The Hindu Business Line : What led to the rollback

WHAT led to the sudden roll back in steel prices in the domestic market that defied the principles of market economy? That was the question that intrigued many throughout Monday.

Informed sources here told Business Line that it was a serious intervention by the Ministry of Finance that prompted the Tata Steel chief to announce a price cut on Sunday, two days after the Government had announced a reduction of import duty on the commodity.

According to calculations made by the Joint Plant Committee for steel, which functions under the administrative control of the Ministry of Steel, steel prices have increased by about 45 per cent on a week-to-week basis in the past one year, contributing to around a fifth of the rise in inflation rate. This, however, is an average figure because prices of various steel products have not increased uniformly.

Iron and steel carries a weight of 3.64 in the wholesale price index (WPI). The inflation rate touched a 41-month high in the last week of July 2004 compared with the corresponding week of July 2003.

"The weightage of steel in WPI calculated as a percentage of the increase in steel price over this period, which is 45 per cent, and then relating it with the increased inflation rate of 7.61 works out to 0.21. Taken in terms of percentage, it is found that this 45 per cent increase in steel prices has accounted for around 20-21 per cent increase in the overall inflation rate," said a senior economist in the Joint Plant Committee.

This set the alarm bells ringing in the Government, particularly in the Ministry of Finance. According to informed sources, the Finance Minister had expressed concern over the issue at a meeting with a delegation from the steel industry in the second week of August.

Last weekend came the final act when the Finance Ministry took up the issue with the largest private sector producer following which Tata Steel decided to roll back prices.