In October 1988, as worsening economic indicators started to be reflected in the balance of payments position, Chief Economic Adviser and Banking Secretary Bimal Jalan wrote to Finance Minister S B Chavan flagging key sectors that needed to be addressed urgently. On the list was Steel. Jalan pointed out that India’s steel policy had been stagnant for three decades — and considering that some measures had been taken to improve the management of state-owned SAIL and that international prices of steel had risen (reducing the gap with local prices), it was a good time to make a new beginning.
Jalan recommended that SAIL be given full freedom on pricing and distribution, to help it determine production patterns in line with demand conditions. The existing policy, Jalan felt, encouraged the emergence of a black market premium and production-demand mismatch, and suggested that the performance of SAIL be assessed by its success in ensuring adequate steel availability and preventing the emergence of a black market. The note recommended regulation of imports through an increase in tariffs rather than quantitative ceilings, an increase in excise duties on import sensitive sectors, and a reduction of duty on steel items in view of foreign exchange constraints. Jalan also thought there was a case for decanalisation combined with higher tariffs, but finally indicated that given the tight forex situation, the government could not, at that point, risk introducing decanalisation.
A little later, SAIL chief V Krishnamurthy asked Vijay Kelkar, who was then with the Bureau of Industrial Costs and Prices (BICP, which became the Tariff Commission in 1991), for a study of the steel sector, which was shackled by several controls, and which had seen growth in production sliding in the 1970-80 period after an average annual growth of over 8% in earlier decades. The mandate of the study was ultimately broadened to look at the long-term liberalisation of the industry — and mindful of potential implications of a change in this core sector on the broader economy, the BICP decided to engage the National Council of Applied Economic Research (NCAER) in the task. Kelkar and economist Rajiv Kumar submitted their report on liberalisation measures for the sector in 1990.
A year later, as the Narasimha Rao government began dismantling the licensing regime, Steel was one of the early sectors to be freed. Iron and steel was taken off the list of industries reserved for state-owned firms, compulsory licensing went, prices were progressively de-regulated, foreign investment up to 74% was allowed, and import duty on capital goods lowered. Some of these solutions weren’t new. In the late 70s, the Dagli committee had recommended several changes and, in 1985, a committee headed by former RBI Governor M Narasimham advocated a shift from physical to financial controls and encouraging competition. It was important for India then to be exposed to greater international competition to develop cost and quality consciousness, the Narasimham panel had said. With the opening up in the early 90s, a string of companies entered the sector — Jindal, Ispat, Essar, Bhushan Steel, Malvika Steel, Electrosteel Castings, etc.
Beginning 1991-92, production rose — from 14.33 million tonnes to 21.40 million tonnes by 1995-96, and 29.27 million tonnes by 2000-01. And yet, a slowdown began in 1997-98 as the Asian currency crisis and the collapse of the Soviet Union saddled the industry with excess capacity and low demand. By 1998, when the Vajpayee government took over, many of these companies were in deep trouble, and development finance institutions were forced to restructure their debts. After McKinsey drew up a plan, the Finance Ministry agreed to a Rs 8,454 crore package for SAIL, which offered VRS to 40,000 employees. By 2004, the economy rebounded, and a new steel policy was unveiled in 2005. In 2007, when growth was close to 9%, Tata Steel bought Corus for $ 13 billion, a costly acquisition. But the global financial crisis and an economic downturn dragged the company down. Poor demand, excess capacity in China, and other factors have over the last few years led to another crisis in the industry. It is deja vu — another NDA government is working on a revival package for the industry, which has an exposure of over Rs 3 lakh crore to Indian banks. Just as in the late 1990s, Indian lenders have been forced to recast loans to the some of same promoter firms that had dragged them down then too!
Source: Mining.com