Iron, steel and gravy

Iron, steel and gravy

The new Rs300 tax imposed in the Budget on every tonne of iron ore exported out of India is a gift to India’s steel lobby.

Who are the losers? The Wall Street Journal said on Wednesday that the effect of this tax is being felt in China, the biggest market for Indian iron ore. Spot prices of steel are expected to climb, as higher ore prices force China’s most inefficient steel plants to turn off their furnaces. This will please those who believe that “our" iron ore should not be sent to China, which exports part of the steel it makes back to India. It’s better that the ore stays at home and is used by the local steel industry.

But is it as simple as this? Higher global steel prices will either lower margins for companies that use steel or feed into inflation, if steel users can pass on higher input costs to consumers. So, the export tax will hit shareholders of companies using steel as well as consumers, including Indians.

This is mercantilist rent-seeking, pure and simple.