The Hindu Business Line : Steel prices: Tinkering with tariffs makes little sense

When analysing an economic proposal, one must trace not merely the immediate results but the results in the long run, not merely the primary consequences but the secondary consequences, and not merely the effects on some special group but the effects on everyone.

— Henry Hazlitt in Economics in One Lesson

THE appropriateness of policy responses to tame the scourge of inflation is always debatable. The fiscal policy response of the Government to reduce the import and excise tariffs on petrol and diesel to mitigate the effect of rising international crude oil prices has been welcomed to a large extent. As petroleum products have always been subject to heavy tariffs and taxes, the reduction in the tariff structure has been accepted as inevitable.

The latest move by the Government to reduce the import tariffs on non-alloy steel to 5 per cent, however, can hardly be placed in the same category. Realising that the reduction in import tariffs may not materially alter the domestic prices of steel and the differential between landed costs and domestic prices was sizeable, it appears to have exerted subtle pressure on Tata Steel to slash steel prices. Even as Mr Ratan Tata announced a Rs 2,000 per tonne reduction in prices, he hoped that, "other steel manufacturers and members of the steel trade will display a sense of responsibility by rolling back their steel prices in the interest of curbing inflationary trends." This forced a flurry of price cuts of Rs 500-1,000 per tonne by the members of the Indian Steel Alliance such as Steel Authority of India, Essar Steel, Ispat Industries and Jindal Vijayanagar Steel. Going one step forward, Tata Steel also announced that it would maintain the Rs 2,000 per tonne price cut till March 31, 2005, regardless of any rise in input costs.

While this move will help check the rise in the Wholesale Price Index, which touched 7.94 per cent last week, the fiscal policy response is debatable on several counts:

Instead of reducing the import tariffs to 5 per cent, the Government could have considered a restoration of the excise duty to 8 per cent from 12 per cent, to which it was raised in the latest Budget. In end-February, the NDA government had reduced the excise duty on most steel products from 16 per cent to 8 per cent. As any reduction in excise duty would have involved sacrificing tax revenues on a large scale, the new Government appears to have sidestepped the issue. Rising international prices of steel alone have been the justification for reducing the import tariffs on steel from 25 per cent to 5 per cent over the past six months.

The latest move of the Government is no different from the nudging by the NDA Government that made steel companies hold their price line of hot rolled coils between March and June. If the latter reeked of political populism in the run-up to the general elections, the latest response can be termed as economic shortsightedness.

There was much hue and cry when the Union Minister for Steel and Chemicals and Fertilisers, Mr Ram Vilas Paswan, in June, mooted the idea of a steel regulator to monitor and fix steel prices. The Government shot this proposal down later. Is not the Government probably achieving the same purpose through the latest move?

Through these price cuts, the Government has managed to impose a quasi-price ceiling on the steel industry. As international prices of steel are likely to rule firm, the secondary effects of the price ceiling will become visible only over time. In the long products segment, the competitive forces are likely to be curtailed as a result of this rollback in prices. As the long products segment is basically a fragmented market, with the unorganised sector ruling the roost, the tendency to hoard steel will be much greater, if they (the trade) believe that these price cuts will only be a temporary phenomenon. Second, the production that may have been stepped up by both the existing secondary steel producers along with new producers entering the fray, sensing the higher prices may no longer happen. Hence, the market forces which could have brought the supply in alignment with demand may be short-circuited by this development.

In the flat products segment, as the price line has been held by the steel producers since March, it is only a matter of time before market forces lead to a re-examination of the pricing scenario for hot and cold rolled products. The scale of price cuts in the range of Rs 500-600 effected by flat producers, such as Essar Steel, Ispat and Jindal Vijayanagar Steel, appears to reflect only a temporary accommodation on their part. By its repeated intervention and shortsighted moves, the Government may be able to contain inflation in the short term.

As the steel price cycle is fundamentally on the uptrend, and firm prices may prevail for at least the next year or so, its impact on the WPI is, however, not going to disappear in a hurry.

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