US fiscal cliff deal small step, not a climb

Written by Sushim Banerjee | Sushim Banerjee | Updated: Jan 8 2013, 05:30am hrs
Postponing a crisis is one way of tackling a challenge and that is exactly what the US has done in dealing with the fiscal cliff. Most of the existing tax rates have remained unchanged, but the spending cuts would be applicable till March.

The tax hike for the middle income group and richer class would imply a reduction in private consumption. The US economy has been performing comparatively better than many other developed economies with productivity in manufacturing showing a rising curve.

But after the three months period, it would be interesting to observe how it faces the challenges of massive fiscal deficit without adopting a few painful measures involving cut in social expenditures. History shows that our country is adept in pursuing this strategy quite a number of times but with limited success.

In the 1980s, economic reforms were pushed back and India missed the bus which China hopped onto and moved ahead.

The reforms in 1991 were pushed from the top with the countrys economy hopelessly seeking a reprieve. Whatever our country has achieved today largely owes to the economic sagacity and timely steps taken by the then finance minister backed up by an unsuspecting prime minister.

Economic reforms deemed to be necessary for a country do not offer multiple chances to be successful. Currently, iron ore prices have moved up from a low level of $121/t cfr China in the third week of November12 to $154/t cfr, a jump of 27% within a period of one and half months.

The rise is due to restocking by China to take advantage of lower prices, which is also reflected by the increased stocks at the ports.

Similarly, the hard coking coal that came down to around $160/t fob by $10/t in Q4 of 2012 may move up caused by the continued restocking efforts by China.

The forecast for Q2 in the current year has already been estimated to reach $175/t. Apart from taking advantage of the low prices, there was an indication by mid of October12 that steel demand in China would enhance due to the announcement by the National Development and Reform Commission that a number of railway projects worth of $111bn investment would be implemented and also road projects in order to connect the interiors of China with the developed coastal region.

The rise in iron ore prices has enabled a number of mines in China to commence production. Meanwhile, the manufacturing sector is performing much better as indicated by the HSBC index.

But the advantage of low prices of major raw materials, which was available till mid December12, may no longer be available to Indian steel producers as indigenous problems with regard to availability of iron ore may not be abated immediately due to problems of iron ore in Odisha. The increased cost of production may only be made up by equivalent rise in prices of finished steel in the coming months, which has strong possibility to rise, albeit not significantly. It is observed that the manufacturing sector in the country is showing an upturn (Purchasing Managers index at 57.5 in December12) with more order loads for the next 6 months. The rising Chinese demand pushing up the global market in the coming months would help the Indian steel industry, which needs to act proactively on several fronts and convince the government for the required policy support.

The author is DG, Institute of Steel Growth and Development. The views expressed are personal