Economics of scale in the Indian cement industry

Abstract

The paper purports to investigate the existence or otherwise of economies of scale in the Indian cement industry. The investigation is attempted through the estimation of cost-output (sales) relationships both from the time series and cross-section data and both at the industry level and at the firm level. Furthermore, at the industry level the cost-output relationships have been estimated separately for All-India, Bihar, and Madras, the regional classification for which the time-series data are available. The relationships between the cost components (material cost, labour cost and depreciation cost) and the output have also been determined to identify the sources of economies or diseconomies of scale. It is found that the industry is dominated by the L-shaped average cost curve and horizontal marginal cost curve. In other words, the industry is found to be still operating in the first half of the U-shaped average cost curve and thus cement firms have not yet reached their optimum size. Significant economies of scale exist only with respect to labour costs in All-India and Bihar and total costs in Associated Cement Companies Ltd, Jaipur Udyog Ltd, Mysore Cement Ltd and Sone Valle Portland Cement Company Ltd; significant diseconomies exist only with respect to total cost and material cost in Madras industries. Inter-regional comparison has indicated that expansion of the industry in places other than Bihar and Madras and contraction of Madras firms will be beneficial from the side of cost. Among the four cement firms considered the Associated Cement Companies is enjoying the maximum economics of scale.