New 2004-2005 budget creates discontent in India’s steel industry
On July 8, 2004 the Indian Ministry of Finance released the new budget for fiscal year 2004-2005. This new budget is said to be growth-oriented and non-inflationary. Major issues in the budget worth noting include agricultural growth, quality health and education services, improvement in infrastructure, promoting
investments, and attaining a lasting annual growth rate of 7-8%. In addition, the Finance Ministry aims to cover the revenue deficit by 2008-2009.
Indian Ministry of Finance officials believe that focusing the budget on agriculture and investment will trigger national economic growth in general.
The budget has been criticized mainly for the tax imposed on the salaried class, higher allocation to defence, as well as setting up funds to regenerate certain industries. Economists state that economic growth can be attained when the economy is driven by the private sector and people are encouraged to spend their money instead of paying taxes.
The steel industry, suggesting that this budget is not in favor of the steel industry, will experience a cut in customs duty and a rise in excise duty. The reduction in customs duty on both alloy and
non-alloy steel is set at 5%, bringing duties down to 15% and 10% respectively, whereas excise duties have been increased to 12% from 8%.
As a result of the decline in customs duty and the increase in excise duty, pressure will be put on operating margins. While lower customs duties will make imports cheaper, higher excise duty will require a hike in steel prices. However, it will not be favorable either for the producers or the end-users, besides it may cause an inflationary trend in the industry.
Actually, the new budget already started to show its impact in the steel and auto industries with producers revising auto and
steel prices. Both domestic companies such as Maruti Udyog and Mahindra & Mahindra and foreign companies such as Ford, General Motors and Hyundai are reportedly effecting or going to effect price hikes.
Meanwhile, Indian Steel Minister Ram Vilas Paswan, objecting to the new budget, was reportedly going to demand the Finance Ministry to rollback the excise duty on steel products, as reported by SteelOrbis last Friday. Recent market reports reveal that
Indian government restores Duty Entitlement Pass Book (DEPB) incentives for steel exports in order to compensate for the rise in excise duty.
Some in the market and major steel companies of
India expect that the steel industry, which is open to damages from lower duty protection by the government as of February this year, will be affected negatively by the budget changes in duty levels which are indirectly creating risk for the growth of the domestic steel industry.
On the other hand, maintained railway
freight and incentives in infrastructure may partially compensate for the adverse effects cited above, with
freight effective on operating costs and infrastructure on steel demand. Anyway, the
construction sector is forecasted to revive in the short to medium term and increase the steel demand.
According to the major steel companies, the government should have given priority to the volatile steel industry, enabling capacity expansions which would also help the country to achieve its growth target of 8%. Additionally, a benchmarking price or floor price would have settled the possible problems that will result from the reduction in customs duty.