Indian Steel Sector - A pampered infant who must grow up - Mr RK Singh Image Source: NikkeiMr Ritesh Kumar Singh, chief economist of Indonomics Consulting and a former assistant director of the Finance Commission of India, wrote in Nikkei that despite the global glut in steel, Indian producers relentlessly expanding capacity as if they live in a different world. He wrote “Which, in a sense they do. After decades of protection, subsidies and preferential treatment that has insulated Indian steel from international competition, the industry has grown in the bubble of a large and expanding domestic market to which access for foreign rivals is heavily restricted. They are now responding to the global upsurge in economic nationalism inspired by US President Donald Trump to push the Narendra Modi government to raise import barriers even further.”
He opined “This must stop. There are much better ways for the Indian government to support economic development than waste scarce resources protecting steel instead of backing other priorities, such as India-wide job generation. By making steel more expensive than it should be, protection hurts downstream industries that add much more value and could create many more jobs, for instance, automobile and auto components, and construction, the country's top job creator after agriculture and textiles. Many of these downstream industries are facing slowing demand and rising input costs due to India's steel protectionism. This cuts into their margins in an intensely competitive market place and in turn, reduces their ability to add capacity and employment. This dampens economic growth and thwarts Modi's loudly proclaimed attempt to raise manufacturing's share in gross domestic product. Moreover, overpriced steel leads to overpriced products which encourage the import of cheaper steel-containing consumer goods from China and elsewhere, discourage the export of value-added finished goods and contribute to India's current-account deficit.”
He wrote “It is time New Delhi changed its definition of a strategic industry. It should be based on a sector's net contribution to adding value in the domestic economy, exports and job creation rather than clinging to an age-old definition of a strategic industry as a basic industry such as steel. India must use its limited financial resources and policy tools to promote future-oriented industries such as aerospace, semiconductors or artificial intelligence rather than raw material processors.”
He added “Large steel manufacturers have successfully lobbied for the continued imposition of a whopping 30% export duty on high grade (with iron content above 58%) domestic iron ore, the industry's key raw material. That discourages exports and keeps iron ore prices low in India, benefiting 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. Due to this fearsome combination of protective layers, steel producing facilities always sell well in corporate bankruptcy proceedings. So even when companies fail, often because of financial mismanagement, the assets remain in production. Despite the global glut, and capacity reductions in China and elsewhere, the Indian industry keeps growing.”
He wrote “India's excessive love of steel echoes the former Soviet Union's obsession with heavy industry at the expense of consumer goods. Indian policy makers think that because steel is a basic input for other industries including capital goods, such as machinery, it needs special nurturing. But they should realize that if a primary input material is expensive, it will impose cost on much more dynamic downstream industries such as automobiles, construction, consumer appliances, electrical equipment and machinery. That in turn, kills investment and many potential jobs.” Source : NIKKEI
Image Source: NikkeiMr Ritesh Kumar Singh, chief economist of Indonomics Consulting and a former assistant director of the Finance Commission of India, wrote in Nikkei that despite the global glut in steel, Indian producers relentlessly expanding capacity as if they live in a different world. He wrote “Which, in a sense they do. After decades of protection, subsidies and preferential treatment that has insulated Indian steel from international competition, the industry has grown in the bubble of a large and expanding domestic market to which access for foreign rivals is heavily restricted. They are now responding to the global upsurge in economic nationalism inspired by US President Donald Trump to push the Narendra Modi government to raise import barriers even further.”
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