Last year, the domestic sparring on cement prices threatened to overshadow P Chidambaram?s Budget. This year, rising steel prices and the government?s attempt to glare them down could result in a scenario not very dissimilar. In the past two months, steel companies in India have raised prices by upto Rs 4,000 per tonne. In response, Union steel minister Ram Vilas Paswan has made his displeasure clear. These companies, he has said, are not justified in hiking prices, and so the government would examine whether they are going beyond limits. The minister?s statement is strange, to say the least. The steel sector was deregulated a long time ago, and private companies do not require prior government approval to effect any change in prices. In fact, it is the market interplay of demand and supply that determines general price levels, with companies trying their utmost to secure a premium through product/service differentiation.
It is true that governments in India have a long tradition of looking at steel as some sort of essential commodity that deserves their intervention. And such measures as lowering import duties have been taken in the past to check rising prices. However, the government has always had to beat a retreat. Today, the import duty on most steel items stands at a low of 5%, so there?s not much scope for reductions here. Also, the steel minister would do well to remember that the steel industry has indeed been exercising pricing restraint in cases of acute shortage. Stable pricing adds to market perceptions of a brand?s reliability, and customer goodwill does count for something. The minister, however, seems to have very little faith in the market?s self-regulatory mechanisms. He remains suspicious of any hike in prices, despite the prevalence of competition among steelmakers. There is no denying the cascading effect of rising raw material prices. But the more critical raw material issue concerns iron ore, the export of which influences relative prices in the country. Last year, the government had to roll back a duty hike on its export because of pressure from miners. The question to ask, then, is what makes the government so keen to let iron ore exports flourish? In terms of both value addition and employment generation, the steel industry is leagues ahead of the ore mining sector. Such logical inconsistencies are worrisome.
