Why is Modi govt protecting steel companies? - The Daily Reckoning
The Daily Reckoning by Vivek Kaul
On This Day - 15 September 2015
PRINTER FRIENDLY | ARCHIVES
Why is Modi govt protecting steel companies? A  A  A

- By Vivek Kaul

Vivek Kaul
The Prime Minister Narendra Modi met Indian industrialists some time back and encouraged them to take more risk. The Indian businessmen in turn asked him for lower interest rates, a weaker rupee and more sops.

Take the case of the steel industry. It has been successfully lobbying for import duties on different kinds of steel. In June 2015, the government imposed an anti-dumping duty of up to $316 per tonne on a type of stainless steel imported from China, South Korea and Malaysia. A Reuters newsreport points out: "India consumes about 1 million tonne of this type of stainless steel and more than 40 percent of that is imported, mainly from China."

The duty was imposed after the Director General of Anti-Dumping Duty, which comes under the ministry of commerce, had conducted an enquiry and had said this: "the domestic industry has suffered material injury; and (c) the material injury has been caused by the dumped imports of the subject goods originating in or exported from the subject country."

The investigation was carried out on an application filed by Jindal Stainless Steel for "initiation of an anti-dumping investigation concerning alleged dumping of certain "Hot Rolled Flat Products of Stainless Steel of ASTM Grade 304 with all its variants" originating in or exported from China, Korea and Malaysia," a PTI newsreport points out.

Advertisement
  Your First Step Towards The
"Dream Retirement" You Desire...
 
  Our recent interactions with a number of retirees have revealed that the real retirement today is in complete contrast to the fancy picture we all are presented of it!

That's why our colleagues at Common Sense Living have urgently released a new guide titled "10 Things EVERYONE Wants From Retirement".

This guide addresses some important issues people face after they retire, and gives some proven solutions for them as well.

What's more, this guide is also completely FREE to read. So don't miss out.

Click here to grab this free guide right away. It will be available till 14th September only!
 

Over and above this, the director general (safeguards) has recommended that a safeguard duty of 20% be implemented on flat steel. A government panel of consisting of steel, commerce and revenue secretaries has accepted this recommendation yesterday, media reports suggest.

The Section 8B of the Customs Tariff Act of 1975 gives power to the central government to impose a safeguard duty if the government "after conducting such enquiry as it deems fit, is satisfied that any article is imported into India in such increased quantities and under such conditions so as to cause or threatening to cause serious injury to domestic industry [emphasis is mine]."

The World Steel Association puts out the data for country wise production of steel every month. The latest data released on August 20, 2015, points out that between January and July 2015, Indian companies manufactured 52,889 thousand tonnes of steel. This is 9.2% more than what was manufactured during the same period last year. So where is the serious injury to domestic industry happening?

Further, why is only the situation of the steel companies being taken into account? As Henry Hazlitt writes in Economics in One Lesson: "The tariff has been described as a means of benefiting the producer at the expense of the consumer. In a sense this is correct. Those who favour it think only of the interests of the producers immediately benefitted by the particular duties involved. They forget the interests of the consumers who are immediately injured by being forced to pay these duties."

Steel is used as an input to many products. As the World Steel Association puts it: "Steel is the world's most important engineering and construction material." It is used in the manufacture of cars, auto-parts, washing machines and other consumer goods, roads, railways, oil pipelines, wind turbines, real estate and so on.

So, industries which use steel as an input to manufacture their products, will find their costs rising. These industries may or may not be able to pass on the cost to the end consumer, given that consumer demand continues to remain subdued.

In case these industries are able to pass on the cost, then the end consumer will have a lesser amount of money to buy other things. And this lower capacity of a consumer to buy things will have an impact on some other businesses.

There is another important point that needs to be made here. For the bureaucrats and the politicians in decision making positions it is easy to go by the logic that steel companies are being hit by steel imports. Further, lobbyists working for steel companies also work on this angle.

What is not as clearly visible is the impact that the increase in duty on imported steel has on industries which use steel as an input. And the further impact this has on the end consumer. As Hazlitt points out: "[The] loss spread among all other productive activities of the country would be minute for each...The added amount which consumers pay for a tariff protected article leaves them just that much less with which to buy all other articles. There is no net gain to industry as a whole." And this is a fundamental point those giving protection to the steel industry tend to ignore or perhaps not realise.

Further, if the industries which use steel as an input are not in a position to pass on the increase in the cost of steel to its end consumers, then the profits of these industries tend to go down. If they are loss making, then their losses go up. The point here being that essentially that there is no free lunch.

Also, it needs to be pointed out that the price of commodities that go into the making of steel have fallen as well. As TN Ninan writes in the Business Standard: "Since January, NMDC has cut its price for iron ore lumps by a third, and for iron ore fines by nearly half. Most of the major steel producers reported a profit for 2014-15, including Steel Authority of India. One private producer reported its highest profits in five years."

The steel companies still making losses are primarily doing so because they took on an excessive amount of debt over the years, and are now finding it difficult to service as well as repay that debt.

The moot question that the Modi government needs to answer is - does it want to protect steel companies or does it want to ensure that companies that use steel in making their products, have access to steel at lower prices? I don't think that is a difficult question to answer especially given the fact that India needs to build massive physical infrastructure in the decades to come. And for that it needs steel.

If the government still goes ahead and protects the steel companies, then it is essentially going back to practising the crony socialism of the sixties, seventies and the eighties, which protected big existing business from all competition and did not lead India anywhere.

Publisher's Note: Vivek Kaul, the India Editor of the Daily Reckoning, just made a bold call - Real Estate prices are headed for a fall. Well, if you are someone who is looking to buy real estate, or is just interested in the space, I recommend you read Vivek's detailed views in his just published report "The (In)Complete Guide To Real Estate". To claim your copy of this Free Report, just reconfirm your Free subscription to the Daily Reckoning...

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Get The Daily Reckoning directly
in your mail box.
Just enter your e-mail address » 

Read our Privacy Policy and Terms Of Use.

Equitymaster requests your view! Post a comment on "Why is Modi govt protecting steel companies?". Click here!

10 Responses to "Why is Modi govt protecting steel companies?"

Arun

Sep 17, 2015

The government should always be acting in the short-term with focus on the long-term. The temporary protection being provided to domestic steel firms is in line with the protectionist methods used to nurture and scale local industries so they can catalyze growth in many years to come. If, as per what you have suggested, the government only concerns itself with lesser cost for consumers, what happens when Chinese or some other nation has an increased demand and steel prices go up internationally ? With our domestic manufacturering in doldrums we would be doomed.

Its generally good to be a critic of public policy that seems to smack of cronyism. But no where does it say that economic journalism should eschew the long term benefits of short term seemingly un-economical moves.

Like 

R Tayal

Sep 16, 2015

Dear Vivek, This is a rare (though lately becoming more common) example of your simplistic (instead of simple) explanation of events. Why do you assume that the enquiry conducted to establish the need for anti-dumping wasn't genuine? Taking only 1 or 2 years data is often not adequate to derive meaningful conclusions. The steel industry has been in bad shape for more than 2 years. I am not saying your conclusions are necessarily wrong, but certainly they seem to be based on inadequate data, almost as if you have come to a conclusion first and then selectively picked data & figures that support these.

Like 

Prabhakar G

Sep 16, 2015

Dear Vivek,
The import of stainless steel is more, when we have biggest steel producers in our own country(SAIL, TATA, JSW, JINDAL, ISPAT, KALYANI, etc.,) means they are not capable (or) competitiveness of our steel producer's is very low. So here my view is that the Govt. of India should act on giving incentives(Tax rebate) to our steel producer's by making the steels @very low price when compared to China.. instead of recommending safeguard duty of 20% and also this will solve our domestic steel users to buy from Indian steel producers.

Like 

Deepak

Sep 15, 2015

Even a fully integrated player like Tata Steel incurred loss in Q1 only because China is dumping steel in India as Chinese producers are not able to sell their production in China. What is so wrong in protecting Indian companies from the wrong doings of large Chinese players.
If government cannot protect Indian producers (steel manufactures, coal and iron mine owners, banks who have lend money and government which generates royalty income) then what is role of Make in India slogan. If such is the case we should not even go for electronics manufacturing in India as China is much more competitive in that space as well.
We should only stick to Software, Call Centers and Pharma.

Like 

veeramani vishwanathan

Sep 15, 2015

Dear Sir,

I have read all your reports and with the help of Ms. Suman, I received the 3 books of you which I have yet to read completely and keep with my collection of books. I have always praised your intellectual knowledge. I am living in Coimbatore of Tamil Nadu. Actually I am from Palakkad of Kerala and am not interested in TN at all but have to live here because of my wife selection.

I can communicate with you whenever you find time to ask a few things about the State here and am sure that you will be helpful with your knowledge.

With best regards,

Veeramani A.V.

Like 

Tejas

Sep 15, 2015

Dear Vivek,

Steel imports is actually a big threat to the domestic Steel industry. It is true that consumers of Steel are affected, but pls note that for Indian Steel producers, raw material prices are not the same as available internationally.
In fact Iron Ore & Coal prices are higher in India. Also there is unfair dumping of Steel by China, Japan & Korea. Some form of price protection is required in such cases, only if TEMPORARY.

Like 

Rajanikanta Verma

Sep 15, 2015

If the argument made in the article is accepted, then the whole concept of "anti-dumping" duties will have to be discarded. In every case cheap imports help the domestic consumer and adversely affect the domestic producer of the goods in question.

Like (1)

Saikat Banerjee

Sep 15, 2015

The Govt has correctly imposed the anti dumping duty. It has two way
advantage. Firstly it will make Indian steel cheper than chinese imported
steel. This is because the china counterpart will pass on the anti dumping tax
to the consumer. So Indian manufacturered steel will have a good market
domestically. After all as it pointed out manufacturered steel has to find its
own consumer. So at least some action is taken by the government

Like (1)

Deepak

Sep 15, 2015

Not that I am great supporter of steel companies or integrity of their promoters but while giving expert comments, we need to have deep understanding of cost structure of these companies vis-a-vis China. When we say 'Make in India', we also need to respect entrepreneurs who have set-up huge plants in India despite higher associated cost. Government also generates revenue through royalty income from usage of coal and iron-ore by Indian plants.

Like (1)

Deepak

Sep 15, 2015

Please refer to the profitability of top 10 steel producers in India for Q1 2015, almost everyone is loosing money and also research on how many non-integrated plants are closed, just output of steel should not be a criteria to understand what is "serious injury".

Like (2)
  
Equitymaster requests your view! Post a comment on "Why is Modi govt protecting steel companies?". Click here!

Recent Articles:
A Darkness Is Spreading Across the US
August 22, 2017
Today, we are attacked by one preposterous thing after another, each of them even more absurd than the last.
Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working
August 21, 2017
Most Indians who cannot find jobs, look at becoming self-employed.
Trump Takes a Beating
August 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.
Which Gods Will Bring Down the US Empire?
August 17, 2017
Mr Trump is in the White House and the gods are in their heavens; what's not to like?