India needs a PLI for steel – The Financial Express

Clipped from: https://www.financialexpress.com/opinion/india-needs-a-pli-for-steel/2361464/

Sino-Indian tensions telling on Indian iron-ore exports, PLI can catalyse domestic value addition

The fortunes of the Indian producers in terms of exports of iron ore and prices are thus intimately linked to the Chinese market.The fortunes of the Indian producers in terms of exports of iron ore and prices are thus intimately linked to the Chinese market.

Following a flare-up in border tensions with China last year, India appears to have hardened its stance on economic relations; investments are being scrutinised more closely while imports are being reduced. A column in this newspaper has highlighted how India’s iron ore exports remain heavily dependent on the Chinese market. China remains our largest trade partner with two-way trade likely to touch $100 billion this fiscal, up from $86.4 billion in FY21.

These numbers indicate no discernible downtrend in the near term; the trade balance is heavily tilted against India. China remains the largest source of our imports with a share of 15.7% while only 6.4% of our exports are headed to the mainland. Indications are that the bilateral deficit this fiscal will be of a similar order of magnitude as the $44 billion registered in FY21.

India’s position vis-a-vis China appears akin to that of a Third World country that exports raw materials like iron ore and intermediates for plastics while importing manufactured goods like electrical and other types of machinery, transmission apparatus for radio and telephony, active pharmaceutical ingredients, auto parts for two-wheelers, among others.

Iron ore comprised 20% of India’s exports to China, amounting to $4.2 billion in FY21. Around 87% of our total exports of this ferrous commodity were absorbed by the mainland. While India sends most of its iron ore to China, it is a marginal player whose incremental increase in exports in volume terms in 2020 accounted for only 1.5% of the 1.4 billion tonnes that China imported.

The fortunes of the Indian producers in terms of exports of iron ore and prices are thus intimately linked to the Chinese market. The bad news is that prices are currently trending lower as Beijing has mandated curbs on steel production since June in a bid to check emissions. Asian ore prices witnessed a dramatic correction in the third quarter this year with the IODEX index dropping by 46%.

Looking ahead, prices are expected to remain under pressure due to lower steel production and power shortages in the mainland. The FE column points out Chinese mills are even being forced to resell already contracted iron ore volumes. Partly for this reason, since July, iron ore producer NMDC reduced prices of lump and fines on three occasions.

The big question is what can be done to reduce India’s export dependence on China. Economists, such as Indira Rajaraman, suggest that Tata Steel and Arcelor Mittal, among others, can be encouraged to export local iron ore to their overseas facilities, diversifying Indian supplies to new markets. Another suggestion is the use of policy instrumentalities like production-linked incentives (PLI) for greenfield steel production as has been done for specialty steels.

More integrated steel plants will ensure greater domestic value addition, like Arcelor Mittal’s plans to produce 12 million tonnes of steel in Odisha. Although this state accounts for one-third of the country’s iron ore, foreign firms like South Korean POSCO and Arcelor Mittal have so far not established any major manufacturing capacity. All of this can change with a PLI providing not just the right financial incentives but also captive iron ore supplies. Given the frictions in the Sino-Indian relationship, this will make a huge difference in the utilisation of iron ore even within the country.mail logo

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