Ratan Tata has written to the Prime Minister, urging the government to avoid iron ore exports “at all costs”. His contention is that a country that ships limited natural resources abroad is compromising its long-term interest. Tata believes that India should focus on adding value to its mineral resources—use it to make steel domestically, in other words.
This neo-mercantilist argument has been used before in other contexts. Tata’s statement is part of a tug-of-war between mining and steel companies. And though he has written the letter as chairman of the Investment Commission of India, Tata has a direct stake in the issue since he runs a steel company. He is not a neutral observer.
Unfortunately, the finance ministry bought this argument last year and imposed export taxes on iron ore. The steel ministry is now pressing for a 15% tax on iron ore exports in the coming Budget. Industry lobby group Associated Chambers of Commerce and Industry seeks a 35% tax. Even the national trade unions have made similar demands. A tax (or blanket ban) would keep down ore prices in India and benefit domestic steel makers.
An export ban on iron ore could affect the domestic mining sector in two ways. First, some mines may have to shut since there is not enough steel making capacity right now to use the iron ore that is being mined in India. Exports are almost twice the domestic consumption. That could lead to job losses. Second, unwanted intervention in the markets for natural resources would act as a disincentive to new investments in the sector. Neither is a cost worth paying for the sake of the steel industry.
The broader economics, too, is faulty. The plea to promote value addition is a beguiling one—but mistaken. And why limit it to only iron ore? Would the steel companies agree to a ban on steel exports so that costs for downstream industries such as automobiles, consumer durables and construction are kept under control? We may as well take India back to the 1970s.
The web of international specialization and trade is based on comparative advantage. Countries do what they are good at. If China can make cheaper steel from Indian iron ore than our own companies can, then let’s import Chinese steel and reduce costs in the rest of the economy.
The premise for banning or taxing iron ore exports is wrong—both in terms of the immediate impact on output and jobs as well as the long-term impact on efficiency.
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