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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.

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