roject cost index, as measured by the composite ERIL Index of Cost of Project Inputs in terms of wholesale price index (WPI) of relevant capital goods, clawed to a 1 per cent increase during fiscal 2013-14, against 4.9 per cent rise in the previous year and 6.8 per cent two years ago. The hold-up in the pace reflected very poor demand from project vendors and project developers, which in turn reflected extremely weak project execution.
According to macro data from CSO, gross fixed capital formation declined during the year. The production index of capital goods declined for the third consecutive year. Machinery import also declined, after stagnation in 2012-13. In particular, production index of machinery, motor vehicles, fabricated metal products, office, medical equipment, and radio and TV declined during the year; electrical machinery showed 14 per cent increase, but the feat came after a standstill in the preceding year and a steep 22 per cent drop during 2011-12. Steel production increased 4.3 per cent and cement production 4.1 per cent during the year. The WPI of manufactured products, which conceptually drives project investment, slowed to 3 per cent, from 5.4 per cent in the previous year and 7.3 per cent in 2011-12.
Earlier, the ERIL Project Cost Index had escalated from 3 per cent in 2005-06 to 7 per cent average between 2006-07 and 200809, but plummeted in 2009-10 with 1 per cent decline following global meltdown effects.
The ERIL Index of Cost of Project Inputs 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 235 inputs that go into project construction as also building capital goods that cater to project investment.
Intra-year, the slide in project cost index had started from September 2012 when it was ruling at 5+ per cent and drifted to about 1 per cent by the end of fiscal 2013. In the subsequent fiscal 2014, the y-o-y rise in the project cost ruled at sub-one per cent till around November l2013. Since then, probably reflecting a slight revival in the pace of project execution follow- ing some action by the earlier UPA II government to activate stalled projects, ERIL Index has been inching up, breaching 2 per cent rise in April-May. The uptrend in project cost index is likely to gain further in the coming months of the ongoing fiscal 2015, as the new Modi government has taken up revival of project investment as an immediate task for execution.
Among the major investment goods categories, the WPI for cement and lime, steel-flat and long and metal products like gold and silver declined during the year, even as the prices of structural products increased 6.9 per
cent, after 6.1 per cent in the preceding year and 9.2 per cent during 2011-12. The investment goods with less than 1 per cent average increase over the year included construction machinery and non-electrical machinery. Capital goods with noticeable increase included graphite products etc. (5 per cent), agricultural machinery (3.4 per cent), machine tools (3.9 per cent), cables and wires (4.8 per cent), and automobiles (3.9 per cent).
CSO’s price deflator
As worked out by us from the relevant data at current prices and constant prices, implicit price deflator for gross fixed capital formation by Central Statistics Office, Government of India, is the other macro indicator of project cost. The price deflator for fixed capital investment was assessed at around 4.7 per cent in fiscal 2014 and 6.5 per cent in FY2013, against 1.1 per cent and 4.9 per cent respectively for these years, as assessed by the ERIL Index of Cost of Project Inputs. Even as the magnitudes vary, the direction of change has remained same in both the indices.
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.