Why is Modi govt protecting steel companies?

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.

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.

The column appeared in The Daily Reckoning on Sep 15, 2015