Project costs escalate in 2007-08
Dr. M.S. Kapadia
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
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
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
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
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
Organisationís 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.
[May 19-25, 2008]