Steel policy for 2047 needs to shift focus: from protection to competition

Why in the News

The Ministry of Steel’s Draft National Steel Policy: Vision 2047 aims to make Indian steel globally competitive and to raise steel exports to 45 million tonnes (Mt). Economists at the Centre for Social and Economic Progress (CSEP) find that the industry’s high profits rest on protection rather than efficiency, so competitiveness by 2047 requires phasing that protection down.

What does the draft aim for, and how strong is the industry?

1. Draft policy: It does not define what “globally competitive” means.
2. Scale: India has climbed from ninth place in 2000 to become the world’s second-largest steel producer, still far behind China.
3. Profitability: EBITDA (earnings before interest, taxes, depreciation and amortisation), a measure of operating profit, averaged around 15% of sales over 2000-25, above the rest of Indian manufacturing.
4. The takeaway: High profits can come from efficiency or from shelter, and an industry that profits from shelter will struggle once it competes on world prices.

How is the steel industry protected?

1. Cheap iron ore: A 30% export duty makes high-grade iron ore costly to sell abroad. Domestic ore therefore sells 30-40% below global prices, a cheap input for steelmakers.
2. Loss to mining regions: Underpaid ore lowers the incentive to mine, causing economic loss for mineral-rich regions.
3. Import duties: A tariff works like an entry fee on foreign steel. An import tariff plus a safeguard duty (an extra duty against import surges) total about 18%, against 3-4% in the Association of Southeast Asian Nations (ASEAN).
4. Quality Control Orders (QCOs): These orders bar the sale of a product without certification, and they cover 228 steel products. The Gauba Committee reportedly recommended removing many, but only 59 have been suspended.
5. Price premium: Domestic hot-rolled coil, the basic flat steel product, sells at a 6-7% premium over Japan, itself a high-cost producer.

Who pays for protection, and what happens if it ends?

1. Downstream users: Steel is around 15% of project cost in construction and roughly 5% of raw material in automobiles. Export-critical small firms also pay more.
2. Price-cut scenario: If lower tariffs cut domestic steel prices by about 6% to Japanese levels, the largest public sector firm’s profitability falls by 50%.
3. Global-ore scenario: If firms pay global ore prices after the duty goes, the largest public sector firm turns loss-making.
4. Public sector lag: The Steel Authority of India Limited (SAIL) has lost most of its market share since 2000 as private rivals such as JSW grew.

Does cutting protection hurt an industry?

1. Tariff cuts elsewhere: India cut import tariffs on pharmaceuticals and automobile parts from around 40% to 10-15% over two decades.
2. Exports grew anyway: Lower tariffs did not shrink these industries. India’s share of global auto parts exports rose more than sevenfold, and its pharmaceutical export share nearly tripled.

Challenges

1. Imported coking coal: India imports nearly 90% of its coking coal, so steelmakers stay exposed to global price swings.
2. Cheap import surges: Global steel surpluses, particularly from China, can flood the market and depress domestic prices once duties fall.
3. Discouraged exploration: A finder of a new mine must surrender it and bid again at auction, so only 10% of India’s obvious geological potential has been explored.
4. Green trade barriers: The European Union’s Carbon Border Adjustment Mechanism (CBAM), a charge on the carbon emitted in making imports, raises costs for Indian steel exports.

Way Forward

1. Phased tariff cuts: Cut import duties to ASEAN levels in steps over five years.
2. Remove steel QCOs: Withdraw the QCOs on steel products immediately.
3. Abolish the ore duty: Remove the export duty on high-grade iron ore.
4. Privatise some SAIL plants: Sell some public sector plants to improve efficiency, keeping strategic oversight.
5. Australia-style mining policy: Reward exploration, as Australia and other mineral-rich countries do, to speed up new mines.

Conclusion

Indian steel has scale and profits, but its competitiveness rests on shelter that builders, carmakers and small exporters pay for. Whether the final policy sets a dated path for lowering trade barriers will show if “globally competitive” means efficient or merely protected.

Key numbers

1. World position: under 5% of global steel output in 2000; 170 Mt now, against China’s 961 Mt.
2. Duty structure: 7.5% import tariff plus 11.5% safeguard duty; ore duty applies above 58% iron content.
3. Other scenario losses: fastest-growing private firm’s profitability down 40% if prices fall 6%, and 95% at global ore prices.
4. SAIL market share: 30% to 10%.
5. Export shares: auto parts 0.2% (2003) to 1.5% (2024); pharmaceuticals 0.7% to 2%.

Matching Previous Year Question

“[2020, GS1, 15 marks] Account for the present location of iron and steel industries away from the source of raw material, by giving examples. (वर्तमान में लोह एवं इस्पात उद्योगों की कच्चे माल के स्त्रोत से दूर स्तिथि का उदाहरणों सहित कारन बताइए l)”