Wholesale Price Index Vs New Age Construction Industry

CONTINENTAL ENGINEERING CORPRATION

EFFECT OF NEWLY INTRODUCED SUBGROUP OF CONSTRUCTION MACHINERY IN THE REVISED WPI SERIES OF BASE YEAR 2004-05 ON THE ADJUSTMENT OF CONTRACT PRICE IN MAJOR CONSTRUCTION

CONTRACTS & PROPOSAL

Wholesale Price Index Vs New Age Construction Industry

November 2014

Source: http://eaindustry.nic.in/

The representation of the Subgroup “Construction Machinery” in the latest series of Wholesale Price Index is to be tuned with the Construction Industry which inter alia has high end equipment, new construction practices, advanced methodologies etc. There is a dire need for revamping the Subgroup - Construction Machinery of the WPI Series by way of increasing the representation which currently included only two (2) equipment in the list.

By: Navlesh Kumar, General Manager – Commercial Arun Soni, Asst. Manager-Contracts Data Credits: Ajay Tripathi, Sr. Engineer - QSS

EFFECT OF NEWLY INTRODUCED SUBGROUP OF CONSTRUCTION MACHINERY IN THE REVISED WPI SERIES OF BASE YEAR 2004-05 ON THE ADJUSTMENT OF CONTRACT PRICE IN MAJOR CONSTRUCTION CONTRACTS & PROPOSAL

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1. BACKGROUND 1.1 For Major Construction Contracts that run for more than a year, the Contract Price is

adjusted to cater for the fluctuation in prices of main constituents (Labour, Material and Plant & machinery & parts) of the Works by a typical formula given called Price Adjustment (Escalation) Formula in the Contract.

1.2 The formula as shown below takes account of the percentage variation in whole sale price index/ rates of major components (Labour, Materials, Fuel & P&M) of the Works and the value of executed works is adjusted periodically (monthly) by using this formula and incorporating relevant changes if index /rates.

V = 0.85 x P% x R x (Ci – Co) / Co

Where,

V = Price Adjustment Value of a component (viz Labour, Fuel, Machinery and Material (Cement, Steel, Bitumen and Other Material) on account of variation in indices /rate of that component. P = Percentage for the component, (viz Labour, Fuel, Machinery and Material (Cement, Steel, Bitumen and Other Material)a s defined in the Contract R = Value of executed Works [Turnover] for a particular period as arrived by applying tendered rate/price Ci = Current wholesale price Index(WPI)/Rate of a particular component for the relevant period Co = Base wholesale price index (WPI) /Rate (Indices/rate 28 days prior to the bid submission date) of the same particular component.

1.3 The components viz. Labour, Fuel, Machinery Cement Steel and Other Materials except

bitumen are common for most of the Construction Projects; however the percentage of individual component (P) of particular Contract depends upon the type and nature of the Project.

1.4 The WPI (Wholesale Price Index) measures and tracks the price of a representative basket

of wholesale goods on periodical basis on which the inflation rate is computed. The Office of Economic Advisor in the department of Industrial Policy and Promotion, Ministry of Commerce & Industry is responsible for compiling and releasing it.

1.5 The concept of WPI adopted in practice represents the quoted price of bulk transaction

generally at primary level. The compilation of WPI involves defining the concept of WPI,


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finalization of base year, finalization of item basket, allocation of basket, and allocation of weights (W) at items, groups / subgroups levels etc.

1.6 The composition of WPI of all commodities consist of 4 levels (i) Major Groups (ii) Groups (iii) Subgroups (iv) Item. The weightage are allocated from top down methods means weights are assigned first to Major Groups, then to Groups, Sub groups and the Item.The detail information about compilation is available on the website of Office of Economic Advisor of India (www.eaindustry.nic.in).

2. REVISION OF WPI SERIES AND RELEVANT CHANGES

2.1 The WPI is revised roughly once in every decade and during the revision, revision of

weighting diagram and restructuring are done. In the latest revision, base year has been shifted from year 1993-94 to year 2004-05 and the revised WPI has been made effective from 14 Sep 2010 with closure of old Index of base Year 1993-94.

2.2 Prior to 14 Sep 2010, the WPI of base year 1993-94 with effect from April 2000 was being

used in formulae of all Construction Contracts for the adjustment of Contract Price on account of fluctuation in prices of materials (cement, steel & other commodities) and machinery components of the project works. These were available with categorization and weightage in following manner:

Table-1

1993-94 Series Item in WPI WT Cement 1.73105 Bars & Rods [Steel] 1.24088 Heavy Machinery & Parts 1.82158 All Commodities [Other Material] 100.00

2.3 In the revised Index, addition of many new commodities as well as restructuring has been

done. The major addition of commodities (items) as may be seen from the below table of WPI compositions, has been done in the manufacturing head wherein 237 items have been added in the latest index of base Yr 2004-05.

Table-2

Sn Description WPI of base Yr 1993-94 WPI of base Yr 2004-05

Weight No. of items Weight No. of

items 1 All Commodities 100 435 100 676

1.2 I Primary Articles 22.02 98 20.12 102 1.3 II Fuel & Power 14.23 19 14.91 19 1.4 III Manufactured Products 63.75 318 64.97 555


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2.4 As a result of restructuring and addition of new items, change of items/ group, revamping of structure and reduction of weightage have taken place. The eleven Groups from A to L (Table-3) that cover entire manufactured products have remained same but there are changes at level of subgroups and at items/commodity level.

2.5 The three construction items i.e. ‘Cement’, ‘Bars &Rod’ and ‘Heavy Machinery & Parts’ of

old series that were under the Groups of ‘Non-Metallic Mineral Products’, Basic Metal, Alloys & Metal Products and ‘Machinery& Machine Tools’ respectively have also got affected due to augmentation and restructuring.

2.6 Earlier Cement was a single item under Subgroup of ‘Cement’ which has become four items

(grey cement, white cement, slag cement & lime) in new Series. Similarly, there is no item of Bars & Rods in new Series, instead there is an item of Rebar and thus Rebar represents the item of Bars & Rods.

2.7 Following tables show the composition of Groups of both Series, relevant changes of

components of Price Adjustment Formula in New Series: Table-3

Description

Old WPI series (Base Yr 1993-94

New WPI series (base yr 2004-05)

Weight No. of items Weight No. of

items

III MANUFACTURED PRODUCTS 63.749 318 64.972 555

(A) FOOD PRODUCTS 11.538 41 9.974 57

(B) BEVERAGES, TOBACCO & TOBACCO PRODUCTS 1.339 11 1.762 15

(C ) TEXTILES 9.8 29 7.326 55

(D) WOOD & WOOD PRODUCTS 0.173 2 0.587 10

(E ) PAPER & PAPER PRODUCTS 2.044 11 2.034 18

(F) LEATHER & LEATHER PRODUCTS 1.019 1 0.835 13

(G) RUBBER & PLASTIC PRODUCTS 2.388 15 2.987 45

(H) CHEMICALS & CHEMICAL PRODUCTS 11.931 69 12.018 107

(I) NON-METALLIC MINERAL PRODUCTS 2.516 9 2.556 29

(J) BASIC METALS, ALLOYS & METAL PRODUCTS 8.342 53 10.748 69

(K) MACHINERY & MACHINE TOOLS 8.363 56 8.931 107

(L) TRANSPORT, EQUIPMENT & PARTS 4.295 21 5.213 33


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Relevant changes in CEMENT and REBAR items: Table-4

WPI 1993-94 Series WPI 2004-05 Series

III. MANUFACTURED PRODUCTS III. MANUFACTURED PRODUCTS (I) NON-METALLIC MINERAL PRODUCTS (I) NON-METALLIC MINERAL PRODUCTS

(c) Cement (c) Cement & Lime

Cement Grey cement

White cement

Slag cement

Lime

(J) BASIC METALS, ALLOYS & METAL PRODUCTS (J) BASIC METALS, ALLOYS & METAL

PRODUCTS

a. Basic Metals & Alloys a. FERROUS METALS

a1. Iron & Steel

Basic pig iron a2. STEEL: LONG

Foundry pig iron Rebars

Steel ingots(plain carbon) Rounds

Blooms Wire Rods

Billets & slabs Angles

Skelps Joist & Beams

Oromild steel &tensil plate Rails

Angles,channels & sections

Joist & rolls

Bars & rods

Relevant change in MACHINERY item:

Table-5

WPI 1993-94 Series WPI 2004-05 Series (K) MACHINERY & MACHINE TOOLS (K) MACHINERY & MACHINE TOOLS

a. Non-Electrical Machinery & Parts 3.3787 a. Agriculture Machinery & Implements

a1. Heavy Machinery & Parts 1.8216 b. Industrial Machinery 1.83759

Complete tractor 0.7276 Boiler & Accessories 0.2527

Agriculture Implements 0.0687 Industrial Furnaces 0.0225

Tractor Components &Acces. 0.0510 Coupling 0.0100

Material Handling Equipment 0.0783 Filtration Equipment 0.0182

Cranes 0.0506 Material Handling Equipments 0.0507

Boilers, its parts & accessories 0.1806 Textile Machinery 0.1509

Complete Engines 0.5119 Rubber Machinery 0.0124

Excavator 0.1064 Cranes 0.0465

Hydraulic Machine 0.0465 Lifts 0.0478

a2. Industrial Machinery for Textile etc 0.5680 Oil Mill Machinery 0.0103

a3. Refrigeration & Other Non-Electrical Machinery 0.9891 Rice Mill Machinery 0.0121

b Electrical Machinery 4.9845 Sugar Machinery 0.0347

Food/ Beverages/Tobacco Processing Machinery 0.0056

Mining/Quarrying/Metallurgical 0.0386


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WPI 1993-94 Series WPI 2004-05 Series (K) MACHINERY & MACHINE TOOLS (K) MACHINERY & MACHINE TOOLS

Machinery/Parts Plastic Machinery 0.0823 Fasteners 0.0564 Ball/Roller Bearing 0.1777 Pump & Assembly 0.1024 Drive Equipment 0.0065 Heat Exchanger 0.0810 Hydraulic Equipment 0.0450 Pneumatic Tools 0.0076 Industrial Valves 0.1561 Chemical Plant Equipments 0.1484 Other Industrial Machinery 0.2612

c. Construction Machinery 0.04487 Loader 0.01029 Concrete Vibrator & Mixture 0.01260 Other Construction Machinery / Equipment 0.02198

d. Machine tools 0.36702 e. Air conditioner & Refrigerators 0.42879 f. Non electrical machinery 1.02563 g. Electrical machinery 2.34277

h. Electrical Accessories, Wires, Cables 1.06278

i. Electrical Apparatus & Appliances 0.33666 j. Electrical Items 0.96117 k. IT Hardwares 0.26700 l. Communication equipments 0.11821

Summary of relevant changes of components of Price Adjustment Formula of the Construction Projects and Contracts in the New Series:

Table-6

Item in WPI (1993-94 Series) Item in WPI (2004-05 Series)

Cement Grey Cement

Bars & Rods Rebars

Heavy Machinery & Parts Construction Machinery

All Commodities All Commodities

2.8 The major change is found in case of machinery component. Earlier, the WPI of ‘Heavy

Machinery & parts’ with weightage of 1.82, covering a particular group of machineries and falling under Group of ‘Machinery & Machinery Tools’ was usually used in the price adjustment formula. However, as a result of restructuring in New Series, Subgroup of ‘Heavy Machinery & parts’ has been got deleted from the Group of ‘Machinery & Machinery Tools’.


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2.9 In the new series, the Group of ‘Machinery &Machinery tools’ consists of twelve Subgroups

and most relevant replacement of ‘Heavy Machinery & tools” could be considered as two Subgroups i.e. ‘Industrial Machinery’ and ‘Construct Machinery’.

2.10 On the basis of weightage as well as coverage of machineries ‘Industrial machinery’ well

qualifies as a replacement of ‘Heavy Machinery & Parts, however on the basis of pure terminology, it is ‘Construction Machinery’.

3. IMPACT OF RELEVANT CHANGES ON PRICE ADJUSTMENT FORMULAE OF

CONSTRUCTION CONTRACT

3.1 As far as cement, and bar& rods of old series are concerned, these can be represented as Grey cement and Rebars of new series respectively. Though weightage of these have mildly come down but each being a specific item, replaced items shall continue to make movement of indices depending upon price fluctuations& transactions.

3.2 In case of machineries, it is appreciable that a Subgroup of ‘Construction Machinery’ to represent the wholesale price fluctuation of machineries and parts specifically for Construction has been created and thus, obvious choice as a replacement of ‘Heavy Machinery& parts of old series, should be the Subgroup of ‘Construction Machinery’.

3.3 However, when one sees the coverage (representation to the Construction Industry) of machineries and the weightage, a great variance in comparison to old series is appeared. Otherwise as well, the Subgroup of Construction Machinery due to presence of nominal and light machinery items beneath it cannot act as a true representative of machineries that are being commonly used for Construction Projects’.

3.4 First, comparing with old series, there were nine heavy items under the subhead of ‘Heavy machinery & parts’ with combine weightage of 1.82 as may be seen from Table-5, whereas in ‘Construction Machinery’, there are three light items naming ‘Loader’, Concrete Vibrator & Mixture and ‘Other construction machinery/equipment’ with combine weightage of 0.04. Thus, Subgroup of Construction Machinery in New Series is neither true replacement of Heavy machinery & parts of old series nor representing machineries that are commonly used for the construction projects.

3.5 Unlike, Rebars & Grey Cement which are individual / single commodity, and their rise and fall of WPI indices are purely dependent upon market economics, Construction Machinery represents as a group of machineries/ commodity and thus proper coverage of machineries is an essential requirement to make the indices true representative to the Construction Contracts.

3.6 The major machineries that are commonly used in all types of construction projects (Building, Industrial, Highway& Bridges, MRTS (Metro), Hydropower, Refinery & Petrochemical) and are essentially required to be considered to make truly representative basket of Construction Machinery are as below:


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1. Hydraulic Excavator 2. Dozer 3. Wheel Loader 4. Dumpers 5. Compactors 6. Tractor Trailors 7. Slip form concrete shutter 8. Batching Plants 9. Mixers 10. Concrete Pumps 11. Transit Mixers

12. Concrete Placers 13. Hydraulic Piling Rigs 14. Cranes 15. Lifting tools & tackles 16. Dewatering Pumps 17. Compressors 18. Generators 19. Transformers 20. Rectifiers 21. Submerged Arc Welding Unit 22. Rebar Cutting & Bending machine

3.7 In comparison of above listed machineries commonly used for all type of construction projects, the machineries chosen under the Subgroup of ‘Construction Machinery’ are insignificant and cannot act as representative for the Construction Projects where heavy machineries and state of art machineries are being utilized for speedy, highly technical and complex construction

3.8 In the past decades, the usage of heavy and highly complex hydraulic machinery such as Earth Movers, Pavers, Batching Plants, WMM Plants, HM Plants, Gantry Crane, various types & capacity Cranes, Crushers, Tunnel Boring Machine, Piling Ring, Dipharm wall rig etc. is widely seen and with passage of time, more and more advanced machineries shall be used. In such condition, a truly representative basket for Construction Machinery is required rather present one which is just notional and does not serve the purpose for measuring the price fluctuation of construction industry machineries.

3.9 For best representation, the above machineries should be included in the future WPI series, and which will be applicable for future Projects. However, for maintaining continuity with future (revamped) WPI series, currently for the running Projects a new representation is designed for Construction Machinery based on the available commodities in current WPI series and which are representing the Construction Projects (Industry). While designing the new basket (subgroup) for the Construction Machinery the major focus was on representation of set of machinery and equipment. The new sets of machinery proposed to be included in Construction Machinery are, Table-7

Commodity Weightage Construction Machinery 1.73727 Material Handling Equipment 0.05072 Cranes 0.04647 Mining/Quarrying/Metallurgical Machinery/Parts 0.03860 Pump & Assembly 0.10241 Hydraulic Equipment 0.04504 Pneumatic Tools / Compressor 0.00763 Loader 0.01029 Concrete Vibrator & Mixture 0.01260 Earth Moving Machinery 0.19193


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Tractors 0.40572 Auto Parts 0.80388 Other Construction Machinery / Equipment 0.02198

3.10 With the newly designed Construction Machinery basket, a small study is done citing the historic (last five years) index number for comparison and further analysis and proposal.

3.11 It may also be observed from given below graph and table that Subgroup of WPI ‘Construction Machinery’ (original) has not shown changes in last 5 five years. It is very surprised to see that when prices of all other (manufactured) commodities are going up, WPI of ‘Construction Machinery’ has risen mere 7.61%, lowest among peer group and against the overall inflation of 42.69% in the last five years.

The growth pattern of the new basket for Construction Machinery is consistent and representation

of the market scenario. The design of new basket for Construction Machinery gives a steady growth of 15% which is

representing the market and is very close to the Industrial Machinery.

Table-8 Trend of WPI in past five years

Commodity Name Weightage

2009 2010 2011 2012 2013 2014 All Commodities 100.0000 0% 9.56% 19.94% 28.98% 37.14% 42.69% Manufactured Products 64.97164 0% 5.42% 13.21% 19.69% 23.66% 27.55% Machinery & Machine Tools 8.93148 0% 2.19% 5.48% 8.35% 11.07% 13.72%

Industrial Machinery 1.83759 0% 5.70% 8.94% 11.76% 14.79% 16.99% Construction Machinery (Original) 0.04487 0% 1.32% 1.23% 3.52% 5.26% 7.61%

Construction Machinery (New Basket) 1.73727 0% 2.02% 6.28% 9.28% 12.12% 15.11%

110.00

130.00

150.00

170.00

190.00

2009 2010 2011 2012 2013 2014All Commodities Manufactured ProductsMachinery & Machine Tools Industrial MachineryConstruction Machinery (Original) Construction Machinery (New Basket)


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Percentage increase of index number is demonstrated and is shown for last five years only, considering 2009 as base year. For 2014 average of monthly index from January ’14 to October ’14 is considered.

Construction Machinery’s close cousin Industrial Machinery also shows that there is steady growth of 17%. The Index no. for both Construction Machinery and Industrial Machinery was 129.9 in 2009, but it has grown marginally up to 151.5 for Industrial Machinery whereas it has reached up to 138.8 only for Construction Machinery. Also, the group head i.e. (K) MACHINE & MACHINE TOOLS have also grown 13% representing the whole group steadily. The major motive for all this discussion arose due to low realization of price adjustment (escalation) payments since the revision of the WPI series with base year 2004-05. Impact for such an increment should also be seen in terms of financials too. Project Cost = Rs. 300 Crs. Time for Completion = 3 years Percentage for Plant & Machinery component = 15%. ∴ Per cost against Plant & Machinery = (Rs. 300 Crs x 15%) / 3 = Rs. 15 Crs. Also, per year Price Adjustment (Escalation) will be calculated based on the percentages arrived at in the above Table which is based on the new WPI series. Table-9

All amounts below are in Rs. Crs.

Commodity Name Weightage Total Price Adjustment 2012 2013 2014

Machinery & Machine Tools 8.93148 1.25* 1.66 2.06 6.81 Industrial Machinery 1.83759 1.76 2.22 2.55 6.58 Construction Machinery (Original) 0.04487 0.53 0.79 1.14 2.83 Construction Machinery (New Basket) 1.73727 1.39 1.82 2.27 5.48

‘* Sample Calc., for Machinery & Machine Tools, Year 2012 = 8.35% of [(300 x 15%) / 3] = 1.25 It is seen that, considering the available indices for Construction Machinery average escalation (Price Adjustment) amount for a 300 Crs-3 years project would be Rs. 2.83 Crs only whereas, “Industrial Machinery” and the Group Commodity “Machinery & Machine Tools” both are above Rs. 6.5 Crs. Thus it is imperative to look towards redesign of Construction Machinery which as per our design and proposal is yielding escalation of Rs. 5.48 Crs and is quite representing the Group Commodity and the closest cousin “Industrial Machinery” For comparison of growth of the group commodity of WPI vis-à-vis true market scenario, there are two major dependent factors viz. (a) representation of the group and revision of the index numbers of the group’s individual commodities, and (b) price movement of the individual commodities of the group.


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As per WPI Compilation Manual, Point No. 4.1.1, “At present data collection for WPI is solely based on voluntary basis……. Since the collection of prices is on voluntary basis, the flow of price data, especially from manufacturing units, becomes irregular leading to problems in compilation of WPI.” From the above, following position is arrived at, 1. Even if the current Construction Machinery group is seen as a true market representation then

also a practical problem persist viz. ‘Data Collection’. Data collection is done on voluntary basis thus the sources are not fixed and regular leading to compilation of WPI. Thus true representation to market is not seen.

2. The components of the Construction Machinery group i.e. Loader, Concrete Vibrator and Other Construction Machinery are partially representing the Construction Industry. The price movement of the aforesaid machineries is also very limited. For example Concrete Vibrator is not a high end equipment of Construction Industry and cannot be compared with rate of procurement, usage and requirement and in short the price movement of cranes, batching plant, dumpers, excavators etc. in a similar project.

3. Thus for representing a true market scenario the commodities in the group should represent the true market scenario and the price movement of the commodities should be regular and accurate.

The crux of such discussion lies towards the representation of group commodity Construction Machinery and its low inflation trend resulting in low price adjustment payments to the executors of the multi crore Projects. It is obvious that with high end projects, the Contractors would be using highly technological and complex machines and equipment for a working period of 24-48 months and with such weightage and growth in index numbers, thereto, they would be getting very low compensation in terms of Price Adjustment after deploying expensive set of machinery and equipment. 4. RECOMMENDATION / CONCLUSION Above points are laid in view of immediate action as well as a permanent solution by revisions in the WPI series in future. For sake of understanding and a clear motive for all such analysis, the recommendation is further split, Therefore, the pattern of recommendation (priority – top being most convenient) is also to be drawn practically such as, I. FOR RUNNING CONTRACTS (existing projects with various departments like PWD, CPWD,

NHAI etc.), the price adjustment computation can be done following, a) Index numbers for Industrial Machinery (Weightage – 1.83759): In the current WPI series, the

Subgroup Industrial Machinery is very common with Construction Machinery and has many elements (commodities) which are very commonly used in Construction Projects (viz. Material Handling


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Equipment, Cranes, Mining/Quarrying etc., Pump & Assembly, etc.). And the biggest convenience is that it is readily available in the current WPI series and is regularly published with other commodities.

b) Index numbers for proposed basket for Construction Machinery (Weightage – 2.015145): The newly designed basket for Construction Machinery referred under Pt. No. 3.9 is hereby proposed as a second option for Running Projects. This new basket for Construction Machinery is very close representation of new age Construction projects and specifically this basket is designed from the available commodities of current WPI series, by which the applicability would be transparent.

c) Index numbers for Group Commodity Machinery & Machine Tools (Weightage – 8.93148): If the

above two options are not found suitable as a replacement for existing Subgroup “Construction Machinery” then the Group Head commodity i.e. Machinery and Machine Tools which is obviously representation for Construction Machinery on a macro scale and is relevant too.

II. FOR FUTURE CONTRACTS, the price adjustment computation can be done following,

Index numbers for proposed basket for Construction Machinery (Weightage – 2.015145): The newly designed basket for Construction Machinery referred under Pt. No. 3.9 is hereby proposed as an only option for Future Projects. This new basket for Construction Machinery is very close representation of new age Construction projects and specifically this basket is designed from the available commodities of current WPI series, by which the applicability would be transparent.

III. FOR UPCOMING SERIES OF WPI by the Office of Economic Advisor (Ministry of Commerce & Industry)

a) Revamping of complete representation of Construction Machinery with including the machineries

suggested in Pt No. 3.6 of this document. This will revolutionize the representation, weightage and index growth for the Construction Machinery and thus will a steady increase in indices in sync with the Construction Projects / Industry.

b) Or, The basket proposed basket for Construction Machinery (Weightage – 2.015145): The newly designed basket for Construction Machinery referred under Pt. No. 3.9 to be an option for future series as well. This new basket for Construction Machinery is very close representation of new age Construction projects.

Therefore, the proposal for designing / revision of the basket for Contraction Machinery is imperative and is hereby proposed to.

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Wholesale Price Index Vs New Age Construction Industry