RBI has unexpectedly cut down the Repo rate by 50 basis points last month. Unexpected, as the quantum exceeded the level of expectation. May be the Central Bank in one go cumulated the small doses of reduction anticipated in the past. There are already pronouncements by the major banks of reducing the lending rate and home loans by 35-40 basis points. Coming on the eve of festival season this augurs well for consumer products and project investments.
But impact on investment flow must be assessed along with the business sentiment prevailing at that point of time and it must be acknowledged that business sentiment is yet to brighten significantly on the back of reforms actually undertaken.
The major changes brought about in land acquisition, allotment of mining leases for coal and iron ore, including creation of DMF and encouragement to mine exploration by initiating the process of fund creation, can indeed contribute largely to more output, more income and employment if only the demand for these raw materials from various end-users like steel, power and cement could be sustained. The production index of power, cement and steel during April-August ’15 has grown by 2.8%, 1.8% and nil per cent respectively and are below the desired rates.
Real steel consumption in the country in September grew by 5% and cumulatively by 4.1% during the first 6 months. Production growth of finished steel however is much lower at (-) 0.5% during the period as incremental consumption was sustained by higher imports at a rate exceeding 41. It is quite possible that hot-rolled (HR) coil imports would substantially get reduced following the announcement of a Safeguard duty as a simple calculation shows that the current landed price of $290/t CFR from China (SS 400) becomes R26,500/t inclusive of customs duty of 12.5% and safeguard duty of 20%and port clearances as compared to ex-works price of domestic HR at Rs 27, 500-28500/t. In the first 5 months of the current fiscal, imports of HR from China and Russia/Ukraine at 0.33 MT comprised of 22 per cent of the total imports and that from Japan and Korea at 1.14 MT consisted of 74 per cent of HR imports. The imposition of Safeguard duty would make imports from China/CIS countries costlier and the special grades of HR coil, being outside the purview of the Safeguard duty, are likely to continue flowing to India. It is also a fact that some standard grades HR coil from Korea and Japan were being imported to India under duty concession of RCEP treaties. Taken together around 65-75% of HR coil (standard basic grades) would not be found to be economical to be imported with Safeguard duty and would leave a market space of approx.1.2-1.5 MT of HR coil to be made available by the domestic manufacturers for the next few months.
Thus for a major boost in steel demand, we may have to wait for a few big infrastructure projects in power, real estate, irrigation, oil and gas, ports, airports and flyovers. Downward trend in lending rates and continuation of low-interest regime in USA are helping market capitalisation of a host of industries while inviting FIIs in equity markets. Reports indicate that out of the stalled projects, the share of steel projects is significant. The initiation of activities in stalled projects and commencement of fresh investment in steel capacities would be in tandem with improvement in market sentiments. A few more economic reforms like GST, removal of infructuous clearances for setting up units in the country would go a long way to improve the market sentiments.
The author is DG, Institute of Steel Growth and Development. The views expressed are personal