Great leap back

No one will deny that dismantling the administered pricing and distribution of steel, and lowering tariff barriers, have done the domestic steel industry a world of good. Forced to compete after years of extreme domestic and international protection, the major Indian steel producers rapidly learnt the art of lean manufacturing.

Today, as a result, India can boast of having some of the lowest-cost producers of steel. Even the public sector Steel Authority of India (SAIL) has made vast improvements in terms of both profitability and efficiency.

Given all this, the new steel minister's proposal to introduce a price regulator is hard to understand, and seems to confirm that several members of the new government do in fact have a foot-in-mouth disease. To no one's surprise, steel shares took a tumble.

The most obvious reaction to the proposal is that it would mark a return to the pre-1990s regime when a Joint Plant Committee (JPC) decided at what price and where steel producers would sell.

In those days, high tariffs created an artificial domestic shortage that, in turn, required regulating so that consumers did not suffer unduly (though this was a debatable point).

Today, the market paradigm is quite different, and it would be difficult to justify price regulation in a competitive market. True, there has been a cyclical swing in the demand-supply balance and prices have soared, but the market and prices have already peaked.

In any case, what precisely does the minister seek to achieve by appointing a price regulator? Is the government hoping to protect the consumer against escalating steel prices? But why should steel producers sell under price control in India, if they can export at higher prices?

To prevent that and to enforce the price control, will the minister then ban exports as well? Surely, the fallacies become obvious.

The ministry itself has suggested an alternative answer to the problem by proposing that the 5 per cent import duty on scrap be abolished. Reducing the 15 per cent tariff on value-added products to, say 3 to 5 per cent, as even protectionist China has done, would help consumers even more.

In any case, it is difficult to understand the logic of protecting consumers and asking producers to take a hit in terms of sub-optimal margins. Liberalised imports would also benefit industry, in that it would continue the pressure on producers to become competitive, and to lower their break-even point so that they can survive and prosper even when the market is in a trough.

The government could possibly be worried that its banks are owed vast sums by the steel producers, and many of these loans were not being serviced when steel prices were low.

However, the price tide has turned long ago, and producers are clearing their loans. In any case, this concern should be the finance minister's, for it is he who has to worry about the banks' non-performing assets. And if producer viability is the issue, then price control is hardly the logical answer.

Overall, a regulator will accomplish little other than providing work for a reborn JPC that, inexplicably, acquired a plush office in a tony Kolkata suburb after steel de-regulation.