By: Sushim Banerjee
Indian economy is facing one of the stiffest challenges to sustain the momentum of rising exports. In FY15 the total exports declined by 1.2% compared to the previous year’s performance and in Q1 of FY16 it went down by 11.6%. The lower trend of export growth had adversely affected our inflow of foreign exchange. Simultaneously the country witnessed a drop in imports but at a lower scale, 0.6% in FY15 and 7.2% in Q1 of the current fiscal. Thanks to a steep decline in crude oil and other prices the outgo of foreign exchange due to high imports had a lower rise and the country could contain the CAD to 1.3% of GDP in FY15.
For the steel sector, the country exported 5.9 MT of steel in FY15, a negative growth of 2% compared to the previous year, while imports at 10.0 MT grew by 76%. There was a net deficit of R238 billion in FY15 and it stood at R92.5 billion in Q1 of FY16, threatening to be much higher than last year. The significant drop in global steel prices had affected export proceeds while it contained exchange outflow despite higher imports.
Rising imports are always indicative of growing size of the domestic market. In some cases the trend of high imports also signals a low manufacturing capability in the commodity sector and under services category it signifies poor state of IT and communication facilities that necessitate some essential imports of technology and equipment. This is the standard model of progress by all developing economies.
Looking from this angle, India presents a unique picture. We have become a major exporter in IT and communication segments that are currently serving all the domestic needs of the country by creating massive capacities or expanding their range of services to meet the potential needs of the sector. The automobile is another example where the shortfall in domestic capacities to cater to all variety of needs of the customer segments has led to creation of manufacturing hubs by the global auto majors in association with domestic players.
For a high capital-intensive industry like steel with a minimum gestation period of four years between commencement and commissioning, the investor is worried on ROI with a subsequent drastic change in the market scenario, both domestic and global. The banks are equally concerned about the ability of the creditors to repay loans as per schedule and restrain further loans. The high capital cost adds to the worry of current and prospective investors. In the context of high capital cost and lower margin due to subdued market condition, the benefits of lowering cost of raw materials like iron ore and coking coal are not helping much and this is clearly evident from the declining profitability of the steel industry and this phenomenon is largely engulfing other sectors of the industry.
Under such a scenario the government needs to act fast to restrict imports, and specifically steel imports, flowing from the idle capacities in China, South Korea, Japan, Russia, Ukraine and Turkey to provide a level playing field to the investment already made and prospective volumes . Looking around we find Indian steel exports are facing a large number of restricted market access from anti-dumping, countervailing duties, safeguard levies and various other NTBs like standards and specifications (latest measures from Indonesia, Thailand and Malaysia).
Recently the US has issued notifications to strengthen the trade measures and put in place an effective method of monitoring steel imports against the views of group of consumers preferring cheap imports from China. We also have a class of consumers and trading merchants who clamour for cheap imports. The government must weigh the interests of indigenous investors desirous of giving a boost to the sagging manufacturing sector and help employment, income and utilisation of domestic capacities and those of the consumers opting for cheaper varieties of steel and largely of inferior grades.
The author is DG, Institute of Steel Growth and Development. Views expressed are personal.
Source: FE
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