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CONTROVERSY Why Did The Vajpayee Administration Melt Before The HR Steel-Makers? If it wasn't for love of India, Indian hot-rolled coils, and Indian hot-rolled coil-manufacturers, it must have been for money. By Ranju Sarkar
While the deed has been done, the run-up to it amply demonstrates how the Vajpayee Administration bent backwards to help India's hr coil-makers like Essar Steel, Ispat Industries, Lloyds Steel, Usha Ispat, TISCO, and sail. And the only question on everyone's lips is whether the Administration was merely being benevolent, protecting the local steel units from the ravages of a recession--or if it was actually favouring some of its old friends, doling them out a bonanza.
So, immediately after the floor-price was fixed, the coil-makers withdrew the discounts they had been offering their customers, indirectly hiking prices. That angered the Cold-Rolled (CR) coil-producers, who argued that the increase could not be passed on to their final consumers. For instance, the latter argued that automobile manufacturers, like Maruti Udyog and Mahindra & Mahindra, were forcing them to reduce their prices by 5 per cent. But the hr coil-producers didn't buy that, claiming that the impact on the prices of final products would be only between 0.16 per cent and 0.22 per cent. While the Steel Ministry says it agrees, it has itself conceded that the floor-price should either be reduced, or be taken into account only while calculating import duties. Either way, the Administration is tacitly admitting that it may have blundered. Based on documents and interviews, BT provides an insider's account of the notification that recoiled on a government. THE GENESIS: Why did the GOI decide to
For India's steel-manufacturers, this resulted in a double whammy: cheaper imports--which peaked at 400,000 tonnes in 1997-98 before falling to 200,000 tonnes the next year--and sluggish local demand from industries like automobiles and capital goods. However, the hr coil-manufacturers were saddled with yet another problem: overcapacity. While the demand for hr coils was 6 million tpa in 1998-99, the capacity was 9.50 million tpa. Since, by end-1999, Jindal Vijayanagar Steel (capacity: 1.60 million tpa) and Ispat Industries (1.20 million tpa) will commence full production, domestic capacity would be twice the domestic demand.
So, on September 5, 1998, a meeting was held in Union Finance Minister Yashwant Sinha's office to discuss ways in which the steel giants could be protected. Attended by bureaucrats--including Union Finance Secretary Vijay Kelkar, Joint Secretary (Steel) K.S. Rajendra Kumar, Union Revenue Secretary S.D. Mohile, Head of the Anti-Dumping Directorate (Commerce Ministry) Rathi Vinay Jha--and CEOs--like sail's Arvind Pande, Jindal Vijayanagar Steel's Sajjan Jindal, and Ispat Industries' Pramod Kumar Mittal--the meeting was crucial because the idea of a floor-price was first mooted there. Since the situation seemed grave to them, the CEOs argued that the GOI should impose a US-type price-trigger, below which imports would not allowed. This was to side-step the anti-dumping mechanism, which was both cumbersome and time-consuming. True, because, by September, 1998, the Commerce Ministry had still not completed its investigation into the complaints filed 10 months earlier. And a minimum anti-dumping margin of Rs 481 per tonne was finally slapped on 5 exporters from Russia and Ukraine only on November 11, 1998. In early October, 1998, a Working Group, headed by Union Banking Secretary C.M. Vasudev, was set up by the Finance Minister to independently "identify measures to impart growth momentum in the steel sector." After only 2 sittings, it submitted a report recommending several policy-changes--including one that would allow domestic producers to adjust to competition from imports. And then, events started moving at breathtaking speed. On November 20, 1998, Union Steel Secretary A.K. Basu wrote to Union Commerce Secretary P.P. Prabhu urging that floor-prices be fixed on 7 steel products--including hr coils. And, within 3 weeks, 2 notifications were issued by the Commerce Ministry to impose floor-prices on both prime hr coils and also seconds and defectives. THE CONTROVERSY: Was the On at least 2 counts, the Administration goofed. On the floor of the Lok Sabha on March 5, 1999, Sinha declared that the floor-prices for hr coils was based on the average prices in Europe and Japan between May and July, 1998. Predictably, that raised a storm since user-industry associations--like the Cold-Rolled Steel Manufacturers Association of India (corsma)--charged the government with having used the wrong benchmark. Explains S.C. Mathur, 43, Executive Director, corsma: "The prices in the London Metal Bulletin are only list-prices--not selling-prices." Not correct, screams the rival camp. Explains the CEO of a hr coils-manufacturing firm: "The government had to refer to some prices. Since the export prices for most producers are, generally, lower than their domestic prices, the Bulletin was the best reference." In fact, to prove that the floor-price was fair, the Steel Ministry cites the example of the US, which, in January, 1999, imposed a floor of between $288 (Rs 12,096) and $310 (Rs 13,020) on imports of hr coils from Russia. However, the two floor-prices are simply not comparable. Simply because the import duty in the US is a mere 4 per cent compared to 31.50 per cent in India. For an Indian user, the actual cost of imported hr coils would work out to $400 (Rs 16,800) per tonne compared to between $296 (Rs 12,432) and $316 (Rs 13,272) per tonne for an American user. Actually, since users are only interested in the landed cost (inclusive of duty), the GOI should have imposed a floor-price of less than $245 (Rs 10,290) per tonne, which would have allowed Indian users to pay the same price as their counterparts in the US. What nails the Administration is the fact that hr coils prices crashed from mid-1998 all over the world. In fact, Basu's letter (November 20, 1998) to the Commerce Ministry admitted that prices in the global market slumped after July, 1998--just after the end of the 3-month period which was taken into account while fixing the floor-price. Even a letter, dated February, 2, 1999, written by Rajendra Kumar to N.L. Lakhanpal, Director-General, Directorate-General Of Foreign Trade (DGFT), Commerce Ministry, states: "The international prices of these commodities (including hr coils) may have fallen after July, 1998." Why, then, did the GOI only consider prices for the period May-July, 1998, especially when the floor-prices were notified only in December, 1998? In addition, the sequence of decision-making is quite intriguing. First, the Anti-Dumping Directorate investigating the 1997 complaint felt that no injury had been caused to the local hr coil-makers. In October, 1998, the Anti-Dumping Directorate head, Rathi Vinay Jha, told BT (See No Grounds For Dumping, BT, October 22, 1998): "We did not impose an anti-dumping duty on hr coils even though there was evidence of dumping since the casual link between dumping and injury to domestic industry could not be established." Surprisingly, a month later, the same Jha signed the notification (dated November 18, 1998) which imposed anti-dumping margins on imports of hr coils from Russia and Ukraine. The only exception from the 6 exporting firms against whom complaints had been filed was the Kazakhstan-based Mittal-owned Ispat Karmat. Not surprisingly, Somnath Chatterjee, Member of Parliament, Communist Party of India (Marxist), claims that the Mittals were, probably, spared because of their political clout. Nor did it end there. Around the same time (November 20, 1998), the Steel Ministry recommended a floor-price of $302 on the import of hr coils to the Commerce Ministry. And the price was $57 (Rs 2,394) more than the $245 per tonne so far considered the fair import price by the Anti-Dumping Directorate in its November, 1998, notification. The obvious question: why was the price raised by $57 within weeks, especially when global prices were falling? According to the hr coil-manufacturers, the Anti-Dumping Directorate based its price on the 1996-97 costs of production of exporting firms while the Steel Ministry considered the mid-1998 prices. Says J.J. Irani, 67, CEO, TISCO: "There is no point in comparing the anti-dumping prices with the floor-price imposed by the government." There are other twists in the tale too. For example, the hr coil-producers contend that the Working Group, headed by Vasudev, had recommended the imposition of the floor-price. False, since the Working Group actually suggested that "one option (the only one suggested in its report) is to convert (the) ad valorem rate of (import) duty into (a) fixed rate." It was only in the case of imports of seconds and defectives that the Working Group actually recommended that imports "below a fixed price be removed from OGL (Open General Licence)." In fact, the Steel Ministry too was planning the imposition of a floor-price only on imports of seconds and defectives, as is evident from a letter (dated November 12, 1998) written by the Union Minister For Steel, Naveen Patnaik, to the Union Minister For Commerce, Ramakrishna Hegde. The letter noted: "One of the issues causing serious concern is the import of seconds and defectives of CR coils/sheets, hr coils, electrical sheets, and tinplates, which are increasing at an alarming rate over the past 3 years... I would urge you kindly to take immediate steps to remove imports of seconds and defectives below a certain floor-price from OGL." But, 8 days later, the Steel Ministry also recommended a floor-price on prime steel, including hr coils, in Basu's letter to Prabhu, which read: "I would request you kindly to consider announcement of the floor-price for both prime and seconds and defectives, in modification of our earlier proposal." The equations had changed. THE PROFITS: did the hr coil-producers Undoubtedly. Manmohan Singh, former Union finance minister, charges that the gains to local hr coil-producers will amount to Rs 5,000 crore in a year. That's an exaggeration, since Singh assumed that the entire $57 difference between the floor-price ($302 per tonne), and the average import price ($245), as calculated by the Anti-Dumping Directorate, would be loaded on to the consumers. And this, multiplied by India's annual steel consumption of 23 million tonnes, comes to Rs 5,506 crore. However, there were gains to be made. In fact, the price of hr coils went up by Rs 1,600 per tonne immediately after the floor-price was imposed on imports. That was almost equal to the hike that the domestic companies had been demanding in order to get back into the black. However, after the controversy gained steam, hr coil-prices were cut by between Rs 600 and Rs 800 per tonne. Even that translates into an annual bonanza of at least Rs 500 crore. However, the producers contend that selling-prices were increased to cut losses. Explains Sajjan Jindal, 36, CEO, Jindal Vijayanagar Steel: "The domestic prices of hr coils, at $241 per tonne, are way below the floor-price of $302." THE REPERCUSSIONS: why is the Soon after the controversy erupted--in the wake of the disclosures by Mohan Guruswamy, the former advisor to the Finance Minister--the traditional game of passing the buck started. Sinha publicly stated that the floor-price was fixed by the Steel Ministry alone. And the Commerce Ministry too distanced itself from the scandal. In its internal communiqués, its bureaucrats categorically stated that the floor-price was only decided by the Steel Ministry. One memo, dated February 26, 1999, written by the DGFT to the Commerce Secretary, stated: "It is obvious that the Ministry of Steel has not done enough homework before making the proposals (to fix the floor-price). (But) there was no alternative for us except to go by the recommendations of the Steel Ministry." And what were the bureaucrats of the Steel Ministry doing to stem the attacks against them? In the meeting held by the Commerce Ministry on January 18, 1999, Rajendra Kumar stated that "in the light of the representations made (by the users of hr coils), we will re-examine the need for revising the floor-prices for prime steel products" And on February 2, 1999, he wrote a letter to Lakhanpal justifying the imposition of the floor-price, and arguing against any reduction. But the letter also proposed an option to wriggle out of the situation. While retaining the floor-price, Rajendra Kumar said that this price "be used only for the sake of (calculating the) Customs duty, and not for banning of imports below the floor-price" The suggestion, which is akin to imposing a fixed rate of duty on the import of hr coils, demolished the justification for fixing the floor-price in the first place. Patnaik, in fact, went a step forward by openly saying that a new floor-price could be fixed based on the lower international prices between July and December, 1998--again, an admission that the earlier floor of $302 was too high. Clearly, the manner in which the floor-price on the imports of hr coils was fixed raises more than a few eyebrows. Especially since it was based on the wrong benchmarks, and ended up boosting the bottomlines of the hr coil-producers. In addition, the way the Steel Ministry is trying to backtrack on its original notification is an indication of its efforts at extricating itself from the mess it created in the first place. Finally, the Finance Ministry's efforts to force the financial institutions to bail out the very same steel companies--like Essar Steel--adds credibility to the charges of corruption being at the root of the controversy. For the scam-tainted Vajpayee Administration, defending itself against these allegations will require armour of steel. |
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It's a hot-n-cold controversy
which the Atal Bihari Vajpayee Administration is trying to sweep under the carpet even as
it rolls it up to leave. In the 4 months since the Union Commerce Ministry imposed a
floor-price of $302 (Rs 12,684) per tonne on the import of Hot-Rolled steel coils (a.k.a.
hr coils), the issue has shaken Parliament and rocked the government every other day. Now,
the 3 ministries involved--Commerce, Steel, and Finance--are back-pedalling and
buck-passing, each trying to save itself from acute embarrassment. 
The primary charge: the floor-price was
fixed at an extraordinarily high level, which provided the domestic hr coil-producers an
opportunity to hike prices and make windfall profits. Worse, the Administration decided it
on the basis of the data published in the London Metal Bulletin for the quarter May-July,
1998, when prices had peaked in the world market. Moreover, while it was necessary to
impose a floor-price only on the imports of seconds and defectives, prime quality hr coils
were quietly brought into its ambit later. 
The origins of the problem
lie in the flagging fortunes of the steel industry, both globally and locally, since 1997.
Asia's collapse created a glut as countries like South Korea turned into net exporters of
steel from being net importers due to the decline in domestic demand. That, obviously,
resulted in manic depression: the global prices (cost, insurance, and freight) of hr coils
crashed from $330-$340 (Rs 13,860-Rs 14,280) per tonne between October and December, 1997,
to $210-$240 (Rs 8,820-Rs 10,080) per tonne a year later. Worse, steel-makers in the cis
were selling their products at even-lower prices: $165-$170 (Rs 6,930-Rs 7,140) per tonne.
To compete against imports, the local hr coil
companies had to reduce their prices by 10 per cent in 1998-99. The result: losses. While
sail is projected to post net losses of Rs 1,100 crore in 1998-99, Essar Steel incurred a
loss of Rs 226 crore in the first 9 months (April-December, 1998) of the year. With a
question-mark emerging over their survival, these worried manufacturers approached the GOI
for help in March, 1998. At that time, the Commerce Ministry was already saddled with the
complaints, filed by Essar Steel and sail in November, 1997, about dumping by the CIS
countries. 