The Hindu Business Line : Tinkering with tariffs

THE DECISION BY the Government to slash import tariffs on non-alloy steel to 5 per cent is part of the multi-pronged approach to containing inflation wherever it can. But it is a moot point if it will yield the desired results. Thanks to the firm price trends in the global markets, even with the latest import tariff cut, the prices of hot rolled coils in the domestic market will be lower than the landed cost by a comfortable margin of over Rs 1,500 per tonne. This will continue to offer the steel producers the latitude to hike domestic prices, if they choose to do so.

To be fair to the leading producers, flat product prices (for the regular customers) have remained unchanged over the past two months, since import tariffs on finished steel were brought down to 10 per cent in the Budget in early July. On top of this, following the earlier decision of the steel producers to hold the price line between March and June, flat product prices have not been revised for the past five months. As far as long products are concerned, since the sway of the secondary and unorganised sector is fairly strong, the latest import tariff reduction may, at best, keep these prices stable in the near term.

If the underlying rationale for the Government's latest move is to check price hikes and enhance availability of steel for domestic consumption, a more prudent move would have been to reduce the excise duty. In the latest Budget, the Government had raised the excise duty levels to 12 per cent from 8 per cent (brought down in late February). Restoring the excise duty to 8 per cent levels is likely to afford more relief to downstream users than any tinkering with the Customs duty structure.

The Government has to recognise that as long as international steel prices remain firm, this tweaking of tariffs will offer only a short-term palliative, both to industrial users and end-consumers. Besides, these repeated interventions not only militate against the "invisible hand principle" of the market, they also postpone the need for long-term and enduring solutions for the sector. In a market driven regime, the end-user industries of steel, such as automobiles, consumer durables and engineering, will be forced to enter into long-term contracts with steel producers, as is already being done extensively in the US and Europe. Once this becomes a practice, steel producers will also be able to enter into long-term sourcing agreements for inputs such as iron ore or coking coal with international majors. Also, the spate of short-term policy moves initiated by the Government in the past six months has the potential to slow down the long-term prospects for steel, both in terms of capital investment and profitability. Only a stable policy regime can attract large-scale capital investments by global steel majors in India or offer some scope to usher in the much-needed consolidation among the existing steel producers.

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