Mine it, use it, don’t export it

The revival of manufacturing in India, coupled with increased exports of finished goods, will be a game-changer for India’s economic and social development. Given the declining trend in China’s export competitiveness on account of currency appreciation and labour cost inflation, its cost advantage appears to have shrunk. India, in fact, is already one of the most competitive manufacturing nations in the world today. In the Global Manufacturing Competitiveness Index published by Deloitte in 2013, India is placed as the fourth most competitive nation in the world, behind China, Germany and the US. But the share of the manufacturing sector of India’s GDP has stagnated at around 15 per cent.

The National Manufacturing Policy proposed by the previous government — yet to be taken up for implementation — had set its agenda to increase the sectoral share of manufacturing in GDP to at least 25 per cent by 2022; increase the rate of job creation to 100 million additional jobs by 2022; and enhance global competitiveness, domestic value addition, technological depth and environmental sustainability of growth.

To achieve these objectives, India needs to invest around $1.5 trillion by 2022 in the manufacturing sector. Given that the cost of overall input factors of production, namely, land, labour, capital, key raw materials and so on is continually on the increase, it will be extremely difficult to attract necessary investments unless availability of key raw materials such as gas, coal and iron ore are ensured at the right price.

It is not out of place here to mention also that in the National Mineral Policy of 2008, India had recognised that a country should utilise its comparative advantage and give priority to import substitutes, value addition and export, in that order. This is, of course, a fairly standard policy being followed by various countries in order to boost investments in manufacturing to create employment.

One of the prime movers of the manufacturing sector is steel. With strong backward and forward linkages, the steel industry is a visible engine of economic growth as well as of employment generation and also a powerful symbol of quality of life and economic prosperity. Most developed nations, during the course of their progress, have relied heavily on their own domestic steel industry to meet the requirements of rapid industrial advancement and for building physical infrastructure.

World steel production has already exceeded 1.6 billion tonnes. This phenomenal increase has been led by China, accounting for over 47 per cent of world steel output. China is not just the largest producer, but it is also its largest consumer of steel, followed by the US and India. With a production base of over 81 million tonnes in 2013, India currently is the fourth largest steel producer in the world, after China, Japan and the US. The Indian steel industry is growing fast, despite a temporary slowdown.

India’s per capita steel consumption is around 60 kg, which is not only very low, but also much lower than the international average of over 215 kg. This indicates a huge gap in prosperity levels, though it also reflects a huge potential for the growth in steel consumption. Realising the enormous potential, the high level committee on manufacturing has decided to plan ambitiously for crude steel capacity of 300 million tonnes by 2025-26.

Needless to say, the availability of iron ore at affordable prices and on short delivery schedules are key to the viability and sustainability of the industry. The current capacity utilisation figure for the steel industry in India has fallen to 77 per cent as against around 92 per cent in well-performing steel plants of the world. The import of iron ore cannot be justified, even if iron ore prices fall internationally, because of the requirement of foreign exchange which will always be in short supply in view of the heavy dependence of the Indian economy on the import of oil and gas.

All these make it clear that the Government needs to come up with reforms that will help in reducing red-tape in brownfield and greenfield expansion of steel plants as well as in mining operations and in granting environmental clearances. More importantly, it needs to ensure the availability of critical raw materials to the domestic industry.

India can actually be a steel manufacturing hub provided the competitive advantage of iron ore is appropriately leveraged. It is ironical that many steel units which made value addition within the country with large investments, creating employment, contributing substantial revenue to the exchequer and saving precious foreign exchange, are actually suffering due to lack of iron ore.

As iron ore exports were earlier allowed virtually freely from India, high grade iron ore, except from a few captive mines, were exported in large quantities, thus leaving low grade ores to the domestic steel industry, particularly in Karnataka and Goa.

This negatively impacted the productivity of steel plants, besides causing an additional financial burden in the form of extra cost of processing low grade iron ore through repeated stages of beneficiation.

Most countries have regarded natural resources as strategic for the development of the country and have exercised abundant caution in the exports of minerals. Indonesia has restrained the export of unprocessed minerals. It also brought in the concept of domestic market obligation, making it mandatory for mining companies to meet the domestic market requirement first, before exporting.

In 2001, China was the second largest global exporter after Australia. Subsequently, the Chinese government restricted exports in favour of satisfying domestic demand. It implemented a law to restrict the export volume of coal, and abolished VAT from 13 per cent in 2004 to 0 per cent in 2006.

When countries around the world are conserving their natural mineral resources to secure their future and are also emphasising value addition, exports from India of a vital national wealth like iron ore would not be prudent. It is of paramount importance that the Central and State governments take steps to conserve natural resources and formulate and implement robust policies to revive manufacturing in India.

The writer is a former managing director of Rourkela Steel Plant and director of SAIL

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