Unable to put pressure on cement manufacturers to slash prices, the government is planning to offer them a five-year tax holiday to set up more capacity to end the current demand-supply mismatch and consequently soften prices.

According to a source in the Department of Industrial Policy and Promotion, the government may give a five-year tax holiday to cement units announced on or after April 1 with a caveat that they have to commence production within three years.

Cement makers and the government have been at loggerheads over prices, which have risen over 40% to a peak of Rs 255 per 50 kg bag in the last 12 months. Manufacturers have so far not paid heed to the Centres call to roll back prices, but have promised not to raise them further for a year.

Official sources believe that cement manufacturers are currently in a commanding position as far as prices are concerned, due to a major demand-supply gap. Various infrastructure and real estate projects have seen construction activity growing at an unprecedented pace, and this has led to growing demand for cement. It is understood that the proposed policy move is also aimed at incentivising participation of new companies.

The cement industrys current capacity is 165 mtpa and capacity utilisation has been 92% so far this year. Cement production127 mt during April-January (06-07)has seen a growth of almost 10%.

Industry players welcome the proposed move, but also point out loopholes in it. Such short-term incentives may leave a trail of winners and losers, says Cement Manufacturers Association vice-president and Shree Cement MD HM Bangur.

It would lead to bunching of capacity and the plants that commence production after these three years would lose out, says Mr Bangur. It, however, may not be easy for manufacturers to take advantage of the proposed incentives. Equipment supply is a major constraint and cement makers will have to work very hard to finish projects in time, points out Grasim Industries director DD Rathi. Equipment suppliers order books are already full and with increasing demand from India and the Middle East, equipment delivery time has almost doubled from the usual six months.

The industry has announced the addition of 42 million tonnes in the next two years. Given the past trend, not all of them are expected to materialise. In 2006-07, manufacturers had announced the addition of 13 million tonnes, but only 5 million tonnes came up. The fact that cement makers enjoy high margins due to supply-demand mismatch is one reason cited by analysts for slow addition of new capacities.