The Modi government’s ‘Make in India’ campaign is aimed at transforming the country into a global manufacturing hub and creating millions of jobs for those who will join the workforce in the coming years. With the global industrial powerhouse China moving towards consumption-led growth, the time is ripe for India to raise the profile of its manufacturing sector. But a high-cost domestic steel industry does not augur well for the ‘Make in India’ initiative.
Out of the nearly two dozen sectors identified by the government as focus areas under the campaign, the cost of steel is crucial to the competitiveness of manufacturing in at least nine industries – automobile, automobile components, construction, defence manufacturing, electrical machinery, railways, renewable, thermal power, and oil and gas.
Yet the news here is not good. The domestic steel industry has lost its export competitiveness in recent years and as a result, India has now become a net importer of steel. For instance, in 2003-04, India’s steel imports were 1.5 million tonnes and exports 4.5 million tonnes, but in 2014-15, the country’s steel imports were 9.3 million tonnes and exports had increased barely to 5.5 million tonnes. The steel sector’s global competitiveness has further eroded, with exports falling 29.7 per cent in 2015-16 up to December, from the same period last year, according to the Joint Plant Committee, an agency mandated to collect data on the steel sector.
A tonne of reinforcement steel produced in India for use in buildings can cost up to 15,000 rupees more compared to China, according to industry sources. Unsurprisingly, with the declining competitiveness of the sector, the steel industry has lost ground to global suppliers in the domestic market too.
The domestic steel industry is pushing for the basic customs duty on steel products to be raised up to 25 per cent, the maximum permissible under WTO guidelines, to curb imports. Under pressure from domestic manufacturers, the government has raised import duties and imposed anti-dumping duty to discourage steel imports. However, steel manufacturers are still unhappy and want the government to do more to check imports.
In the Union Budget 2015-16, the tariff rate of basic customs duty on iron and steel, and articles of iron and steel, was increased from 10 per cent to 15 per cent. No change was made to the effective rates of basic customs duty on these goods at the time. However, the government later raised the applied rates on long and flat steel products by 2.5 per cent.
Trend in Steel Output, Imports
|Year||Production (mt)||% increase||Imports (mt)||% increase|
|FY16 (upto December)||67.229||1.1||8.389||29.2|
Source: Joint Plant Committee; mt – million tonnes
The government has also levied a 20 per cent ad valorem safeguard duty for 200 days on certain hot-rolled flat products effective from September 14.
The per capita consumption of steel in India currently stands at the low level of 60 kg as against the world average of 220 kg. But this figure could increase significantly in the coming years if the Modi government’s flagship programmes, such as the ‘Smart Cities Mission’ and the ‘Housing for All by 2022’ besides ‘Make in India’, gain traction.
India’s steel imports jumped 29.2 per cent in the current 2015-16 up to December, after a 72.2 per cent spike in the previous year. According to the World Steel Association, India’s steel demand will likely grow at 7.3 to 85.8 million tonnes in 2016, the highest growth rate for any country in the world.
Vishnu Deo Sai, the minister of state for steel, has told parliament that steel imports from Japan and Korea have become cheaper after the free trade agreements with those countries became operational, and surged on the back of new-found price competitiveness. Deo, however, was quick to clarify that domestic capacity addition and production have not been impacted by the import surge. Free trade agreements with Korea and Japan became effective in 2010 and 2011, respectively.
Steel suppliers from China have also stepped up exports to India in recent years. Steel imports from China have surged from 1.7 million tonnes in 2013-13 to 3.5 million tonnes in 2014-15.
Unfazed by its eroding competitiveness, the domestic steel industry is adding capacity. Last year, India overtook the US to become the world’s third largest producer of steel after China and Japan. This despite the fact that the industry saw its capacity utilisation level fall from 91 per cent in 2010-11 to 77 per cent in 2013-14, mainly due to the shortage of iron ore.
Fed up with persistent lobbying by steel manufacturers for protection from imports, Finance Minister Arun Jaitley has asked the steel industry to be more competitive. “You have also to enable your own self for cost competitiveness. In the eventual race, hand-holding can take place up to a point. Beyond that point, one has to stand up on your own strength, run the industry on your own strength,” Jaitley said, while inaugurating an industry conference last August.
What lies ahead
The steel industry’s stand is clearly out of sync with the government’s broader goal of promoting manufacturing. The industry is clamouring for protection as it cannot compete with imports. It is raising the China bogey to create a nationalistic appeal. However, the fact remains that steel consumers are as Indian as manufacturers and that former’s interests cannot be sacrificed to shield producers from market competition.
A case is being made that public sector banks have given 50 billion dollar in loans to the steel industry, which could become duds if manufacturers are not protected against imports. The questions remains – should the government choke steel imports just to protect the narrow interests of the steel industry? Is that a realistic option? If the government chooses to do so, there is a risk that this could provoke retaliatory action against our exports from the affected trading partners.
Under the latest national steel policy, the Centre has envisaged raising steel manufacturing capacity to 300 million tonnes by 2025-26 from the level of 101 million tonnes in 2013-14. That would entail an investment of Rs 8 lakh crore. Banks are already reeling under the steel sector’s stressed loans. Given the domestic industry’s non-competitiveness, the government will have to take a view if such a huge capacity expansion is worthwhile.
N Mohammed is a business and trade analyst