How Will India’s Steel Industry Thrive?

| March 31 , 2018 , 13:31 IST

While at the outset it might appear that all the steel companies admitted under India’s Insolvency and Bankruptcy Code were plagued by organisational mismanagement or even greed, painting - or tainting - all companies with the same brush is never a reasonable proposition.

Over the past five years, Indian ports have been stormed with cheaper steel from many neighbouring nations especially China, Korea and Russia. A prolonged dullness in the Chinese economy resulted in an oversupply of raw materials too in India that led to a fall in Indian steel prices. Further, the steel industry anywhere in the world is highly capital intensive. To remain competitive in the domestic and global market, Indian steelmakers had to frequently upgrade manufacturing facilities and processes which demanded a large amount of investments.

And so there were several unfavourable external conditions that dragged the Indian steel sector - one that grew unwaveringly during 2008 to 2014 even while the global steel market had slumped. Finally, another blow came to the steel industry when in 2014 the Supreme Court of India to retrospectively cancelled all coal block allocations made between 1993 to and 2010 (except those allotted to government companies and large power projects) by previous governments. This was a move that was disastrous for India’s banking sector, leaving millions of Indians jobless, and was a death knell for the country’s mining industry and steel manufacturers that were powered by captive blocks of thermal coal. 

Indeed, over the past few years, there were some efforts by the government that boosted the ailing steel sector. For example, in 2015 the government of India imposed a provisional safeguard import duty for 200 days on some steel products. In the same year, the government set a floor price or Minimum Import Price on imports, which effectively did help deter Chinese and other suppliers to kill the domestic steel industry. Further, the MSTC Metal Mandi, an e-platform under the Digital India initiative was launched to sell finished and semi-finished steel products. Also, to make the domestic industry more competitive, the Central Board of Excise and Customs removed export duty on iron ore.

Also read: Indian Steel Production Rises 5.1%, Consumption Up 4.2% In April-November

Yet the steel sector is clearly not progressing as the government imagines it should.

Steel companies are ailing thanks to a systemic failure of the ecosystem in which the entire industry operates. So much so that amongst the 525 cases admitted under India’s Insolvency and Bankruptcy Code in 2017, the largest number of companies are in the steel sector representing a staggering underlying default amount of Rs. 57001crore. 39 steel companies are undergoing Corporate insolvency resolutions. While resolution plans have been approved in the case of 2, liquidation orders have been passed for 3, and the case for 1 company has been closed by appeal.

The National Steel Policy 2017 pledged a target of 300 MT production capacity for 2030 - more than doubling the 122 MT capacity in FY 2015-16 - but there is much to be done to match the Indian government’s ambition for the dismal state of the steel industry.

There is an urgent need to realise that the reasons for these bankruptcies have less to do with the specific companies in question. To make the sector more competitive, the government needs to be a greater supporter of the steel industry without resorting to the Chinese style of state-sponsored capitalism. In fact, in this regard, the government has perhaps much to learn from the Korean case instead.

After the Korean war in 1953, Korea had to build its economy up from scratch. One of the routes the government chose to do so was by stimulating its steel industry.

The Korean government spent its war reparations payment from Japan to build POSCO’s steel mill, a company that eventually became a major engine for Korea’s overall economic growth. The government also spent on infrastructure construction, efficiently implemented policies to support the mutual growth of steel and steel-consuming industries, and invested heavily in R&D to wean off Japan’s technical support so much so that Korea became an exporter of steel technology.

It practised protectionist trade policies long enough to get Korea’s steel business on its feet and then supported a market-driven business model. The Korean government also kept a close watch on supply and demand forecasts, made assessments fairly accurately, and pro-actively updated its supply policies accordingly. It kept in mind various socio-economic factors, to make policies that were at all times pro-industry.

Back in India, the cancellation of coal blocks was based on an apprehension of some wrongdoing without any judicio-economic impact assessment exercise, and for which the economy and hence people suffer. This was yet another example for the lack of economically responsible justice, as has been in the case of, say the unconstitutional imposition of a tax that hits the automobile industry, or the ban on selling liquor near highways that affects the tourism industry in India.