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The cost of protecting steel: India’s steel industry is a standing example of how protectionism harms the economy

The cost of protecting steel: India’s steel industry is a standing example of how protectionism harms the economy


News is brought to you by Mr. Shailesh Karia


Published on 8th March, 2019


 


Despite a long-standing global glut, Indian steel companies have been adding up production capacities. India is now the world’s second largest producer of crude steel after China and the EU. Thus, it’s not surprising that despite India losing a WTO dispute on steel import duties, Indian steel companies are increasingly relying on ‘economic nationalism’ and their ‘strategic industry’ tag to get the government to raise import barriers, force automakers (the top consumer) to use locally made alloy steel and ensure for them preferential access to the fast growing domestic market.


However, expensive steel hurts downstream industries that add much more value and could create many more jobs – for instance, automobile and components manufacturing or construction – that are already struggling with slowing demand and rising input costs. Higher import duties on steel add to their predicament.


With steel being a common industrial input, any increase in import duties on steel causes widespread cost inefficiencies for user industries and induces import of steel-intensive goods such as earthmover and construction equipment from countries like China. Besides, it also discourages export of steel-intensive value added products, for example engineering goods, by making them expensive – adding to India’s current account woes.


Thus, it’s time India categorised a ‘strategic industry’ based on its net effect on domestic value addition as well as contribution to exports and jobs, rather than clinging to its conventional definition of strategic industry that gives too much importance to globally over-supplied basic commodities such as steel.


India’s steel industry – dominated by large companies – remains the most pampered one. It has one of the lowest effective taxations after adjusting for numerous deductions and exemptions, besides having access to an increasingly captive domestic market. It gets preferential treatment compared to non-ferrous metals such as aluminium and copper. For example, the import of flat rolled steel products attracts a basic customs duty of 12.5% compared to flat-rolled aluminium products at 7.5% and copper plates and sheets at 5%.


The government often resorts to highly prohibitive protectionist tools such as imposition of minimum import price that prompts indigenous steel manufacturers to increase their prices unreasonably. The last such imposition led to a surge in domestic steel prices forcing government to warn steel companies not to keep prices above Rs 40,000 a tonne.


Further, large steel manufacturers have successfully lobbied for continued imposition of a whopping 30% export duty on high grade (Fe content above 58%) iron ore, their key raw material. That discourages exports and keeps iron ore prices artificially low in domestic market – which benefits steel companies at the cost of iron ore miners.


Thus, Indian steel companies have access to cheaper raw material, a fast growing domestic market protected from import competition along with low effective taxation. No surprise, sale of steel assets prompted by insolvency and bankruptcy proceedings have best recovery rates and there is intense competition among major bidders including defaulting promoters to acquire distressed steel assets.


Indian policy makers tend to think that steel is a basic input for other industries including capital goods, hence it needs to be nurtured and protected. Fair enough, but what they forget is that it will impose cost on much more dynamic but dependent downstream industries such as automobile and component manufacturing, construction and infrastructure, engineering goods, electrical equipment and machineries, and in the process, adversely affect their cost competitiveness. Iron and steel accounts for roughly 15-20% of the total cost in real estate.


Even for steel companies, though high import duty may lead to increased top lines, it results in lower profitability due to its widespread inflationary impact on other industries. That in turn affects their future ability to invest and may force many of them to over-borrow as rightly observed by the steel minister. Investors too are taking too much risk betting on continuation of protection that may backfire on them.


Given India’s looming demographic crisis – inability to find productive employment for more than a million youths joining the country’s workforce every month – the basic criteria to define a strategic industry needs urgent tweaking. A strategic industry should be defined on the basis of its multiplier effect on employment, value added production and exports. A basic raw material or commodity with excess capacities globally shouldn’t be considered ‘strategic’ especially when it adversely affects the cost efficiencies of more value adding downstream industries.


The country should use its limited financial tools such as subsidies and differential taxation policy to boost futuristic industries such as artificial intelligence, robotics or semiconductors as envisaged by Made in China 2025, and not oligopolistic raw material processors that’s imposing a cost on the economy in terms of lower exports and number of jobs created.


Steel companies should rather be asked to focus on moving up the value chain where quality and services and not price affect effective demand. That’s the way to survive and thrive going forward. Besides, India should remove import duties on recyclable steel scrap or metal scrap in general – opposed by politically connected big guns of India Inc. Recycling is ecofriendly, saves energy and should be embraced as a policy.



Source : https://timesofindia.indiatimes.com//


 





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