Project cost index slows down to 4.9% in FY13

Project cost escalation, as measured by the composite ERIL Index of Cost of Project Inputs in terms of wholesale price index (WPI) of relevant capital goods, slowed to 4.9 per cent during fiscal 2013, from 6.8 per cent in fiscal 2012 and 5.2 per cent two years ago. The hold-up in the pace reflects more the demand-side slack due to insipid project investment during the fiscal.

The production of machinery and motor and other vehicles declined and electrical machinery stagnated at year-ago level. Steel production increased 2.5 per cent, a fourth of the year-ago rate, even as cement production, in terms of revised data, fared better with 9.3 per cent (6.7 per cent) increase. Machinery import was 6 per cent lower and engineering goods export 3 per cent less over the fiscal.

Gross fixed capital investment at macro level was up by a dismal 1.7 per cent at constant prices during the year, dropping from 4.4 per cent in fiscal 2012 and 14 per cent two years back. The WPI of manufactured products, which conceptually drives project investment, increased by 5.4 per cent during the year, while that for all commodities by 7.4 per cent.

Earlier, the ERIL Project Cost Index had escalated from 3 per cent in 2005-06 to 7 per cent average between 2006-07 and 2008-09, but plummeted in 2009-10 with 1 per cent decline following effects of the global meltdown. The ERIL Project Cost Index is a key indicator developed by Economic Research India Pvt. Ltd to monitor trends in project costs on
a month-by-month basis in respect of 237 inputs that go into project construction as also building capital goods that cater to projects investment.

The y-o-y escalation in project cost, which had ruled at 6+ per cent till August last year, started easing subsequently reaching 5 per cent by October, 3.5 per cent average in next three months, and 2.5 per cent by March 2013. The preceding fiscal had seen a marked acceleration in project cost from 5 per cent during April-June to 6-8 per cent in following seven months and a fallback to 6.3 per cent by end of the fiscal.

Among the major investment goods categories, the WPI for machinery and machine tools increased the lowest by 2.6 per cent, declining from an already uninspiring 3.1 per cent during fiscal 2012, whereas the price realisation for non-metallic products (mainly cement) and basic metals,alloys and metal products was much better at 6.8 per cent and 6.3 per cent respectively. This would indicate that industrial projects were more subdued than infrastructure and construction projects. The consolidated WPI for transport equipment and parts rose 4.2 per cent.

The WPI of grey and white cement and bricks and tiles increased 7.5-8.8 per cent during the year, over 4 per cent for cement and 12 per cent for bricks and tiles in the previous year. Price realisation of concretepoles and rods increased 16 per cent, over 38 per cent shoot-up in fiscal 2012; prices of graphite rods were up 11 per cent, but the rise was against 6 per cent drop in the preceding year.

In ferrous metals, the WPI of iron and semis increased 6 per cent, over 19 per cent a year ago. Prices of steel rebars, rounds and angles were up around 8 per cent each, over double-digit rise during fiscal 2012.

The WPI of HRC and stainless steel alloys rose 7 per cent. Prices of steel pipes/tubes and castings and forgings were relatively subdued at 2 per cent (6 per cent) and 4 per cent (8 per cent) respectively during the year. In non-ferrous metals, aluminium wire prices were up 10 per cent, but the feat was against 18 per cent decline a year ago; copper wire prices stagnated (16 per cent rise a year ago).

The WPI for metal product rose 9 per cent (18 per cent) due to galloping gold prices. In machinery and machine tools, oil and rice mill and food
beverage machinery, and hydraulic equipment recorded 8-12 per cent price rise. Price realisation of construction machinery and air-conditioner and refrigerator improved 2-3 per cent and machine tools 6 per cent.

In non-electrical machinery, earthmoving machinery prices declined 8 per cent. The WPI for electrical machinery, equipment and batteries increased 4 per cent (8 per cent). Electric connectors, plugs, sockets, holders and battery chargers were prominent in this category with 10-11 per cent price rise. In electrical cables and wires, conductor prices rose 8 per cent, insulator prices 4 per cent, and PVC insulated cables 3 per cent.

In electronic items, television prices rose 4 per cent. Computer prices stagnated at year-ago level. In transport equipment and parts, motor vehicle prices rose 5 per cent, and tractor, buses and trucks 3-4 per cent. The composite WPI for auto parts was up 4 per cent: Prices of carburetors were up 11 per cent and engine assembly and chassis 8 per cent. Shaft (all kinds) price realisation rose 11 per cent.

CSO’s price deflator: As worked out from relevant data at current prices and constant prices, CSO’s implicit price deflator for gross fixed capital formation is the other macro indicator on project cost. The price deflator for fixed capital investment was around 6 per cent higher in the fiscal 2013 and 6.4 per cent in FY2012, against 4.9 per cent and 6.8 per cent respectively for these years, as assessed by ERIL Index of Cost of Project Inputs.

ERIL’s Project Cost Index mapping month-by-month 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. Caveats in ERIL Index: It may be pointed out that project outlay includes, apart from physical inputs, services like wages and salaries of construction workers, installation costs, engineering and EPC contractors’ services, consultants’ services etc.

But valuations of these and similar other services, whose proportion would vary from project to project, should technically move with the price indices for physical inputs.