The suggestion must be seen in the context of the South Indian market’s health, which has seen a de-growth of 8% in cement demand in the nine months of the current.
Chennai: In what may be considered a throw-back to an older economic era, top industrialist N. Srinivasan has suggested the revival of a freight equalisation fund for India’s cement industry.
This is essential to move cement seamlessly to North India, said Srinivasan, who is also the vice-chairman and managing director of The India Cements (ICL), in an interaction with journalists on Friday.
Asserting that the cement demand-supply equation in the South "is the worst’", Srinivasan says that cement capacity, especially in the south, would remain ahead of demand at least for the next four-to-five years. The India Cements boss believes that that Andhra Pradesh and Telangana together account for over 30% of the country’s limestone deposits. "A lot of it is sitting here (in these two states)," he said, adding that a lot of demand though emanated from the northern part of the country.
This has resulted in huge price disparity between the two regions, which could have serious cost repercussions for projects in North India, seen as a cement-consuming region.
The suggestion for resurrecting the freight equalization fund must also be seen in the context of ground reality in the South, which has seen a de-growth of 8% in cement demand in the nine months of the current financial year. South Indian states together reported a 12% de-growth in cement demand in the third quarter of this year, which again must be viewed in the context of demand growth in other regions of the country.
"The main contributing factor being the stalling of major projects in Andhra Pradesh and Telangana," he said. The deferment of infrastructure projects in these states and the general slowdown in the economy only accentuated the worries of the cement units in the South.
"With huge capacity overhang in a low demand scenario, the price of cement has come under continuous pressure in South," he added.
Since limestone deposits are heavily concentrated in the South, the price dynamics could prove disadvantageous for projects in the North. This will have adverse fall-outs on development of the region in the long-run. Srinivasan said a freight equalisation kind of a system must be looked into by taking a holistic picture of the emerging scenario.
India’s freight equalisation policy was introduced in 1952 by the Centre to facilitate equal growth of industry across the country. This essentially meant a factory could be set up anywhere in India and the long-distance transportation of minerals would be subsidized by the central government. The policy applied only to commodities such as iron, steel, cement and the like. The policy, a creation of Nehruvian socialism, ostensibly intended to redistribute wealth and resources so as to provide equal access to everybody.
Antagonists of the policy were of the view that caused artificial disadvantage to a region already blessed with an advantage. Often times, economists described this phenomenon as ‘the resource curse’ or the ‘paradox of plenty’. The policy was eventually scrapped after India’s economy was liberalised in the 1990s.
Its legacy has often been viewed as one of the biggest reasons why resource-rich states like Bihar weren’t able to properly develop. While there has been on-and-off demand for restoration of a freight equalization policy, the Centre has been steadfast in refusing.
Coming as it does at a time when the economy is going through stressed times, Srinivasan’s suggestion to revisit the long-buried policy is bound to trigger a new kind of debate in the Indian corporate circuit.