One is worried what is coming up next in the iron ore or steel sector in terms of new measures or withdrawal of a few existing ones.
For example, one hears of the government considering withdrawal of export duty on flat steel products. Perhaps there were no reasons to have them at all in the first place. If the duty is to be lifted from this group of products, what is holding the government back from doing so for long products as well? If forcing the steel makers to sell in the domestic market instead of exporting them out was the objective, why is the government in certain quarters seeing the opportunities in generating revenue through export duties? Revenue to the government will increase only if exports are maintained or raised. This was clearly not the objective of the government at the time export duties were brought in.
Government policy should not be based on the size or the colour of the cloud in the sky early in the day but on firm economic logic meant to achieve a clear objective. If conditions are volatile and unpredictable which may require frequent interventions, the basis of the policy should be well known so that one can predict what may come up as and when the conditions change. A foreign investor in the iron ore or the steel sector in India stands worried about the future as conflicting statements emanate from different government sources as also from the highly speculative media.
The government has a revenue generation angle to many of its decisions. It perhaps believes that if import duty revenue is to be foregone, it has to come from an export duty on something else from within or near about the same sector. The revenue concerns of the government are legitimate, but, there are many more things it can do instead of trying it out on the metals sector. The government has to take a larger view than remain confined to the sector to seek revenue neutrality out of a fiscal concession given to that industry or sector.
For example, why are IT products tax free or with very low tax rates? Does the government think that laptop sales will drop and India?s IT business will be adversely hit if there is a 5% import duty on them? The government is being simply unrealistic in thinking that IT sector is being held stronger by this supportive fiscal regime. They would have remained so even otherwise.
The other issue is the government?s excessive concern about inflation. There are no specific problems if the country?s population is flooded with cheaper petro-products or steel for a short while to provide some breathing space to adjust in the short term even if through some market distortionary policy measures. But, if low prices are artificially maintained through continuous and infinite market interventions through fiscal and regulatory measures to provide relief to the consumers, one will have to be prepared to face a host of adverse consequences of the same on the economy immediately or in the days ahead.
Let there be a study on how much steel and petro-products prices mean really to an average income household in the country.If the consumption decisions of the population are to be insulated from the oil or metal prices, the economy will continue to pursue a difficult path of energy and material intensive growth. It is dangerous for the economy in the long run.
The author is independent strategy consultant, Steel and Natural Resources