Financial exposure of steel industry and the resultant stressed assets of the major banks are making news these days. It is now being suggested that capacity addition by steel industry since 2007 partially supported by the bank loans was an inexplicable sort of crime. This only strengthens the view that there is little appreciation and lack of knowledge by a section of the media on the challenges faced by the industry and looking for an easy solution of literally closing down the industry even at the cost of income, direct employment of around 0.8 million and another 1 million engaged indirectly. The issue needs a dispassionate analysis.
Demand for steel always fluctuates and can never be projected to grow secularly upwards in the coming years. Global market distortions, huge uncertainty on the continuity of Euro Zone, steep falling prices of oil and other essential inputs and above all economic restructuring in China and subdued market sentiments all around have made the debt burden of the industry appear unrepayable and the root of all troubles.
When the fund was borrowed a few years back, assuming a capital-intensive steel industry needs a minimum of 4 years gestation period, the market realisation was envisaged at a much higher level thereby leading to complexities in debt repayment. This is a natural phenomenon in steel industry, which faced a similar situation in 90s with the emergence of a few major private players in steel. There are always instances of willful defaulters but that is no case for blaming the industry or recommending stoppage of infusion of blood to the arteries for survival and growth.
China, the whipping boy in steel and in many other commodities, is a classic example of creating massive capacity dependent on corporate loans by banks. The country has now chosen an alternate economic model preferring consumption over investment, role of light industries, closing down polluting industries (including BFs for steel making) to thrust development of service and light engineering and gradually moving away from heavy industry-based development process. From the current trend in China it emerges that the drop in share of investment in GDP is not going to be drastic. The NPAs of banks because of the inability of the steel manufacturing units to repay the loan in the context of steep decline in prices are being tackled at the national level.
This leaves the central issue of global surplus capacity and allowing other countries to utilise a part of it to meet the gap between demand and availability in the country and by discouraging all attempts to create fresh capacity indigenously. In Q1 of the current fiscal, steel consumption in the country has grown by more than 7%. The higher consumption is largely fed by rising imports that has grown by 57% in the quarter on top of 75% rise in FY15.
It is also seen that while share of imports from China came down from 36% in FY15 to 26% in Q1 of FY16, share of imports by South Korea and Japan under the garb of CEPA/FTAs rose from 35% to 44% during the period. Thus an incorrect assessment about the implications on domestic industry of import access under concessional/free duty in steel was equally responsible. The debt-ridden domestic steel industry bore the brunt of not only cheap imports from China but also duty-free (negligible) steel from two advanced countries and all of them chose India as the abundant pit where steel surplus in their own countries could be dumped.
India’s need for steel would continue to be enormous on the back of immense deficit in infrastructure, housing, manufacturing and rural development. An import-led policy to meet the gap would be further disastrous to the existing and ongoing capacity augmentation of domestic steel industry that neither wants the government to own the debts incurred by it nor is afraid to face the stakeholders to work out a solution to the crisis for which some time (achhe din) is only needed.
The author is DG, Institute of Steel Growth and Development. Views expressed are personal.