Govt Fixing Steel Prices: Is Make in India Just a Slogan?

make in india
On February 5, 2016, the directorate general of foreign trade imposed a minimum import price(MIP) on 173 steel products. The prices range from $352 per tonne to $752 per tonne of steel.

The MIP has been imposed in order to counter the dumping of cheap Chinese steel and should help the Indian steel companies. Also, the move should help public sector banks as well.

Why do I say that? As the RBI Financial Stability Report released in December 2015 points out: “A risk profile of select industries as at end September 2015 showed that iron and steel, construction and power industries had relatively high leverage as well as interest burden.”

The report further pointed out: “Five sub-sectors viz. mining, iron & steel, textiles,  infrastructure and aviation, which together constituted 24.2 per cent of the total advances of scheduled commercial banks as of June 2015, contributed to 53.0 per cent of the total stressed advances.”

What does this tell us? Steel companies have borrowed a lot of money from banks which they are now finding difficult to repay. The only way they can repay these loans is by ensuring that their sales and profits continue to grow. And that is not possible if cheap steel from China keeps hitting the Indian shores.

The government has tried to correct this by slapping an MIP on steel, in the process making imported steel more expensive. The idea is that anyone who needs steel within India, buys from Indian companies, instead of importing cheaper steel.

The question is does this make sense? It does for the steel companies. But not for the overall Indian economy as a whole. Before I get into explaining this, allow me to discuss what is known as the broken window fallacy. The French economist Frédéric Bastiat discusses this concept in his 1874 book That Which is Seen, and That Which is Not Seen.

Bastiat talks about a shopkeeper whose rather careless son has broken a glass window of his shop. As Basitat writes: “If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—“It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?

The point being if window glasses were never broken what would glaziers ever do? As Basitat writes: “Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade—that it encourages that trade to the amount of six francs—I grant it, I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But what about that which is not seen? “It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way which this accident has prevented,” writes Bastiat.

What is Bastiat trying to tell us here? When we are analysing economic issues, we tend to look at that which is seen and tend to ignore that which is unseen. In the case of minimum import price being fixed on steel imports, it means looking only at the benefits that this would bring to the Indian steel companies.

Stock analysts have labelled this move of the government as a “gamechanger” for the steel companies and have recommended that investors buy these stocks.  Now that is the ‘seen’ part of it, if we were to apply Bastiat’s broken window fallacy to this situation. But what about the unseen?

As Henry Hazlitt writes in Economics in one Lesson: “The tariff has been described as a means of benefitting the producer at the expense of the consumer. In a sense this is correct. Those who favour it only think of the interests of the producers immediately benefited by the particular duties involved. They forget the interests of the consumers who are immediately injured by being forced to pay these duties.”

A tariff is essentially a tax or a duty that is paid on imports of exports. In the case of the minimum import price on steel imports, no duty has been fixed or tax has to be paid. But given that the minimum import price will force consumers of steel to buy steel at a higher price from Indian steel companies, it basically means that the companies are being forced to pay more than they would have, if this move had not been made. In that scenario they could have simply imported cheaper steel, which they cannot do now. Hence, to that extent even an MIP is basically a tariff.

Steel is an input into many different sectors from automobiles to real estate to engineering to construction and infrastructure. Hence, if the price of steel goes up, companies operating in these sectors need to pay more when they buy steel. And this in turn will impact the prices of the consumer goods that these companies produce and the physical infrastructure that they create. This is the unseen negative that people are not talking about.

Take the case of engineering goods, which is as of now, India’s number one export. As TS Bhasin, Chairman of EEPC India, an engineering goods exporters’ body, told The Hindu: “The MIP will raise the cost of raw materials for engineering products by about 6-10 per cent. This will severely hurt engineering exports that have already declined by 15 per cent in the first nine months of this fiscal.” How will Indian engineering companies compete globally in an environment of slow global economic growth, if steel is made expensive?

Further, this also leads to the question as to how serious is the government about “Make in India”. Is it just a slogan? Or is it more than a slogan? If it is more than a slogan then there is no way that the government should be fixing steel prices and in the process increasing the price the consumers of steel pay.

Also, why is the government just trying to protect steel producers. How about retail companies which have been bearing the onslaught of ecommerce companies selling goods at significantly lower prices, backed by foreign venture capital and private equity money?

As Anindya Banerjee, analyst at Kotak Securities puts it: “The offline retailers have been long complaining how ecommerce companies, funded by cheap dollars/euros/yen of yield hungry bubble vision private investors, is undercutting them in every consumer product. They claim that these ecommerce companies are destroying hard working mom and pop stores and their employees, by resorting to unsustainable discounts. So why is the government not imposing a minimum retail price(MRP) for all products sold online. This MRP should be set at a price which is above the offline retail price. I presume my fellow citizens won’t mind paying more for their stuff they buy. After all they are supporting the economy, aren’t they?

Now that is something worth thinking about. And if something like that were to happen, we would be finally back to the eighties. My growing up years will  be back again.

The column originally appeared in The Five Minute Wraupup on Equitymaster on February 10, 2016

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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