Shifting manufacturing base opportunity for India

Thus to have a capacity augmentation of 300MT of steel by FY31, a domestic demand level of minimum 230MT of finished steel would be required at an annual average rate of 7.9% growth during FY20 and FY31.Thus to have a capacity augmentation of 300MT of steel by FY31, a domestic demand level of minimum 230MT of finished steel would be required at an annual average rate of 7.9% growth during FY20 and FY31.

As we are grimly passing through the months of the pandemic, the holding of webinars and participating in them has become a matter of habit. One unique advantage of these webinars is the chosen themes which are varied, hugely interesting and covering much beyond the areas we have been so long familiar with. It is however, possible that some widely known topics arediscussed in a number of times or discussed as a passing reference many a times. One such area relates to National Steel Policy 2017.

The document envisages a capacity creation of 300MT of crude steel by 2030-31 and not production. Capacity creation target in NSP should have followed the target of steel demand that would emerge in the domestic market in another 13 years’ time (2017-18 to 2030-31). Anyway, the level of steel production that the country targets would depend on capacity utilisation ratio. The large steel players have been operating at more than 100% utilisation, while the average operational ratio of the SME sector stands at 55-60%. Taking together, the average capacity utilisation in 2030-31 can be assumed to be at 85% for India at a conservative level and at 90% optimistically. This gives range of CS production between 255- 270 MT. Thus if Indian steel industry aims a crude steel production level of 255MT, it would necessitate a capacity of 300MT of CS by 2030-31 as per NSP 2017. Taking the actual steel production at 109 MT in FY20, it would require the production to grow at an annual average rate of 8.0% between FY20 to FY31, which appears feasible, but for the temporary setback in the current year. At this level, the finished steel availability, assuming yield loss of 10%, stands at 229.5 MT (230MT, say) which would be available to cater to the domestic demand.This however, assumes that levels of exports and imports match each other. If, however, India becomes a net exporter which is the current trend, it would need a higher capacity utilisation level to make that much quantity of additional steel available for exports.

Thus to have a capacity augmentation of 300MT of steel by FY31, a domestic demand level of minimum 230MT of finished steel would be required at an annual average rate of 7.9% growth during FY20 and FY31. This also appears reasonable for a developing country like ours with a massive deficit in infrastructure (housing, roads, railways, ports, airports, energy, oil and gas) and manufacturing sector. Thus, the pressure of meeting the indigenous demand is going to be the single critical criterion to drive the efforts of fresh capacity creation in the country. The fund requirement of fresh capacity addition (@Rs 6000 cr/MT for greenfield) is enormous. A long-term funding source in line with infrastructure financing investment is urgently needed.

That domestic demand (not only for steel) is to be met by domestic supply and not from imports (result of global excess capacity) is the central piece of logic in Atmanirbhar Bharat policy which also talks of speedy development of Indian manufacturing sector to achieve capabilities to roll out products hitherto being imported. It is no longer assembly of the products in India by importing components. As per the comparative advantage principle of international trade, each country is to aim for producing those items where it is cost competitive (economies of scale advantage) and rarely it is found that a country is self sufficient in making available all the items in the value chain. It therefore leads to importing some critical items where another country has got relatively higher cost advantage. There is no harm in following this principle in terms of total value addition and all along the global trade has flourished on this basis.

Time has changed drastically in the last few years. Concept of free trade has hit the wall of fairness. Enhancing imports of one critical product where the country may not enjoy comparative advantage, while permissible under globalisation, has severely undermined the hidden ability of the country to increase indigenous manufacturing capability and thereby offering employment opportunities to its growing population. Political polarisation has brought in additional risk factors for continuous dependence on single import sources.

The weakness in demand for especially traditional items (including engineering goods) in advanced developed countries has made available two critical components namely, technology and investible finance. The trend to shift the manufacturing base from China by Japan, USA, South Korea, Australia, Canada, Germany is emerging as a good opportunity for countries like Thailand, Malaysia, Indonesia, Philippines and India. This is actually happening and apparent from increasing trend in FDI flows to India and comfortable FE reserve.

Technology transfer by setting up manufacturing facilities in India is the surest way of enhancing the indigenous manufacturing capability to become Atmanirbhar. To become a part of global supply chain would offer abundant opportunities to reap the benefit of economy of scale. A whole gamut of activities and these are specific to each sector and inter-ministerial coordination with much needed policy intervention by the government in terms of technology transfer, land acquisition, speedy project clearance, support in taxes and levies and above all the support of state governments would be a necessary and sufficient condition for the success of a self-reliant Bharat.

The author is Former DG, Institute of Steel Development and Growth. Views expressed are personal

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