Govt Fixing Steel Prices: Is Make in India Just a Slogan?

Feb 10, 2016

In this issue:
» Stock market rout spares few this year
» Sensex hits fresh 52 week low
» ...and more!
Rahul Shah, Co-Head of Research

Dear Readers,

Many of you might have already realized this, but macroeconomics is not our forte. For the most part, our focus lies on bottom-up stock picking. A company is worth picking if we feel it is strong enough to do well in most situations it is likely to encounter. And this approach works; we can vouch for that.

But there's a flipside to this focus - the subtleties of various macroeconomic developments and their implications for the economy are often lost upon us.

And that's precisely where Vivek Kaul steps in. Vivek is Editor of Vivek Kaul's Diary. Vivek is also the author of a highly recommended trilogy on the history of money and the financial crisis titled Easy Money.

Vivek's keen sense of the economy lets him look beyond the apparent. And it is often beneath the surface that the most important insights lie.

We share with you today his views on the government's recent move to fix minimum prices for the import of steel. While most are out there singing praise for the move being a game changer for the steel industry, Vivek highlights the darker side of the story.

Happy reading!
Rahul Shah



On February 5, 2016, the directorate general of foreign trade imposed a minimum import price (MIP) on 173 steel products. The prices range from $352 per tonne to $752 per tonne of steel.

The MIP has been imposed in order to counter the dumping of cheap Chinese steel and should help the Indian steel companies. Also, the move should help public sector banks as well.

Why do I say that? As the RBI Financial Stability Report released in December 2015 points out: "A risk profile of select industries as at end September 2015 showed that iron and steel, construction and power industries had relatively high leverage as well as interest burden."

The report further pointed out: "Five sub-sectors viz. mining, iron & steel, textiles, infrastructure and aviation, which together constituted 24.2 per cent of the total advances of scheduled commercial banks as of June 2015, contributed to 53.0 per cent of the total stressed advances."

What does this tell us? Steel companies have borrowed a lot of money from banks which they are now finding difficult to repay. The only way they can repay these loans is by ensuring that their sales and profits continue to grow. And that is not possible if cheap steel from China keeps hitting the Indian shores.

The government has tried to correct this by slapping an MIP on steel, in the process making imported steel more expensive. The idea is that anyone who needs steel within India, buys from Indian companies, instead of importing cheaper steel.

The question is does this make sense? It does for the steel companies. But not for the overall Indian economy as a whole. Before I get into explaining this, allow me to discuss what is known as the broken window fallacy. The French economist Frederic Bastiat discusses this concept in his 1874 book That Which is Seen, and That Which is Not Seen.

Bastiat talks about a shopkeeper whose rather careless son has broken a glass window of his shop. As Basitat writes: "If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation-"It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"

The point being if window glasses were never broken what would glaziers ever do? As Basitat writes: "Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier's trade-that it encourages that trade to the amount of six francs-I grant it, I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen."

But what about that which is not seen? "It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way which this accident has prevented," writes Bastiat.

What is Bastiat trying to tell us here? When we are analysing economic issues, we tend to look at that which is seen and tend to ignore that which is unseen. In the case of minimum import price being fixed on steel imports, it means looking only at the benefits that this would bring to the Indian steel companies.

Stock analysts have labelled this move of the government as a "gamechanger" for the steel companies and have recommended that investors buy these stocks. Now that is the 'seen' part of it, if we were to apply Bastiat's broken window fallacy to this situation. But what about the unseen?

As Henry Hazlitt writes in Economics in one Lesson: "The tariff has been described as a means of benefitting the producer at the expense of the consumer. In a sense this is correct. Those who favour it only think of the interests of the producers immediately benefited by the particular duties involved. They forget the interests of the consumers who are immediately injured by being forced to pay these duties."

A tariff is essentially a tax or a duty that is paid on imports of exports. In the case of the minimum import price on steel imports, no duty has been fixed or tax has to be paid. But given that the minimum import price will force consumers of steel to buy steel at a higher price from Indian steel companies, it basically means that the companies are being forced to pay more than they would have, if this move had not been made. In that scenario they could have simply imported cheaper steel, which they cannot do now. Hence, to that extent even an MIP is basically a tariff.

Steel is an input into many different sectors from automobiles to real estate to engineering to construction and infrastructure. Hence, if the price of steel goes up, companies operating in these sectors need to pay more when they buy steel. And this in turn will impact the prices of the consumer goods that these companies produce and the physical infrastructure that they create. This is the unseen negative that people are not talking about.

Take the case of engineering goods, which is as of now, India's number one export. As TS Bhasin, Chairman of EEPC India, an engineering goods exporters' body, told The Hindu: "The MIP will raise the cost of raw materials for engineering products by about 6-10 per cent. This will severely hurt engineering exports that have already declined by 15 per cent in the first nine months of this fiscal." How will Indian engineering companies compete globally in an environment of slow global economic growth, if steel is made expensive?

Further, this also leads to the question as to how serious is the government about "Make in India". Is it just a slogan? Or is it more than a slogan? If it is more than a slogan then there is no way that the government should be fixing steel prices and in the process increasing the price the consumers of steel pay.

Also, why is the government just trying to protect steel producers. How about retail companies which have been bearing the onslaught of ecommerce companies selling goods at significantly lower prices, backed by foreign venture capital and private equity money?

As Anindya Banerjee, analyst at Kotak Securities puts it: "The offline retailers have been long complaining how ecommerce companies, funded by cheap dollars/euros/yen of yield hungry bubble vision private investors, is undercutting them in every consumer product. They claim that these ecommerce companies are destroying hard working mom and pop stores and their employees, by resorting to unsustainable discounts. So why is the government not imposing a minimum retail price(MRP) for all products sold online. This MRP should be set at a price which is above the offline retail price. I presume my fellow citizens won't mind paying more for their stuff they buy. After all they are supporting the economy, aren't they?"

Now that is something worth thinking about. And if something like that were to happen, we would be finally back to the eighties. My growing up years will be back again.

Do you think the government's move to fix minimum import prices for steel will harm or help India's economy? Let us know your comments or share your views in the Equitymaster Club.

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3.32 Chart of the day

Equity markets globally are witnessing selling pressure, but the effect is more pronounced in emerging markets and India is no exception. Indian shares have witnessed heavy selling pressure so far this year, with as many as 460 of BSE 500 stocks declining year-to-date. Similarly, 26 of the 30 Sensex stocks are in the red in 2016, while 44 of 50 Nifty Stocks have eroded their value. A slowdown in China is resulting in funds being withdrawn from emerging markets such as India. Simultaneously, falling oil prices is resulting in oil producing nations withdrawing their savings from financial assets.

Selling Pressure Across the Board

BSE Consumer Durables is the only sectoral index to post a positive return so far this year. BSE Telecom and BSE Industrials indices were the worst losers, losing 15.9% and 14.3% respectively. Similarly, Bankex lost 12.7% this year primarily because of a steep rise in provisioning for bad loans. Metal index lost 9.82% this year, which has struggled due to subdued domestic demand growth and pressure from cheap imports from China and FTA countries such as Japan and Korea.

BSE Sensex and Nifty are down 8.02% and 8.16% respectively, so far this year. BSE Midcap and Smallcap indices further unperformed, declining 9.23% and 11.92% respectively, in the same period.

Foreign institutional investors (FIIs) have already pulled out a net of US$1.8 billion from Indian equities in 2016, the steepest since the 2008 global financial crisis. FIIs have been withdrawing money from riskier assets and moving to safety of gold or developed world bonds.

The high volatility in the stock market seems to have taken its toll on retail investor confidence in equity mutual funds as well. Monthly data on inflows into equity mutual funds from the Association of Mutual Funds in India (AMFI) showed that inflows were the lowest in 20 months in January compared to average monthly inflow in 2015. The one solace for mutual funds is that even if the inflows have reduced, it still is better than having to deal with big outflows.

What do we think of the markets? We think differently. We are more than happy when the markets are falling. It throws up that many more opportunities to recommend good quality stocks - at attractive prices.


The Indian stock markets were trading weak today on the back of sustained selling activity across most index heavyweights. At the time of writing, the BSE-Sensex was trading down by around 230 points. The fall has meant that the index has hit a fresh 52-week low today. Losses were largely seen in and stocks.

4.56Today Investment mantra

"The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored." - Benjamin Graham

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

Today's Premium Edition.

Minimum Import Price (MIP) and Its Impact on Steel Industry

The government of India imposed a Minimum Import Price (MIP) on specific steel products to protect domestic players from cheap imports from China and other countries. How MIP will help Steel companies? Will MIP a game changer?
Read On...Get Access

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2 Responses to "Govt Fixing Steel Prices: Is Make in India Just a Slogan?"

Nikhil Nath

Feb 10, 2016

Dear Vivek,

WRT the Broken Window Fallacy, true that the 6 francs couldve been spent by the shopkeeper on other articles but then, isnt it true that the same 6 francs can be spent by the glazier now on similar articles? Hence, the transaction is only a change of hands for money and no value lost.


Kapil Sethi

Feb 10, 2016

I believe the only thing missing in the article is concept of currency. If the world was running single currency, then import of steel into India would not be problem. But the issue is Indian imports are perpetually higher than exports. So any steps that reduces the outflow of dollars needs to be encouraged until the balance of payment reaches an equilibrium state.
Yes, the imposition of MIP may cause prices of goods manufactured in India using Indian steel would be higher, but if MIP for steel and lots of other material not imposed, it will lead to lower employment and ultimately devaluation of Indian currency. In due course of time, the landed price of imported material may begin to exceed domestically produced material.

Equitymaster requests your view! Post a comment on "Govt Fixing Steel Prices: Is Make in India Just a Slogan?". Click here!
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