Consistent trade policy

Ad hoc tariffs and duties must be avoided

As part of its package to address the economic fallout of the Russian invasion of Ukraine and consequent global economic turmoil, Union Finance Minister Nirmala Sitharaman announced some tweaks to trade policy focused on the steel and plastics industries in particular. Ms Sitharaman’s concern is that rising input prices, alongside export, were rendering the final product scarce and expensive. She thus announced the government was “calibrating” Customs duties. Some tariffs for inputs and raw materials would be reduced, and export duty would be placed on steel products at the rate of 15 per cent. Export duty on iron ore, already at 30 per cent, would be raised to 50 per cent. Within a few minutes of the beginning of trading in the stock markets, shares of Tata Steel, the Steel Authority of India Ltd, and JSW Steel hit the lower circuit. Analysts downgraded their recommendations for steel sector stocks.
 

Ms Sitharaman’s concern about the price of steel is understandable. Over the past two years, a combination of returning global demand and supply-chain disruptions caused a steady rally in the sector. Steel prices in March this year were almost twice what they were in March 2020. This was driven also by a solid increase in the global price of coking coal. Tata Steel posted an almost 50 per cent increase in profits three weeks ago, and its share price had more than doubled since December 2020. Yet penalising the sector — and, let it be understood, an export tax is a penalty for success — is not the right way to approach this problem. Multiple reasons might be given as to why this is a bad idea for the sector. In general, it is not right to penalise a sector by cutting off its export routes or its profitability in good times while leaving it to bear the bad times by itself. For steel specifically, these export taxes mean the sector will struggle to meet commitments it has made under government export promotion schemes — so one hand of the government is pushing exports, while the other penalises it. Companies in the sector might also struggle to honour the global contracts already signed, and this undercuts attempts to shift demand for steel away from China to India.

The central problem is the government’s trade policy — in the sense that its actions on tariffs and duties are ad hoc and arbitrary, and detached from economic reality. Low and stable tariffs are a pre-requisite for industrial development in an age of competition and global supply chains. Transitory spikes in pricing cannot be the stimulus for knee-jerk changes in trade policy. Domestic steel prices have already fallen from a high in March and are expected to moderate. Hot-rolled coil prices have gone down by over 25 per cent in developed markets since March. As with all trade policy-based interventions, the “cure” is poorly timed and will be worse than the disease. The government has already u-turned once in the recent past on trade policy for the steel sector alone. It is vital that it understands the need for policy stability in this area. This moment of global disruption is a good time to commit to low and stable tariffs in India.