Banking on bailouts

Steel policy has set unrealistic goals

The new steel policy has set ambitious targets — a per capita consumption of 160 kg by 2030 from around 60 kg at present; 300-million-tonne production capacity from around 120 million tonnes at the end of 2016-17, and reduction of steel imports. To achieve these goals, the government hopes that over the course of the next 14 financial years (till the end of 2030-31), an additional investment of Rs 10 lakh crore will take place in the sector. All these goals are laudable, but there are two broad issues here.

First, the targets are quite unrealistic. Take consumption. India’s economy grew at its most rapid pace in the years leading up to the global financial crisis. Predictably, the demand for steel was up — between 2006-07 and 2010-11, it grew by 9 per cent. However, when growth faltered, so did the demand — it averaged just 3.4 per cent since 2011-12. Compare this to the 7 per cent annual growth in steel demand that would be required each year till 2030-31 to meet the 160-kg target. Similarly, the notion of adding 182 million tonnes of new production capacity over the next 14 years seems unfounded, given that India added just 60 million tonnes of capacity in the past decade. The fact of the matter is that new capacities have been held up due to bottlenecks such as difficulties in acquiring land, processing raw material linkages as well as the growing debt of steel firms. Also, the policy is silent on the availability of funds for adding fresh, greenfield capacity — after all, setting up capacity for each tonne of steel requires an investment $1 billion, or roughly around Rs 6,400 crore. The steel policy’s goal of touching 24 million tonnes of exports by 2030-31 is also unrealistic. Even the earlier policy drafted in 2005 had targeted exports at 26 million tonnes by 2019-20. However, low-cost competitiveness in global markets and over-capacity in China caused exports to stagnate at around 5 million tonnes over the past decade.

Second, the government’s approach towards the steel industry has been based on bailouts and protectionism. For instance, it had slapped a minimum import duty early in 2016 and followed it up with anti-dumping duty. The more substantial failing of this policy is the tool chosen to implement it — that of domestic private sector firms being given preference in government infrastructure projects. If, for argument’s sake, the domestic industry is competitive, it makes sense for the government to slap import duties and prevent the domestic industry from foreign firms dumping steel at prices below the production costs. However, providing domestic firms preferential treatment as a matter of government policy neither helps the consumers nor the firms. Such a policy will allow inefficient firms to remain so, comfortably secure in their privileged status. This will make them sitting ducks whenever they enter a truly competitive market, not to mention their inability to export. For consumers of such firms, such a regime promises low quality at high costs. Instead of a bailout, the government would have done better to focus on a policy that pays equal emphasis on competitiveness, productivity and efficiency gains. The new steel policy also begs the question — why should there not be similar bailouts for copper, aluminium or any other commodity for that matter?