2007-08, plummeting from 15 per cent in 2006-07 and 13 per cent in 2005-06. Among the individual items, broad gauge locomotives/passenger carriage (8-11 per cent) and bicycles (8 per cent) show some positive action on price fronts.
Basic metals and alloys: The average composite WPI for the sub-group escalated 7.5 per cent, quickening from 7.2 per cent average in 2005-06 and 2006-07. The best time for the subgroup was in 2003-04 and 2004-05 when the average annual mount was a hefty 18 per cent. The composite production index of basic metals and alloy industries was up by 12 per cent in 2007-08, against 23 per cent in 2006-07 and 16 per cent in 2005-06. Iron and steel subgroup caused most of the price rise, with the WPI for the subgroup escalating 9.4 per cent during 2007-08. Finished steel (carbon) production rose 5.1 per cent during 2007-08, less than half of 13.1 per cent during the preceding fiscal. Incidentally, most of the price rise in iron and steel was concentrated in March 2008.
u Alloy stainless steel and alloy steel casting prices darted 44 per cent and 31 per cent respectively.
u MS/SS ingot prices soared 30 per cent, over 34 per cent in 2006-07. The merchandise had recorded price hike of 26 per cent 2004-05 and 5 per cent in 2005-06. MS bars and rounds recorded 22 per cent price rise, against 1 per cent average in 2005-06 and 2006-07.
u Foundry and basic pig iron prices increased by 22 per cent. Plain carbon steel ingot prices rose 30 per cent, but this came after decline in the preceding two fiscals.
u The WPI of forging and other iron steel was up by 20 per cent and 28 per cent, respectively.
u The pace of WPI of non-ferrous metals subgroup that was at 33 per cent in 2006-07, came down steeply to 5 per cent.
u The WPI of aluminium ingot and aluminium bars and rods showed a decline, against 26-33 per cent shoot up in 2006-07.
u In other non-ferrous metals whose WPI rose by 10 per cent, over 54 per cent shoot up in 2006-07, copper bars and rods (+23 per cent) and brass sheets and strips (+12 per cent) continued to enjoy buoyant demand. Lead ingot prices also shot up 44 per cent and nickel alloy prices 36 per cent. This was the second year of skyrocketing price realisations for the metals. However, zinc and zinc ingot prices declined during the year.
u Among metal products, steel furniture prices increased by 13 per cent (26 per cent).
u The YoY increase in WPI of CR coils and strips came down to moderate level of 4.3-5.7 per cent
u The WPI of angles, channels & sections, heavy light structural and bars and rods rose by 6-9 per cent annually.
Non-metallic mineral products: The composite WPI of the sub-group rose 9 per cent during 2007-08, over 13 per cent during 2006-07 and 8 per cent in 2005-06. The performance was driven by heavy weight cement, which accounts for over two-thirds weight in the sub-group.
Enjoying a buoyant demand due to infrastructure and real estate investment on the one hand, and a decline in the growth rate in production, cement has been having sellers market for quite some time. The wholesale price index for cement has escalated at double-digit average for past three years.
Among the other items, firebrick prices shot up 24 per cent and ceramic tiles improved their price realisations from around 5 per cent to 11 per cent.

CSO's price deflator
The other macro indicator on project costs is the Central Statistical Organisation’s implicit price deflator for gross fixed capital formation, as worked out from the data at current prices and constant prices. This was around 6.3 per cent for 2006-07, 6.5 per cent for 2005-06 and a recent high of around 11 per cent for 2003-04.
Such deflator for the first three quarters of 2007-08 from CSO data works out to around 5.3 per cent, marginally lower than 5.4 per cent in the corresponding period of 2006-07.
Incidentally, though the levels differ, CSO's implicit price deflator and ERIL Index of Cost of Project Inputs point to matching trends in project cost index. Thus, ERIL Index of Cost of Project Inputs mapping week-by-week changes in overall project cost escalation combined with trends in key inputs that go into project costs is an important micro-to-macro indicator on project cost escalation in the country.