Context:

• The Ministry of Steel has released the Draft National Steel Policy: Vision 2047, which aims to make India a globally competitive steel producer and increase steel exports to 45 million tonnes (Mt).
• However, the policy raises a fundamental question: Does India's steel industry derive its competitiveness from efficiency and productivity or from excessive government protection?
• Therefore, India must gradually dismantle protectionist measures, improve mining policy and enhance industrial efficiency to achieve genuine global competitiveness by 2047.

India's Steel Industry - Growth and Profitability:

• Impressive production growth:
  • India has emerged as the world's 2nd-largest steel producer, with production reaching 170 Mt.
  • Its share in global steel production has increased from less than 5% in 2000. However, India remains significantly behind China, which produces 961 Mt.
• High profitability:
  • The average EBITDA-to-sales ratio of the Indian steel industry during 2000–2025 was approximately 15%, around 3–4 percentage points higher than the rest of Indian manufacturing.
  • The profitability of India's three largest steel firms was also 3–4 percentage points higher than that of their major global counterparts during 2015–2024.
  • But, high profitability may reflect protection and policy advantages rather than superior efficiency.

Sources of Protection and Their Economic Costs:

• Cheap domestic iron ore:
  • A 30% export duty on iron ore containing more than 58% iron keeps domestic prices approximately 30–40% below global prices.
  • This effectively transfers value from mineral resources and mining regions to steel manufacturers.
  • Low domestic prices reduce incentives for exploration and mining, leading to economic losses in mineral-rich regions.
• High import tariffs and non-tariff barriers:
  • A 7.5% import tariff, combined with an 11.5% safeguard duty, results in an effective duty of approximately 18%. Comparable tariffs in ASEAN countries are only 3–4%.
  • Quality Control Orders (QCOs) cover 228 steel products, restricting imports and competition.
  • The Gauba Committee reportedly recommended removing 122 products from the QCO list, but only 59 have been suspended so far.
• Higher costs for downstream industries:
  • Domestic steel manufacturers sell hot-rolled coils at a 6–7% premium over Japan, despite Japan being a high-cost producer.
  • This increases input costs for -
    • Construction: Steel accounts for approximately 15% of total project costs.
    • Automobiles: Steel and related products constitute roughly 5% of raw material costs.
    • MSMEs: Higher input costs weaken the competitiveness of smaller industries, particularly export-oriented enterprises.
  • Thus, protection for the steel industry imposes an indirect cost on the broader manufacturing ecosystem.

Impact of Removing Protection - Examined Through Two Alternative Scenarios:

• Policy change (Alternative 1): Reduce tariffs, lowering domestic steel prices by 6%.
  • Impact: Profitability of the largest private sector steel firm reduces by 25%, that of the largest public sector firm drops by 50%, and the fastest-growing large private firm drops by 40%.
• Policy change (Alternative 2): Remove iron ore export duties and purchase ore at global prices.
  • Impact: Profitability of the largest private firm reduces to approx. 7%, that of the fastest-growing private firm drops by 95%, and that of the largest public-sector firm becomes negative.
• The findings indicate that the industry's profitability is highly dependent on policy support.
• Genuine competitiveness requires firms to survive through productivity, innovation and cost efficiency rather than protection.

Reforms for Global Competitiveness:

• Calibrated liberalisation to strengthen export competitiveness:
  • Reduce import duties over five years to ASEAN levels.
  • Remove unnecessary QCOs, particularly those identified by the Gauba Committee.
  • Introduce greater competition to encourage productivity, innovation and cost reduction.
  • Lessons from other industries:
    • Pharmaceutical and automobile component tariffs declined from approximately 40% in 2000 to 10–15% in 2023.
    • India's share in global automobile component exports increased from 0.2% in 2003 to 1.5% in 2024.
    • Its pharmaceutical export share increased from 0.7% to 2%.
• Consider strategic privatisation:
• The profitability gap between private and public-sector steel firms suggests potential efficiency and governance problems in public-sector enterprises.
• Market-share trends since 2000 - SAIL (declined from 30% to 10%), JSW Steel (increased from 1% to 12%), and Tata Steel (maintained approx. 11–13%).
• Privatisation of selected SAIL plants could improve efficiency, corporate governance and fiscal outcomes while retaining strategic oversight.
• Remove iron ore export duty:
  • Abolish the 30% export duty on high-grade iron ore. Allow domestic miners to realise international prices.
  • Encourage exploration, investment and efficient resource allocation. Expose steelmakers to global input prices, encouraging productivity improvements.
• Overhaul mining policy:
  • India has explored only around 10% of its obvious geological potential.
  • The existing mining regime discourages exploration because discoveries must be surrendered for future auctions, with discoverers receiving limited incentives.
  • Suggested reforms -
    • Adopt exploration-friendly policies followed by Australia and other mineral-rich countries.
    • Provide adequate incentives and predictable rights to mining explorers.
    • Accelerate new mine development.
    • Increase mining's contribution to GDP and improve resource utilisation.

Conclusion:

• India's steel industry has achieved remarkable growth since Jamsetji Tata established the foundations of modern steel production in 1912, overcoming colonial scepticism about India's industrial capabilities.
• The Draft National Steel Policy: Vision 2047 must build upon this legacy by promoting efficiency, technological innovation, competitive input markets and export orientation.
• A phased transition from protection-led profitability to productivity-led competitiveness is essential for sustainable industrial growth.