CHAPTER I

DESIGN OF THE STUDY

1.1 Introduction

The construction of infrastructure and its maintenance is a major

input to the sustained growth and development of an economy. The
developments of physical, industrial and social infrastructure along with
other civil engineering works are thus vital. These outputs of the
construction sector being the inputs of all other sectors of the economy, is
of great significance especially for the developing economies. Cement is a
necessary constituent of infrastructure development and a key raw material
for the construction industry, especially in the government’s infrastructure
development plans in the context of a nation’s socioeconomic development.
Cement is an unusual product in that it has a single major use-in
construction (Environment Agency, 2005). About 75 percent of cement
production is used in ready mixed concrete to be utilized in construction
and the remaining 25 percent is used for paving roads and extracting oil
(Portland Cement Association [PCA], 2009). Concrete is the world’s most
commonly used construction material and the most consumed substance on
earth next to water (World Business Council for Sustainable Development
[WBCSD], 2002a). Hence, cement demand is a direct function of concrete
which depends on the level of construction activity and aids the
development of a nation.

Technological change, the other major ingredient of economic

growth is fundamental to any industrial development and this is very true in
the case of Indian cement industry. Industrial development is a process of
acquiring technological capability in the course of continuing technological
change (Pack and Westphal, 1986). In general, technological change can be
defined as the advance of technology which results in a change in the

1 
 
production function or in the availability of new products. Technology
refers to those activities involved in the transforming of inputs into outputs
and therefore technical change refers to changes in these activities
(Fransman, 1985). Thus, technological change not only means the
introduction of new goods and services but also refers to improvements in
the processes by which goods and services are produced. As such, there is
every reason to believe that the 'technology of technological change' has not
been constant through history (Arora and Gambardella, 1994), and it is a
continuous process for any growing industry. As these technological
changes have transformed Indian cement industry from its infancy to the
world’s prominent matured player, it is important to study, review and
analyze its technological progression along with its economic
repercussions.

This chapter presents the technology of cement manufacturing, its

evolution and the significance of technological change in the Indian cement
industry. This is followed by a detailed literature review broadly divided
into three categories; productivity studies, international studies on the
cement industry and studies on Indian cement industry. The chapter then
proceeds with the research problem, objectives, hypothesis, data sources
and methodology, limitations and scheme of the study.

1.2 Technology of Cement Manufacturing

The technology used in cement production differs amongst

developing and industrialized nations. While small-scale vertical kilns
predominate in China, large scale rotary kilns are most common in
industrialized countries. Large-scale kilns are considerably more energy
efficient. The various technologies of cement production according to the
clinkerization process (kiln type) are: wet, semi-wet, semi-dry, dry long, dry

2 
 
preheater, dry precalciner and shaft. The cement production process for wet
and dry is portrayed in the chart in Appendix 1.

The cement technology globally has undergone a sea change over the
years. Currently, the most advanced and less energy consuming dry
precalciner, dry preheater and shaft technologies are in use. From the figure
given below, it is evident that the technology share of wet, semi-wet, semi-
dry and dry long are all below 0.05 percent as of now (2010) and continues
to decline further. In the future, the wet-long and dry-long technologies
seems to be nonexistent or gets converted to semi-wet and semi-dry
technologies whose share remains abysmally low. The share of dry
precalciner technology continues to increase at a higher rate in the coming
years. Efficient preheater and precalciner kilns use approximately 3.06 GJ
of energy per tonne of clinker (WBCSD, 2002b). The advantages of dry
precalciner technology depict its dominance over the other technologies.
Some of them are: decrease in energy consumption by 8-11 percent, lower
temperature for combustion thereby enabling the usage of lower grade fuel
and lower NOx emission.
Figure: 1.1
Evolution and Forecast of Cement Technology

Source: Adapted from Szabó, Hidalgo, Císcar, Soria, and Russ (2003).

3 
 
1.2.1 Indian Cement Technology
In India, there was a continuous transfer of technology from the old wet
process to the modern dry process over the years. In general, the
technological characteristics of local raw materials, particularly their water
content, determine the choice between the wet and dry processes. In 1950,
out of the total 33 kilns, 32 were using wet process and one by semi-dry
process. The 1950’s witnessed the introduction of dry process. Wet process
prevailed during the early decades of cement manufacture and continued to
dominate till the late 1980’s. The early eighties witnessed the introduction
of more efficient large size dry process technology. The advent of
precalciner technology in mid eighties provided an opportunity to the
industry to modernize and increase the capacity of existing dry process
plants, to convert plants from wet to dry process as well as to set up large
capacity plants incorporating the latest technological advancements
(National Council for Cement and Building Materials [NCB], 2006). In fact
these changes in the technological process contributed enormously to the
growth and development of the industry as well as the economy in various
perspectives. Table 1.1 shows the changes in technology over the years and
the progress of technology of the Indian cement industry at par with the
global technology is given in Table 1.2.

4 
 
 Table: 1.1
Transfer of Technological Process in the Indian Cement Industry
(1950 to 2009)
Process 1950 1960 1970 1983 1995 2001 2009
DRY
No. of 1 18 50 97 117 150
Kilns
Capacity 300 11865 51265 188435 282486 467690
(tpd)
Percent to 1.1 21.5 53.2 86 93 97
Total
WET
No. of 32 70 93 95 61 32 20
Kilns
Capacity 9151 25011 38441 39641 25746 13910 9780
(tpd)
Percent to 97.3 94.4 69.5 41.1 12 5 2
Total
SEMI-DRY
No. of 1 3 8 9 8 8 5
Kilns
Capacity 250 1200 5000 5500 5244 5260 2900
(tpd)
Percent to 2.7 4.5 9 5.7 2 2 1
Total
Total 33 74 119 154 166 157 175
Kilns
Total 9401 26511 55306 96406 219425 301656 480370
Capacity
(tpd)
Source: Cement Statistics (various issues) Published by Cement Manufacturers’
Association, New Delhi.

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 Table: 1.2
Technological Transition of the Indian Cement Industry
Processes Old Technology Modern Technology Global Technology
Plants Plants
Mining & Material Conventional Computer aided Computer aided
Handling
Crushing Two stage Single stage In-pit crushing &
conveying
Conveying of Dumpers/Ropeway/ Belt conveyors Pipe conveyors, Belt
Limestone Tippers conveyors
Grinding Ball Mills with / VRM’s Roll presses with VRM’s, Roll presses,
without conventional dynamic classifier horo mills with
classifier dynamic classifier
Pyro Processing Wet Dry Dry
Semi Dry - 5/6 stage preheater
Dry - High Efficiency Cooler - 6 stage preheater
- 4 stage preheater - Multi Channel Burner - High efficiency
- Conventional cooler cooler
-Single channel - Multi channel burner
burner - Co-processing of
WDF
- Co-generation of
power
- Low NOx/SO2
emission technologies
Blending & Storage Batch-Blending Silos Continuous blending silos - Continuous blending
- Multi-chamber silos
- Dome silos
Packing & Bag - Bag - Bulk
Despatch - Bulk - Palletizing & shrink
wrapping
Process Control Relay Logic / Hard - DDC - DDC
Wired / PLC - Fuzzy logic expert - Neurofuzzy expert
system system
Plant Size (tpd) 300-1800 3000-6000 6000-12000
Source: Task Force Report on Cement Industry for the 11th Five Year Plan set up by the
Planning Commission, Government of India, 2008.

Currently, 97 percent of the total capacity in the industry is based on dry

process technology and 2 percent by wet process and only 1 percent by

6 
 
semi-dry process. In particular, plants have moved steadily away from less
energy - efficient wet process kilns toward the more fuel-efficient dry
process kilns (Choate, 2003; Mohsenzadeh, Nouri, Ranjbar, Mohammadian,
and Babaie, 2006). The cement industry today comprises mostly of Dry
Suspension Preheater and Dry-Precalciner plants and a few old wet process
and semi-dry process plants. Figure 1.2 shows the evolution of cement
technology over the years.
Figure: 1.2
Technological Evolution of the Indian Cement industry
120

100
97 97
94 93

80
76
70
Dry Process
60 61
Wet Process
Semi‐Dry Process
40
33

20 21 21

9
5 6 5
0 3 1 3 2 12
0
1950 1960 1970 1980 1990 2001 2009

Source: Cement Statistics (various issues) Published by Cement Manufacturers’

Association, New Delhi.

1.3 Review of Literature

Given below are the major studies derived through a detailed

literature review in the area of industrial economics in general; related to
productivity, international studies on cement industry and studies on Indian
cement industry in particular. This literature review aims to identify the
research gaps and the significance of the present study. The review of

7 
 
literature not included in this chapter is covered in other chapters when
explaining the various concepts and information needed for the study.

1.3.1 Productivity Studies

The need of studying productivity growth for the present study is important
due its intimate link between technology and economic growth. Role of
productivity growth in the process of economic growth became clear mainly
because of the empirical works on the US economy by Tinbergen (1942),
Schmookler (1952), Abramovitz (1956), Kendrick (1957) and Solow
(1957). Their studies indicated that the accumulation of productive factors
(capital and labour) could explain only a fraction of actual expansion of
output. Particularly Solow’s (1957) study is considered as the first empirical
study explaining the importance of technical progress for economic growth
based on the measurement of global productivity. For instance, in his
seminal study Solow (1957) concludes that 87.5 per cent of per capita
income growth in the US could be attributed to technical change while only
12.5 per cent were due to increases in the capital stock.

Further, Terleckyj (1974), Scherer (1982) and Griliches (1984)

showed that technological advancement was a major source of productivity
growth. Productivity is a relationship between production and the means of
production. This relationship is articulated through the given technology of
production. Their relationship is so close that the two terms are often used
interchangeably.

1.3.2 Productivity Studies of the Indian Manufacturing Sector

The studies mentioned above were just the productivity studies on a global
scale, and for our purpose there was a need of particularizing and
elaborating the studies conducted on the domestic (Indian) industries, for
the better understanding of the industry peculiarities like, market structure,

8 
 
pricing, productivity trends etc., before contextualizing it for the cement
industry. The studies are at the aggregate manufacturing level of the
industries either singly or in groups. It also includes the studies where the
cement industry has been studied as part of group of industries. These
studies will also be helpful to understand the methodological difficulties
that arise when using a general methodology in the Indian context and to
understand how it was solved.

In 1975, Banerji studied productivity growth for large scale

manufacturing industry with special attention to measurement of capital.
His estimates marked an improvement on those of earlier authors in respect
of arriving at the bench mark estimate for the base year and also in respect
of deflation of capital series. About the same time, Hashim and Dadi refined
the measurement of capital further in their study of organized
manufacturing sector. Acharya and Nair (1978) represented output in
physical terms, justifying it on the ground that cement was a homogenous
commodity and capital stock was calculated using the perpetual inventory
accumulation method. They arrived at factor shares from econometric
estimates of production function and reported total factor productivity
growth (TFPG) of 0.25 percent per annum through decomposition using
Solow measure. Similar results were obtained by Arya in 1981, but the
study used a net measure of output and capital which is a broader canvas
than the above study and a different methodology. Mehta (1980) focused on
productivity growth in 27 large scale industries and cement was one of
them. Goldar (1986) studied the aggregates covering Census of
Manufacturing Industries for the years 1951-65 and large scale industries
for the years 1959-79. He explained the inter-industrial variations in
productivity growth for the chosen variables. He took a sample of 37
industries at the 3-digit level. These included cement. Goldar (1986)
conducted the study for aggregate manufacturing sector using production

9 
 
function estimates and total factor productivity indices for 1951-65
indicated significant technological progress, constant returns to scale and
unitary elasticity of substitution. The study also observed decline in growth
rates of labour productivity, capital intensity and an increasing trend in
capital productivity after 1970. Arora (1987) analyzed the effect of
Research and Development expenditure on productivity growth in selected
industries at the 3-digit level and used translog measure of TFPG and
reported un-weighted averages of year to year growth rates during the study
period 1973-81. Her choice of variables and methodology is broadly similar
to that of Goldar.

Ahluwalia's work (1985 and 1991) is the most detailed and

comprehensive treatment of productivity growth for the registered
manufacturing sector in India. In terms of methodology her work differed
from those of others in an important respect. While earlier authors had
deflated their output series at the aggregate level, she deflated series for
different groups by their corresponding Wholesale Price Indices and then
added these series to arrive at the aggregate value series. The major focus of
her study was linking productivity growth to industrial growth and in
particular to the timing of the turnaround in the Indian economy. Dabir-
Alai, (1987, as cited in Mongia and Sathaye, 1998) studied TFPG for
eighteen large scale (Census sector) manufacturing industries at the two
digit level for 1973-78. His study included Paper and Paper Products. The
coverage is same as that in Ahluwalia (1985). He used Kendrick and Solow
indices to measure TFPG and reported unweighted averages of year to year
growth rates. The choice of variables and methodology was similar to
Goldar (1986) except that he used a different procedure for arriving at his
capital series. He used Central Statistical Organisation’s (CSO) input-output
table for 1973-74 and Planning Commission’s input-output table for 1979-
80 to compile a breakup of the fixed assets used by the manufacturing

10 
 
establishments making up the Census sector in India. Balakrishnan and
Pushpangdan (1994) brought out the difference in which the adoption of
double deflation procedure in place of single deflation procedure makes to
the productivity growth series. They have in particular disputed Ahluwalia's
timing of the turnaround of industrial growth. In 1996, Rao examined
rigorously the issues raised by Balakrishnan and Pushpangdan regarding the
double deflation procedure and indicated that it could in fact lead to the
possibility of negative real valued added. He also presented estimates
arrived at under alternative assumptions about the separability of material
and non-material inputs. Pradhan and Barik (1998) suggest that production
functions for the aggregate manufacturing in India cannot be assumed to be
separable in material and non-material inputs on the basis of statistical tests.
Mitra, Varoudakis, and Veganzones (1998) examined the impact of
development and availability of infrastructure on productivity growth and
technical efficiency for 17 manufacturing industries in India at the state
level.

The studies mentioned above have used data either from Census of
Manufacturing Industries (CMI) and/or Annual Survey of Industries (ASI).
CMI data had been used till the year 1958 and ASI data for years beyond.
Gross or net value added has been used as a measure of output. Total
number of employees or workers represented labor input. Wages were
approximated by earnings per employee (workers). Book value of gross
fixed assets, subject to author specific adjustments, has been used to
represent capital. Nominal values of output and inputs were converted to
real magnitudes using wholesale price indices of appropriate commodities/
groups as deflators.

11 
 
1.3.3 International Studies on the Cement Industry
The two studies given below are the important works done on the cement
industry. Mcbride (1981) described and estimated an econometric model of
cement production for a sample of 27 U.S. and Canadian plants from 1963
to 1965. The results exhibited large economies of scale in capital and labor,
with the extent varying by type of plant (wet or dry) and by type of capital
input (kiln or accessory machine). Also material inputs display fixed
proportions with factor coefficients varying by type of plant. Coftas,
Heshmati, and Hjalmarsson (2000) analyzed the time-path of efficiency and
technical change in the Romanian cement industry during the period 1966-
1989 using four different specifications of stochastic frontier models. It was
found that the input elasticity varies over both time and plants and all
models yield slightly decreasing trends in total factor productivity growth.
Even though increasing returns to scale is observed in all models there is
significant variation in it across models. The most important feature of the
Romanian cement industry before the revolution in 1989 is a slow rate of
technical progress at the frontier and a corresponding catch-up in productive
efficiency.
1.3.4 Studies on Indian Cement Industry
Below we review and synthesize evidence about the various studies
undertaken in the Indian cement industry in particular. This part is divided
into the following related themes in a chronological order under each
heading and is used as a reference to our study. The first section illustrates
the growth and productivity studies on the Indian cement industries in
particular due to the reasons mentioned on productivity and considering its
importance for the present study. The second section deals with the studies
which concentrated on the technology related and measurement aspects
which include the studies of capacity utilization, energy efficiency and also
includes some studies that use production functions to explain state of

12 
 
technology. This is followed by a section which used Data Envelopment
Analysis as the methodology for their studies. The third section illustrates
the studies on the spatial economic and environmental issues of the Indian
cement industry. It is followed by fourth section which reviews the studies
which explains how the firm size and market structure affects the economic
performance and the firm’s intensity to innovate which comes broadly
under the domain of industrial economics. This section also reviews some
studies which dealt with the financial analysis for the assessment of
business to deal with the planning, budgeting, monitoring, forecasting. The
fifth section points out the studies which give an overview of the Indian
cement industries and the recent trends; which includes manuals, working
papers, task force reports and thesis. The final section deals with the recent
studies related to mergers and acquisitions.
1.3.4.1 Studies on Growth and Productivity
Ghosh (1962, as cited in Das, 1987) examined the relationship between
employment, earning and productivity of labour in the cement industry for
1949-58 using data of CMI, CSO and observed that the ratio of index of
real earning to that of productivity disfavors labor and favors capital.
National Productivity Council Study Team Report (1964) examined the
factors affecting cement productivity and suggested measures to reduce
manufacturing costs and to pave way for industries growth on rational lines.
Sawhney (1967) analyzed the productivity gains and their factor sharing in
the cement industry for 1950-61 and observed an average annual
productivity growth of two percent with labor and suppliers of raw
materials securing substantial gains. Gupta (1973, 1975) estimated and
analyzed the production function using time series data for 1946-65. The
industry is found to have zero-neutral technical progress with unit elasticity
of factor substitution and operates under constant returns to scale. The
estimates of cost-output relationship using time series and cross-section

13 
 
data showed that L-shaped average cost curves prevailed in the industry and
the firms are working below their optimum size. Acharya and Nair (1978)
conducted the measurement of the total productivity index using Cobb-
Douglas production function for 1959-71 proved no monotonic trend;
coefficient of capital is larger and statistically more significant than labor
coefficient. There may be increasing returns to scale indicating higher
returns in future by expansion.

Mehta (1980) showed that the productivity for cement industry

grows at 6.1 percent for the period 1953-65 from the estimation of Cobb-
Douglas production function. Norman (1979) discussed nature, existence
and measurement of economies of scale for 1970-71 for cement industry in
West Germany and U.S. The results showed that economies of scale
eventually decrease in importance as scale increases. The cement process is
characterized by substantial economies of scale in labor and capital and the
elasticity of production costs is not invariant with scale. Hazara (1983)
studied scale economies with respect to production cost, capital and
employment; Observed significant difference in the employment levels in
wet and dry process plants. Kiln size is as important as plant size in
reducing production cost. With a given investment, large plants would
create three times as much capacity as mini-cement plants. Jha, Murty, and
Paul (1991) analyzed the cost structure of cement, lime and plaster industry
using translog function for the period 1960-61 to 1982-83 and observed the
existence of allocative efficiency. There exist significant economies of scale
and substantial substitution possibilities between factors of production.
Technical progress found to be capital saving and labor, energy and,
materials using. This study differs from the earlier studies with respect to
various factors like testing of allocative inefficiency, use of translog cost
function rather than Cobb-Douglas and Constant Elasticity of Substitution,
addition of energy and materials as inputs apart from capital and labor.

14 
 
Padhi (1999) measured productivity growth in index form and found that a
negative correlation between increase in rate of investment with labor
productivity and with capital productivity. Demand shock related
inefficiencies led to this lower productivity growth as indicated by the
Solow residual index. Schumacher and Sathaye (1999) concentrated on
productivity, energy efficiency and carbon emissions in the Indian cement
industry. The growth accounting and econometric estimates were used to
study productivity growth. The results indicated an increase in productivity
by 0.8 percent during 1973-74 to 1993-94 is because of partial decontrol in
1982. The decline in productivity before 1983 can be attributed to prices
and distribution policies by government, inefficiencies in plant operation
and constraints in essential input factors. The overall economic recession
affected the industry during 1991-93. The analysis of translog model
revealed that technical progress in the industry is energy and capital using,
material and labor saving. The study also showed that there exists further
potential for energy savings and carbon reduction in the industry. Sharma
(2007) analyzed the impact of liberalization and productivity growth of the
Indian cement industry for the period 1989-2005 using total factor
productivity growth index and the Partial Productivity Indices (PPIs). The
results showed a sharp decline in the total factor productivity (TFP) index
and PPIs indicating inefficient use of the inputs.

1.3.4.2 Technology Related Studies

Parikh (1965) analyzed the quantitative significance of economic factors
influencing investment in plant and machinery for 1948-61 and proposed
that there is a lagged response of 2-3 years in capacity utilization, which
indicate the demand conditions and lagged profit representing the role of
internal financing. Expectations play an important role in explaining the
variation in investment. The book published by Institute of Applied
Manpower Research (1977) concentrated on manpower in the cement

15 
 
industry. It was found that, on an average 3.2 persons are required for the
production of thousand tonnes of cement .The ratio decreased over time due
to introduction of dry-process technology. It also suggests guidelines for
micro and macro levels estimation of demand for different types of
technical and non-technical personnel required by the industry. Goel and
Nair (1978) studied the extent of underutilization of capacity and efficiency
of major inputs in the cement industry for 1954-76. It showed a declining
trend in capacity utilization, which is more pronounced after 1965 and the
coefficient of capital from Cobb-Douglas production function is larger and
statistically more reliable than that of labor. Arya (1979) found that size and
installed capacity is highly positively correlated with technology for the
cross-section sample from 1961-74 and time-series analysis for 1951-74
revealed a positive correlation between size and capital intensity. Arya
(1981) measured technological change in the industry using Solow’s index
for 1951-70. Results revealed that the upward shift in the production
function was neutral and rate of progress was higher in the last decade.
Arya (1983) analyzed the contribution of technical change to productivity
for 1956-72 using Cobb-Douglas production function for 15 companies.
Eight of them showed significant rates of growth and capital intensity
increases at an average rate of 2.8 percent per annum.

Lalwani (1984) analyzed productivity trends with special reference

to capacity utilization in the cement industry for 15 units during the period
1970-81. Changes in productivity are the result of shortage of power,
inconsistent performance of coal and railway sectors and mechanical
problems. Sarma and Rao (1991) analyzed trends in productivity, elasticity
of substitution, returns to scale and nature of technological progress using
Cobb-Douglas production function. They observed constant elasticity of

16 
 
substitution and returns to scale, neutral technical progress and positive
association of labor productivity and capital intensity.

Mongia and Sathaye (1998) focused on the survey of available

literature and different approaches to the measurement of productivity
growth and technical change in six energy intensive industries in India
including cement, covering the period 1947-98. Notwithstanding the
incomparability of estimates of productivity growth and technological
change by different authors due to differences in methodology, levels of
aggregation, sources of data and time periods of analysis, it seems that the
most likely long run rate of growth of total factor productivity for the
cement industry can be restricted to the range -0.5 to 0.5 percent per annum.
Denison (1962) from the various elements of sources of growth,
technological change is found to be an important factor of growth. Still it
contributed only about 40 percent of total increase in per capita income.

National Council for Cement and Building Materials [NCB] (2000)

concentrated on the various technologies and schemes for cogeneration of
power (waste heat utilized for electric power generation), recent
developments and evaluation of these technologies/schemes. In the dry
process plants, nearly 40 percent of the total heat input is rejected as waste
heat from the exit gases of preheater and cooler. There exists about 160
MW of cogeneration potential in 40 cement plants with a production
capacity of one million tonne per annum. It was found that cogeneration
technologies based on bottoming cycle have the potential to generate up to
25-30 percent of the power required for a one million tonne capacity cement
plant in India. Technical, financial and institutional barriers restrict the
adoption of cogeneration technologies. Sathaye, Price, Can, and Fridley
(2005) assessed the intensity of energy use in the Indian cement industry
and the types of energy conservation measures that the industry could adopt

17 
 
to improve efficiency, and compared these with worldwide best practices.
In almost all cases, the average energy consumption value is significantly
higher than the best practice value, indicating a strong potential for energy
efficiency improvement in many plants. With the existing energy-efficient
technologies, energy management, process control optimization, the
increased use of blended cement can lead to significant energy savings.

Taylor, Tam, and Gielen (2006) studied the energy efficiency and
CO2 emissions from the global cement industry found that more than half of
all cement production comes from countries with an energy intensity of
clinker production significantly higher than today’s most efficient dry
cement kilns with pre-heaters and precalciners and there is significant
variation in the amount of electricity used to produce cement. In spite of the
new CO2 policies, CO2 emissions in the industry will continue to rise as
most of the cement industry CO2 emissions are process emissions and hence
the effective CO2 reduction policies must focus on process emissions rather
than on energy efficiency measures and fuel substitution. Asthana and Patil
(2006) study reveals that the waste fuels like Tire Derived Fuels can be
used as an alternate fuel in Indian cement kilns. Furthermore, it will reduce
the energy costs in production, solves the problem of waste management
and reduce the use of fossil fuel. They also quotes the Environmental
Protection Agency’s 1997 report “Air Emissions from Scrap Tire
Combustion” for substantiating their point which states that “…with the
exception of zinc emissions, potential emissions from tire derived fuels are
not expected to be very much different than from other conventional fossil
fuels, as long as combustion occurs in a well-designed, well-operated and
well-maintained combustion device (What is “Tire Derived Fuel” and why
is it dangerous? n.d.).” Government’s support and industries initiatives are
essential for the usage of alternate fuels.

18 
 
1.3.4.3 Studies which used Data Envelopment Analysis (DEA):
Bandyopadhyay (2009) concentrated on the nature of relationship between
efficiency and its determinants of efficiency in the presence and absence of
environmental regulation in cement producing firms in India using a two-
stage stochastic DEA model proposed by Banker and Natarajan (2008) for
two time periods, 1999-2000 and 2003-04. The study showed that if all
firms prefer to abide by the regulations, they can gain in terms of efficiency
and the magnitude of gains decreases over time. Under regulation, capital
intensity of output increases efficiency in the initial phase, material
intensity plays a positive role in both phases and labor intensity cannot
explain efficiency in both phases. Size, age and development indicators of
states in which firms are located play a positive role in achieving higher
efficiency levels under environmental regulations. Mandal and
Madheswaran (2010) estimated environmental efficiency of Indian cement
industry within a joint production framework of both desirable and
undesirable output (carbon dioxide) using DEA and Directional Distance
Function with the data taken from the Annual Survey of Industries for the
period 2000-01 to 2003-04. The results showed that there is adequate
potential for the industry to improve its environmental efficiency, and if
subjected to environmental regulation, it has the potential of expanding the
desirable output and reducing the undesirable one from the given inputs.
Yet, this regulation has a potential cost as the firms have to divert some of
their productive resources used for the production of desirable output to
control pollution.

1.3.4.4 Location and Environment Studies

Mehta’s (1955) study was the initial work on the location pattern of cement
industry using location quotient and coefficient of localization indicated a
strong influence of productive inputs in determining the location of units.
The location shift in productive activities is due to change in significance of

19 
 
location factors and the unscientific character of earlier locations. Chopra
(1963) a study on location, identifies the factors at the micro level which
tends to vary spatially and also deals with the basic regional advantages
and disadvantages emerging from location factors and production costs.
Ghosh (1965, as cited in Das, 1987) focussed on inter-regional trade in the
industry for 1954-59 suggests certain criteria for the determination of
optimum location of new units and a distribution system that minimizes
total cost. Manne (1967) mentioned that fuel and power are the significant
elements of costs and regional difference in the costs of these factors may
determine size, location and time-phasing. The Economic and Scientific
Research Foundation of India (1969) studied the location concentration for
the cement industry for 1950-65 and witnessed that the industry
experienced a change in favor of dispersal. Tariff Commission Report
(1974) pointed out the reasons for regional imbalance in the location of
cement plants and suggested that the government should take various steps
to develop areas of limestone deposits, infrastructure facilities etc. Das and
Das (1986) examined the pattern of spatial shift in the cement industry
using rating and also assessed the changes in its locational pattern using
Herfindahl index and Pearsonian correlation coefficient for 1971-84. The
results showed a reduction in spatial concentration to four locations and
favored dispersion. Das (1987) examined changes in the locational pattern,
the degree of potential competition and firm level concentration in the
industry for 1971-80. Even though concentration is declining it is highest in
the entire industry and least in the public sector. Bhardwaj (1996) described
the extent of pollution in each production process. Haq, Kumar and
Chakrabarti (1997) assessed the status of pollution control measures and
compliance with emission regulations for 1990-91. The cost-benefit
analysis for different dust collectors for each section in a cement plant was
found to be economically viable. 64 out of 97 large scale cement plants

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comply with emission norms and the rest have time-targeted schedule to
install the required pollution control equipment. Das and Kandpal (1997)
attempted to estimate CO2 emissions from the Indian cement industry for
different product mixes based on scenario analysis. They also studied the
impact of variations in product mix, and possible energy conservation
measures, on CO2 emissions. It was observed that among process-wise dry
process manufacturing releases the least amount of CO2 into the atmosphere
and in variety wise it is PSC. Changes in the share of Portland Pozzolona
Cement and PSC on CO2 emissions found to be insignificant. Nearly, 13
percent reduction in CO2 emissions from the cement industry is possible if
world average specific energy consumption levels for Indian dry process
plants were to be achieved. Rao (1997) explained problems of pollution, its
influence on productivity factors and factors affecting Green productivity.
The study suggests the steps to create green environment, its advantages
and positive impact on the industry. Technical Environment Impact
Assessment Guidance Manual for Cement Industry (2009) covered the
scientific and technological aspects of cement industry with a summary of
applicable national regulations. They also dealt with various operational
aspects of Environment Impact Assessment including impacts of
environmental and social effects.

1.3.4.5 Studies on the Firm Size, Market Structure, and Financial

Performance
National Productivity Council (1964) found progressive increase in capital
cost per tonne from `102 in 1930 to `141 in 1961 and recommended the
optimum size at 1800 tonnes per day. Indian Association of Trade and
Industry (1964) analyzed the financial trends and productivity in the private
sector 1937-64 covering 90 percent of total production. Hingorani (1964)
examined the relationship between size and cost. For him, “size is a
dynamic concept which changes rapidly with technology and the

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availability of raw materials sets the limit for expansion”. Mehta and
Madnani (1973) from the study of size, technology and productivity using
rank correlation coefficients for 12 companies with 28 units revealed that
size and technology are negatively related and plants with high capital
intensity have higher levels of productivity. Chakraborty and Reddy (1973)
conducted an inter-firm comparison of financial performance for 1967-71
using ratio analysis. Rao and Chander (1978) evaluated the financial
efficiency of cement companies from 1970-71 to 1977-78 covering 70
percent of the entire industry. There was a consistent decline in the
profitability till 1974-75 and considerable increase in the manufacturing
cost of investment because of inflationary pressures and infrastructural
bottlenecks; however profitability improved remarkably in 1975-76 due to
increase in sales.

The study by National Council of Applied Economic Research

[NCAER] (1979) on the financial structure assessment of the industry
indicated that poor profitability and low rates of dividend sets the limit to
raise funds for investment and expansion. The physical scarcities of goods,
heterogeneity in the manufacturing process, variation in input prices etc.
obstructs the efficient operation of free market forces. Kaura and
Subramaniam (1979) (as cited in Das, 1987) studied liquidity, profitability,
financial structure and overall performance of 10 units for 1972-77 using
ratio analysis and merit rating approach and depicted a decline in these
factors because of infrastructural bottlenecks. Bianchi (1982) shows the
findings from the study of the level of determining factor i.e. the market
control on the structure and performance of cement industries in France,
Germany, Italy and U.K. Arya (1984) analyzed the cost function and
changes in cost over time. The results depicted quadratic cost function for
the periods 1951-60, 1961-70 and a linear one for 1951-70. Time is the
significant factor for increase in costs. Sethuraman, Jog, and Khaled (1988)

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examined the characteristics which weaken the market mechanism in the
industry using two firms with the help of financial ratios. The study
recommends formulation of clear-cut policies to reduce unproductive
expenditure and higher costs. Pradhan (1992) examined the producers’
concentration and the change in its trend to assess the changes in the
competitive features of the industry after the introduction of partial-
decontrol policy in 1982. The rate of decline of concentration slowed down
under the new policy i.e. the producers’ concentration found to be
increasing under the new policy. While large firms enjoyed higher rates of
growth after 1982, small firms suffered a decline at a greater rate.

Ghosh and Roy (1993) studied the industry and economy influence
on firm’s liquidity for 10 cement companies for 1972-88 and found that it is
statistically significant although not dominating. Gokarn and Vaidya (1993)
evaluated the performance of the cement industry after decontrol in 1982.
Significant structural change and increased degree of competitiveness was
observed in the industry after decontrol. They also noticed significant real
price increase and an associated increase in profitability in 1990-91. To
explain the relative performance of firms/industries for the period 1971-72
to 1990-91 the structure-conduct-performance framework was used for 33
firms. It was found that big new firms enjoy great advantage over the big
old firms and the mini cement plants mainly due to their technological
superiority or to put it differently it is due to the exit barriers faced by the
big old firms. Shanta (1994) analyzed the relationship between size,
profitability and growth of firms from 1960-80 and found no relation
between size and profitability, also the stability in profit rates increases with
size but not with growth rates. Bhanu (1995) analyzed the inventory
behavior in the industry for a group of 15 cement firms during the various
policy regimes from 1970-87 using flexible accelerator model. Inventory-
output ratio varied from firm to firm, value of inventory per tonne of output

23 
 
found to be higher in 1980’s than in the 1970’s, and there exists no definite
relation between size of the firm and inventory per tonne. He also observed
that output of cement is the significant determinant of stock of raw material
inventory and internal funds for inventory holdings in the linear estimate
and capacity utilization in the log-linear estimate.

1.3.4.6 Studies which gives an Overview of the Indian Cement Industry

Podder’s (1962, 1966) studies was the first attempt to impart a detailed
overview/analysis about the Indian cement industry, pertaining to its
various aspects written in two volumes. Sigurdson (1976) in his booklet
examined the criteria which would justify the establishment of mini cement
plants in developing countries and specifically compares the situation in
India with that in China, where more than 57 percent of cement is produced
by small plants. Singhania and Balkrishna (1981, as cited in Das 1987)
analyzed the relative performance of public and private sector units from
1973-74 to 1977-78 for 16 cement companies. In the public sector share of
capital increased steadily whereas it remained stable in the private sector.
Funds were efficiently utilized in the private sector than in the public sector.
Arya (1985) calculated elasticity of substitution on an aggregate basis for
all cement companies for 1951-60, 1961-70 and 1951-70. Elasticity was
positive but less than unity for the first decade and was negative for the
second and combined period. Saxena, Sushil, and Vrat (1992) explained
scenario building−searching for key variables, identifying the actors, their
activities, roles, alliances, and conflicts, and analyzing seeds of change
using energy conservation in the Indian cement industry. It was observed
that National Council for Cement and Building Materials is the key actor.
Managerial and developmental activities are the very strong driver activities
whereas technological and economic activities were the lowest. Relatively
very few high degree alliances and most of the conflicts are of low degree.
Kamath (1998) in his study on the economic behavior of completely

24 
 
suppressed markets for 1961-82 showed that completely controlled regime
leads to wide spread black marketing, corruption, rent seeking etc. which
entail high social costs. Madhubala (2002) in her book tries to find out the
impact of various policies on the structure and performances of the industry.
It also gives a historical background regarding growth, structure, price and
distribution policies in the cement industry. A comparison is made between
Cement Corporation of India (CCI) and Associated Cement Companies Ltd.
(ACC) in the public and private sectors of the industry. The performance of
the industry with respect to the firms is studied through financial analysis;
cost behaviour, technical and allocative efficiency. WBCSD (2002b)
assessed the current status of industry as a whole with respect to sustainable
development and provides recommendations for cement companies and
stake holders for improving the sustainability. The study team identified
and assessed eight major sustainable development issues and recommended
a set of performance goals and indicators to be adopted by the industry and
suggested a vision of industrial progress for 2020. The study developed a
variety of practical tools to support its assessment and implementation.

NCB Report (2006) compared the status of the modernization in

equipment and technologies implemented by the Indian cement industry
with that of global technology. Technological up gradations with respect to
various processes are portrayed and the perceived benefits from it for the
Pre-1990 era cement plants would result in: increase in capacity, reduction
in thermal and electrical energy consumption, reduction in cost of
production of cement and reduction in the CO2 emissions. Also discussed
the efforts made towards energy conservation and the alternate sources of
energy that can be used in the industry.

25 
 
The report by India Brand Equity Foundation [IBEF] (2006), focused upon
the reasons for India being the fastest growing market and an attractive
investment destination. The study predicted a boost in the cement demand
due to the increase in the infrastructure and housing activities. Low cost
technology, lower per capita consumption of cement paves for further
growth of the industry in the long term and also noticed strong possibilities
for merger and acquisitions. The study also gives an idea about the trends in
production, consumption, capacity, exports for 1993-94 to 2003-04 and the
players in the industry. The Investment Information and Credit Rating
Agency [ICRA] (2006) report is also similar to that of IBEF (2006). It
considered the various aspects of cement industry and concludes that
infrastructure and housing projects will continue to be the driving force
behind the cement demand, with strong growth in cement production and
consumption in future. Joshi and Maheta (2006) in their book discussed
various issues of Indian cement industry in global context. Along with the
historical developments of Indian cement industry it also portrayed the
trends in production, consumption, mergers and acquisitions. The study also
deals with the problems and prospects of the industry. RR Report (2007)
gives a detailed explanation regarding cost, demand, supply, prices,
profitability, strategic analysis, risks and concerns and the players in the
cement industry. It was found that profitability of cement companies and
capacity utilization are closely related. Cement consumption is expected to
rise further. Based on the sensitivity analysis, it seems that there is no scope
for increase in prices.

Annual Report by Cement Manufacturers’ Association [CMA]

(2009) highlights the current performance of the cement industry. It
provides the trends in capacity, production, export, and fuel consumption,
import of coal, cement and clinker despatches, important technological

26 
 
developments like fly ash utilization, conventional fuel security and
alternative fuels. Also discusses the status of ongoing issues related to
Bureau of Indian Standards, pollution control etc. and the various projects
by the National Highways Authority of India. Trends in Green House Gas
emission from 1990 to 2006, type wise Clean Development Mechanism
projects from Indian cement companies are also given.

Task Force Report on cement industry for the Eleventh Five Year
Plan set up by the Planning Commission (2008) is a comprehensive analysis
of the Indian cement industry which is broadly divided into three sections.
The first section deals with a macro overview of the industry, the trends in
capacity, production, consumption and investment mainly of the Tenth Plan
period with a demand forecast. The section also discusses about the mini
cement plants and limestone inventory in detail. Second section is related to
productivity, technology and environmental issues in the industry. Lastly
the logistics related issues have been looked upon. For each section, the task
force made their recommendations and cannot be furnished here as it is too
lengthy.

Burange and Yamini (2008) in their working paper analyzed the

performance of the industry under the controlled period and the
decontrolled period. The primary indicators of the study such as production,
per capita consumption and exports showed better performance in the
decontrolled period. Installed capacity showed a slightly higher growth rate
in the controlled period leading to oversupply in the industry. Greater
consolidation through mergers and acquisitions is also observed. The
competitiveness among firms, evaluated using a composite index for 2006-
2007 for 17 firms revealed that there exists tough competition in the
industry.

27 
 
 Next is on the studies related to Cartel, Mergers and Acquisitions.
The study by Arora and Sarkar (2008) detected the evidence of cartel
formation in the Indian cement industry analyzing structural factors and
concluded that increase in price is the result of a tacit understanding among
players of the cement industry. Anand (2009) estimated that during the
period 2000-2008, the prices for cement have risen more swiftly than prices
for the inputs (except for diesel prices) which was just opposite during
1994-99, which indicated the increase in the market power.

1.4 Research Problem

A plethora of studies available on the cement industry concentrates

on the issues like location, productivity, capacity utilization, costs, market
structure and concentration, environmental issues, mergers and acquisitions,
etc. Very few studies had been done with respect to technological changes
and especially during the last decade. Moreover the dynamic growth and
developments during this decade identified from the review of literature
further validates the present study. The present study also calls for the
analysis of technical efficiency of firms in the context of technological
change in the industry. Thus, this study is an attempt to fill the gap
identified from the review of literature and focus on the economic analysis
of technological changes of the Indian cement industry.

In this regard, some of the research questions that can be explored

are: the nature and contribution of technological change to the output
growth of the industry; the performance of the industry viewed through
various measures; the role of productivity change in measuring the
technological change and how does the major firms contribute significantly
towards growth and development of the industry.

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1.5 Objectives

1. To examine the economic and financial performance of the selected

sample cement firms of the Indian cement industry during 2008-
2009.
2. To assess the technical efficiency of the selected sample cement
firms during 2008-2009.
3. To analyze the growth trends and pattern of the Indian cement
industry.
4. To determine and analyze the trends in technology, and Research and
Development of the Indian cement industry.
5. To identify the problems and issues confronting the Indian cement
industry.

1.6 Hypothesis

• There exist technically efficient as well as inefficient firms in the

sample under study.
• Technology is a major factor contributing to the growth of Indian
cement industry.
• The contribution of R&D expenditure to technology in the Indian
cement industry is less compared to expenditures on royalties/
technical know-how and technology imports.

1.7 Methodology

A sample of 13 cement firms is selected for the firm level analysis

on the basis of sales in 2008-09. The sample firms altogether produces 72
percent of the total cement production in the country. The economics of the
sample cement firms is studied pertaining to costs of production, intensity
ratios, exports, Research and Development, and capacity utilization. The
financial performance of the sample firms are analyzed under the broad five

29 
 
financial ratios categorized as liquidity ratios, leverage ratios, activity
ratios, profitability ratios and growth ratios. The efficiency of the sample
firms is evaluated using Data Envelopment Analysis.

The analysis of the Indian cement industry is carried out for a period
of fifteen years from 1994-95 to 2008-09. The trends in growth of the
industry for selected variables are analyzed using annual growth rates, trend
rates of growth, compound average growth rates. The productivity of the
industry is estimated using partial factor productivities of inputs (capital,
labor, energy, and raw material) and total factor productivity. Kendrick
index, Solow index, and Translog index is used for evaluating the total
factor productivity. To analyze the technological changes in the industry
specifically, the Cobb-Douglas, the Constant Elasticity of Substitution and
the Translog production functions have been estimated. The trends in R&D
intensity is examined using a multiple linear regression equation with four
independent variables sales, technology imports, royalty/technical know-
how, and concentration ratio. The overall the cost structure of the industry
is also evaluated using regression equations. Besides, the growth rates
(trend and compound) as well as the techniques of regression and
correlation were made use of wherever relevant and appropriate.
Data Sources
The firm level analysis utilized the data from electronic database
Capitaline, besides the information provided by the authorities of Cement
Manufacturers’ Association, firms and the Annual reports of the firms. The
data used for the industry level analysis is largely drawn from Centre for
Monitoring Indian Economy's (CMIE) electronic database-Prowess. In
addition, the other sources include data from various publications of
National Accounts Statistics, R.B.I Bulletins, and the various issues of
Cement Statistics published by the Cement Manufacturers’ Association,

30 
 
New Delhi. The data obtained from Prowess for value of output, wages and
salaries, expenses for power and fuel, expenses for raw material were all
expressed in nominal terms and therefore these variables have been
converted to real values using appropriate price indices.

1.8 Limitations of the Study

The analysis of the study relies entirely on the data collected from
the above sources and one of the observed limitations is that the Prowess
database has reported zero values for certain variables of certain firms in
spite that the firms are operational. This, if at all might have affected the
results. The unavailability of data regarding the number of laborers in
Prowess as well as Capitaline made us to rely on the wages and salaries as
a proxy for it. The study did not go for detailed analysis of trends in cement
prices as well as mergers and acquisitions in the industry due to absence of
reliable data. This thesis like any other depends on a particular time frame
the changes beyond that are not examined.

1.9 Scheme of the Study

The rest of the study is structured as follows; as background to the

study, the second chapter provides a broad overview of the Indian cement
industry. Chapter three discusses the theoretical background covering
economics of technology, technological change and its major determinants.
The fourth chapter is a firm level performance analysis using data
envelopment analysis and financial ratios. The fifth chapter is the industry
level analysis for technological change including analysis of productivity,
production functions, cost structure, and problems and issues. Finally,
chapter six summarises the results of the study, discusses few suggestions
for improvement of the Indian cement industry and traces for the future
research areas are posed. 

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