Current concerns of inflation apart, there is a larger lesson from steel minister Ram Vilas Paswan’s veiled threat on Thursday to bring steel under the Essential Commodities Act. India’s government—present or future— needs to see the big picture in the tightening of the global commodity market. By procastinating crucial policy decisions it only gets its back against the wall—and then seeks to impose controls in poll-panic responses.
Steel prices, after all, impact consumers of both industrial and consumer goods across the economy, and hence are capable of fuelling inflation considerably. And with elections around the corner, governments can ill afford it. Ironically, however, they are to blame for a good part of the problem in the first place.
For example, steel producers are citing high input costs —essentially those of coal or natural gas and iron ore—for their latest price hike. All three sectors face capacity and investment constraints because of the government’s inability to either free them of pricing-led distortions or of other controls.
So, at a time when the global prices are shooting up, with demand outstripping supply, the constraints at home hurt even more. With natural gas supplies in the country still woefully short and the allocation policy quite ambiguous, steel producers have to buy much costlier LNG. The coal sector, on the other hand, suffers from inefficiencies that have kept the private sector at bay—political patronage, near absence of rule of law in the coal-bearing states.
Iron ore is a different story, albeit one of government, too. Investments in mining have been slow due to conflicts between the resource-rich states and the Centre. Now, with the new mining policy, fresh impetus is likely. With states getting a more reasonable revenue as ad valorem royalties instead of the so far measly specific amounts, their incentive to expedite leasing of mines would be higher. Of course, issues such as states’ preference for captive mining will have to be resolved to give the mining industry a new lease of life.
All this only points to the need for allowing markets to function, so that investments grow. Stopping steel producers from riding the market is contrarion to that idea.
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