Steely logic

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Taxation as an instrument intended to address public policy quasi-emergencies has become a fashion, of late. Many of these taxes have not met the test of economic logic. At one level, this would apply to the hike on iron ore export duty. The increase—from Rs 50 a metric tonne of ore exports to 15% ad valorem—can be critiqued from the classical and valid position of export taxes being anti-competitive and anti-efficiency. The government’s argument that the tax seeks to protect good quality iron ore from being exported doesn’t address this argument. But there’s another consideration. Taxes were levied on steel exports as part of the government’s anti-inflationary battle. Since iron ore is the key component of steelmaking, and since ore prices globally have been high, steel manufacturers were feeling more than a little squeezed. Between August 2007 and March 2008, the export price of iron ore (the 63.5% fe variety) rose by 74.4%. The rate of domestic price rise went from 6% at the start of 2008 to 63% by mid-February. The price rise has eased recently, but it was still an exorbitant 49% by end-May. Other raw materials for steelmaking have also seen brisk price increases. Price of shredded scrap rose by 53% between August 2007 and March 2008; that of metallurgical coal imported from China, by 105% and that of Australian coking coal, 150%. Rising input costs impacted steel prices—the rate of increase accelerated from 7.6% in early January to 35% by end-April, marginally dipping by end-May. Steel has a weight of 3.6% in the wholesale price index. But its contribution to inflation increased from 6.5% in early January to 17% by end-April. Obviously, steel prices can’t be reduced by government fiat, but by cheaper inputs. To the extent that a higher tax on iron ore exports may impact domestic prices and restore some parity with export-taxed steel, the changed duty may have some temporary rationale.