If the government keeps on cutting development expenditures the way it is doing and the way it did throughout last year, then chances are that domestic cement industry will continue to hit snags. Historically, development expenditure, primarily through the Public Sector Development Programme (PSDP), and local cement sales have shown a strong correlation, as PSDP contains a healthy allocation for infrastructural development.
Although, actual cement demand is triggered roughly after a lag of 8 to 10 months between allocation and actual spending; trends reveal that PSDP spending and local cement sales grew by an annualised rate of 27 percent and 16 percent respectively between July 04 and June 08. But the situation reversed in FY09, with sales dropping 13 percent to 19.4 million tones as the government slashed its development expenditures.
And this year looks like a similar story. Just four weeks into the new fiscal year and we are facing an unbudgeted shortfall of Rs 120 billion arising out of post-budget relief measures such as removal of carbon tax from CNG and the continuation of power subsidies for another six months.
Add to this the likely hiccups in materialisation of pledges from the Friends of Pakistan forum and we are looking at a potential fiscal gap of about Rs 300 billion plus. Most prone escape goat in such circumstances is the development expenditure - as evident by Shaukat Tarins recent decision to cut PSDP by Rs 50 billion to provide room for power subsidies.
So keeping both historical trends and current dynamics in mind, chances are that development expenditure would be reduced to Rs 500 billion as against the budgeted allocation of Rs 783 billion this year. And considering that a major chunk of such cutbacks typically comes from the infrastructural component of the programme, domestic cement sales will likely linger around 18.85 million tons this year - down nearly 3 percent from FY09.
Exports might cushion this fall a bit given its annualised growth of 97 percent between July 06 and June 09. But even that bit is not likely after 2010-2011 when plants commence production in our major export markets of Afghanistan, China, India, Iran, Saudi Arabia and Egypt.
And while we are at it, how does the government plan to raise Rs 22.7 billion from the industry on account of Federal Exercise Duty, which is charged at the rate of Rs 700 per ton? This amount can be generated only if cement makers increase their sales by 60 percent to 32.4 million tons in FY10. So how will the government meet this gap; perhaps by cutting development outlay, again.