Monday, 21 September 2015

Is the Safeguard Duty on Steel Imports Really that Safe?

Today in India, to boost and encourage the domestic manufacturing sector and achieve the “Make in India” dream, the Indian government provides the domestic sector with constant support through numerous and various grants, subsidies, and duties. The primary motive of implementing these policies is to demotivate imports and boost exports, generate inflows of foreign currency, reduce unemployment and in turn improve and grow the Indian economy. A very apt example of this is the Steel Industry of India!

Today the government of India has already provided too many incentives to the domestic steel manufacturers in terms of heavy subsidies and grants, huge financial loans at low interest rate to compete globally, reduced competition by restricting cheap imports through imposition of heavy duties and quality standards, and by increasing demand by making the use of steel compulsory in many huge projects. Additionally, recently the government also announced a steep increase in the custom duty for selected steel products to 12.5% from 10% to curb the inflows of cheap imports and prevent the prices of steel from falling in the domestic market.

All these factors have resulted in the domestic steel manufacturing companies dominating the market by capturing 90% market share of total steel consumption in India. Whereas; the market share of imported steel is restricted to 10% of the total consumption of steel in India. The imported steel exists to satisfy the unmet needs in the steel industry, avoid unfavorable price appreciation and increase efficiency of domestic firms by exposing them to global competition.

Nevertheless, the increase in volume of cheap steel imports in the FY 2014-2015 attracted too much attention and was termed by many as harmful and disastrous. This even resulted in government increasing the custom duty for selected steel products to 12.5% from 10%. However, no one investigated the reason for this steep fall in steel prices globally or reviewed if these increased imports had any effect on the market share of domestic firms!

Coal and iron ore, two of the most important raw materials required for the production of steel, have become extremely cheap over the last year. Prices of iron ore fell from USD 140 pmt to USD 40 pmt over the past one year; almost 70% dip. Also, the prices of coal decreased to USD 47 pmt from USD 62 pmt, decrease by 25%. Due to the steep decrease in the cost of raw materials the steel imports became cheaper; the prices did not fall due to global mills dumping their while incurring losses. Thus, if global mills are able to reduce their prices then so should the domestic mills without complaining about any injuries in terms of profit loss or sales loss, as both the parties use the same priced coal and iron ore. In addition, if statistics are reviewed, it can be proved that the huge inflow of cheap steel has not taken any market share away from the domestic steel mills; instead it has only helped in satisfying the increased demand for steel as the capacity of domestic mills is limited.

Another very important point that needs to be brought to light is that there has not been even a slight effect on the export volumes of domestic mill in the last year, irrespective of decreased prices. On the contrary, they have always exported steel at lower prices compared to price of steel in domestic market. This proves that domestic mills are able to supply steel globally while competing with other cheap steel exports and maintain profits; however they are unable to supply the same steel in Indian market at the same global prices! Why should only the Indian consumers of steel face the brunt of high raw materials cost, while all global consumers are able to consume low cost steel?

Thus, the imposition of safeguard duty will only create demarcation as the government is favoring three-four domestic steel firms over the whole Indian economy. This will only be a gateway to ever increasing problems for the government and citizen of India as the long-term effects of the same are outlined below:

1. Today India's economy is said to be growing at the fastest rate in the world. This is only possible due to our efficiency in terms of competitive pricing and before time delivery. By curbing imports the government will only be hampering this whole growth cycle. Small engineering and consumers firms will not be able to compete globally due to their high raw materials cost compared to other countries. This will lead to industries shutting down or moving to other countries thus, resulting to unemployment and job losses. This will only have a direct negative impact on the growth of the Indian economy.

2. Domestic mills should continuously work towards becoming more efficient and globally competitive. Nevertheless, the imposition of duties will result in increased dependency of domestic mills on government for duties and grants!

3. Importers, who are also Indian citizens and have employees working under them and are paying huge taxes, will suffer heavy losses and some may not even be able to recover from this burden of loss. This means the government is ready to throw other businesses under the bus while fending for three to four firms.

4. Lastly, limiting imports from other countries wrongly, will only lead to retaliation by other countries in terms of increased duties on Indian exports. This will only cause more loss for the Indian economy as a whole.

Lastly, today India is at threshold of building its infrastructure, and it shall consume far more volumes of steel that what the Indian companies are geared to produce. And, if there are very less low priced imports available, it will only dampen the growth targets the government and Niti Aayog have set for the country. Typically, in a growing economy like India, steel consumption growth should be 2 percentage points above the GDP growth and considering that we shall grow the consumption to 9% and soon achieve double digit consumption, we will need the support of imports. In addition, India is very advantageously placed today to take advantage of fall in base metal and steel prices. Rather than decrease the supply of imports the government should take up this opportunity to build the same infrastructure at much lower cost. This will not only solve the problem of domestic mills as their sales volume will increase but will also not hamper the effective

Thus, instead of emanating a negative cycle of economic growth, the government should reconsider their preposterous decision of imposing duty on imports and wisely strategize to undertake measures, taking into consideration all the stakeholders and not only three to four firms of the country. For this, the government shall impart trust and confidence in the Indian manufacturers and discourage the concept of grants, subsidies only to elevate the stature of domestic mills in the market. Most importantly, the government should not jump to critical circumstances so soon and like other countries (e.g. USA), it should provide a 90 days window for material in transit as otherwise; importers will get buried under the burden of heavy losses.

-Kairavi Mehta,

1 comment:

  1. Hey! nice article!! this is true not only for the steel industry but other industries as well such as chemicals. Locally produced material is more expensive then the import.