1. Govt should handle uncertain scenario with adequate policy support

Govt should handle uncertain scenario with adequate policy support

In an earlier column we held a view that increased uncertainty in political and economic environment spoils the entrepreneurial spirits and business outlook.

By: | Published: July 26, 2016 6:14 AM

In an earlier column we held a view that increased uncertainty in political and economic environment spoils the entrepreneurial spirits and business outlook. The just released July ’16 World Economic Outlook by IMF has blamed the same factor, much accentuated by Brexit consequences, to be responsible for cutting down World GDP forecast by 0.1% from the estimates made three months back to 3.1% in 2016 and 2017. For India also the GDP forecast is down by 0.1% to 7.4% in both the years. It has noted a sluggish investment recovery in India to have worked against a higher forecast. It is the regular drop in share of Gross Fixed Capital Formation as a percentage of GDP from 31.6% in 2013-14 to 30.8% next year and to 29.3% in FY16 that has shaped their assessment for India.

But the underlying factor of uncertain business scenario accelerated by recent spurt in political violence, delay in implementation of major reforms like GST has clearly emerged as the prime factor for decelerating private investment. This is in sharp contrasts to S&P forecasts of more than 8% GDP growth in the next two years.

The overall uncertainty is equally contributed by China factor as regards steel industry. The country has produced nearly 400 million tonne of crude steel in H1 of 2016 and exported 57.2 million tonne of steel. While the production is only 1.1% lower (against global rate of – 1.9%), the exports are more than 6% higher than the previous year. The country has also imported 412.2 million tonne of iron ore in the first five months with a 9% rise than the previous year.

Although China has pledged to eliminate 100-150 million tonne of capacity by 2020 (regionwise planned capacity closure announced) and is closing down 30 million tonne capacity in the current year (dismantling BF<= 400 cubic metre and converter<= 30 tonne), it is felt that the same is way behind (out of estimated 400 million tonne of excess capacity in china alone) what is necessary to bring about some equilibrium in supply and demand for global steel. China is indeed concerned about the large scale unemployment that would follow the planned closure of the facilities and the supreme need for redeployment in other sectors that are also becoming victims of the recessionary trend all around.

Secondly, the issue of giving Market Status to China by December 2016 planned as per WTO accession mechanism has gained huge momentum. The constructed costs and prices based on third country details under normal trading scenario, which has been the standard inputs for working out the injury and dumping margins, and the consequent duties necessary to remove the injury on the assumption of China being a non-market economy would have to be replaced by actual data on costs and prices as applicable in China (which are much lower) in case the country gets the market economy status.

In defence, the US and EU have argued that the proof of massive excess capacity in China is indicated by more than $ 15.5 billion losses incurred by major steel firms in 2015, the continual financing of the debts by state-controlled banks ($499 billion by the big mills) and creation of financial firms (asset management companies) by the state to absorb the bad debts of the steel industry. Further, China is also accused of currency manipulation by fixing renminbi (RMB) with dollar rather than at market-determined rate and encouraging third countries to enhance exports to developed countries (like cheap Chinese billets imported by Turkey and exports of long products to the US by Turkey or low-priced Chinese HRC imported by Korea and exports of pipes to the US by Korea). It is strongly felt that the current spurt of WTO-compliant measures against China would no longer be applicable and the face of global trade in steel would completely metaphor if Market Status is accorded to China.

For India to survive and grow in such an uncertain global environment, the import surge from China and FTA partners has been temporarily taken care of. The MIP, the most effective measure to stem the rot, needs modification before extension and the government is reportedly considering this. But the most significant role that it can play to improve the plight of Indian steel industry is to create enablers for generating demand for steel by infusing investment in critical industrial sectors, introducing reforms like GST, relaxing FDI in more sectors and pushing Indian manufacturing. India is, indeed, capable to see through the uncertain scenario with adequate policy support from the government.

The author is DG, Institute of Steel Growth and

Development. Views expressed are personal.

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