The Hindu Business Line : Price of margins

In a refreshing display of initiative, the Steel Authority of India (SAIL) has responded to circumstances unfavourable to itself with a maturity that other public sector undertakings and especially exporters would do well to emulate. With the rupee appreciating and steel imports becoming cheaper, SAIL has reduced prices in order to maintain its market rather than protest about “unfair” import prices or dumping. With the rupee appreciating, flat steel products h ad become cheaper by Rs 2,000 a tonne. By reducing the prices of these products to the level of import prices, SAIL has a lesson for all those producers and exporters who have been whining about the effects of the rising rupee on their markets.

At the heart of their grouse is the prospect of a margin squeeze consequent to the currency strengthening; under adverse conditions, firms tend to reduce prices or offer discounts to retain market share. That is what SAIL has done and that is what the exporters should be doing to retain their share in dollar-denominated regions. One can expect steel producers to initiate a round of cost-cutting measures to recover margins, especially if the threat of cheap imports persists. Keeping prices competitive at the cost of temporary lower margins is the stuff of sound management and, happily for once, a PSU has validated that hardy premise. But it has equally shown North Block that administrative fiats or ministerial suasions are not as effective in influencing firms as the market. Soon after the Budget, the Finance Minister tried to persuade cement and steel producers to reduce prices. Three months later, falling domestic demand occasioned partly by monsoons and imports made cheaper by rising rupee have succeeded where the Finance Minister failed. Admittedly cement producers have not dropped their prices; that is because perverse quality inspection barriers have shut out imports that would have challenged the high domestic prices.

SAIL’s initiative should have a salutary effect on inflation if other steel majors follow its example. For the last 12 months manufacturing inflation indices have contributed to the sharp rise in the Wholesale Price Index (WPI) much more than essential goods. With global crude oil prices firming up over $70 a barrel once again, the RBI’s efforts at keeping the headline inflation rate below 5 per cent may come under pressure. If crude oil prices harden at the upper ranges, the RBI may let the rupee ride at current levels or allow it to strengthen further so as to cool an overexcited WPI. Be that as it may, the central bank should note that a PSU has opened up a flank to combat inflation where it really hurts.

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