The Hindu Business Line : A policy undermined

The Budget impost on iron ore exports once again brings into focus the policy intervention on this issue. The steel industry makes a persuasive case for capping iron ore exports and then gradually phasing it out so that it is assured of supplies well into the future. There is no disputing that converting iron ore into steel for domestic consumption or even for exports is inherently superior to exporting the ore, even without the added disadvantage of steel imports to meet any shortfall.

But the big question is: Whether this happy outcome is to be achieved by the unseen hand of the market, guiding the investment and marketing decisions of innumerable players in the mining/steel industry, or through the all-knowing wisdom of the state steering the actions of those involved. The steel industry appears to favour the latter course. That would be a mistake. The state, and by extension the government of the day, has neither the perspicacity to know the future nor can be trusted to come up on an issue such as this with a policy response that evaluates alternatives objectively and in best public interest. The nation had done so for the first forty years of its independent existence and paid dearly for what has since turned out to be misplaced optimism. It is ironic that the steel industry, which has suffered the most through mindless price and distribution controls, should place so much faith in the ability of the official machinery to order public outcomes along predetermined lines. It should be the first to recognise that a ban on iron ore exports today could quite easily translate into a regulated/licensed one tomorrow that benefits neither the steel industry nor allows the iron ore mining industry to consolidate operations of a global scale.

It would not be far wrong to say that the cess on iron ore export provides the perfect ground for the imposition of a more stultifying regime of administrative controls on exports, at a later date. That apart, policy preferences create their own distortions in the behaviour of economic agents determined to maximise their profits. The supply of iron ore may indeed run out one day if not quite within the time-frame the steel industry reckons it will. A proactive and industry-friendly policy on mineral prospecting may well extend the deadline. A larger point needs to be made. The country, in general, and the steel industry, in particular, will have to face up to the policy challenges inherent in the situation. But Government intervention is a remedy that will be worse than the disease.

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