The Hindu Business Line : Why a regulator for steel?

A REGULATORY COMMISSION for overseeing issues of prices and distribution of steel, as proposed by the Union Minister for Steel, Chemicals and Fertilisers, Mr Ram Vilas Paswan, is not only impractical but may well turn out to be a cure that is worse than the disease. The proposal assumes that there is consensus on what constitutes a fair return on the investment for every steel producer and then that could be worked backwards all the way to prices for a portfolio of steel products. To compound matters, a pricing policy for domestic manufacturers cannot be complete without a mechanism for monitoring international prices and calibrating the import tariff to ensure that overseas suppliers do not acquire an unfair advantage over their local counterparts. When international prices are substantially lower, either the import duty has to be hiked or the burden structured on a standard `tariff value' basis. Such arrangements could potentially fall foul of binding tariff/abolition of quota commitments under the WTO and thus be open to challenge.

Then prices have to be fixed for individual steel manufacturers (an essential requirement of the concept of fair return implicit in regulated prices) taking into account unique regional and technology constraints. That would be an invitation to the creation of a policy framework similar to the one for the fertiliser industry, from which the government is still trying to extricate itself. The only difference between the two would be that while in the case of fertiliser the government absorbed the differential as subsidy, for steel, it would be, ironically enough, the consumers — the very segment that is in the forefront demanding a statutory regulatory commission. Surely they should know that a regulatory commission cannot operate as a one-way street — bring down domestic prices when they are high but otherwise allow market forces to operate when international prices are low.

It has become politically fashionable to credit regulatory authorities with superior insight and greater objectivity in tackling situations thrown up by the normal interplay of demand and supply forces. In practice, however, that is far from the case. Even under conditions of a natural monopoly or involving a large number of small ill-informed consumers — situations that need the reassuring presence of an impartial intermediary to lay down the rules of commerce — the threat of capture of such a mechanism by vested interests is ever present. Prudence, therefore, demands that recourse to such instruments is avoided when a competitive market involving informed buyers and sellers can do the job more effectively as in the case of steel.

This is not to say that steel users do not have a case for cheaper prices. As it happens, they do. They have for long suffered from an inverted duty structure where the products they manufacture enjoy lower rates of protection (from imports) than the producers of steel. The current high international prices of steel could be used to lower the duty on the metal and thereby achieve the purpose of securing consumers' access to cheaper material even while eliminating a distortion in fiscal policy. The steel users should press for this rather than the wholly unworkable remedy of a regulatory commission.

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