R. Suryamurthy
India’s imposition of a 12% safeguard duty on key imported steel products, ostensibly to shield domestic manufacturers, risks backfiring by creating an uneven playing field that favours large players while squeezing the country’s crucial MSME sector, a new report suggests.
The move, detailed in a government notification dated April 21, sets trigger price levels for imports of hot-rolled coils, plates, cold-rolled coils, and coated steel. If import values fall below these thresholds – ranging from $675 to $964 per metric tonne – the duty kicks in for a 200-day period.
However, a critical analysis by the Global Trade Research Initiative (GTRI) reveals that these threshold values are set significantly above prevailing international and domestic prices. This artificially inflates the cost of imported steel, effectively erecting a price floor that allows domestic giants to potentially hike their prices without facing significant competition.
“This effectively creates a price floor, enabling domestic producers to raise prices closer to the threshold, thereby reducing the competitiveness of foreign steel and compelling buyers to turn to local suppliers,” the GTRI report states.
For instance, the safeguard threshold for hot-rolled coil is $675/MT, while international prices hover around $444-$455/MT. Similarly, cold-rolled coil faces a $824/MT threshold against international rates of $540-$585/MT.
The GTRI warns that this policy, coupled with existing stringent Quality Control Orders (QCOs), could severely harm India’s vast network of MSMEs, which contribute a significant 33% to the nation’s manufacturing output. These smaller firms often lack the bargaining power and resources of larger companies and already grapple with issues like monopolistic practices and supplier approval delays, making them more reliant on potentially expensive domestic steel.
“MSMEs already struggle with monopolistic practices, high minimum order quantities, and long delays in getting supplier approvals, making them rely heavily on expensive domestic steel,” the report notes.
Crucially, the report points out that India’s domestic production does not meet the demand for all specialised steel grades. MSMEs requiring specific imports, such as abrasion-resistant plates, could see their input costs rise by 8-10%, mirroring price hikes already witnessed from local mills anticipating reduced import competition.
Ajay Srivastava of GTRI questioned the rationale, stating, “We always forget that local production is not adequate to meet demand for specialised steel and imports are a necessity for a large number of steel types. This only helps local large steel makers to raise domestic prices, hurting GDP and exports.”
Adding to the criticism, the GTRI report questions the basis for imposing the safeguard duty, noting that the Directorate General (Trade Remedies) (DGTR) seemingly approved the measure despite government data indicating a robust 19% growth in domestic steel production and high capacity utilisation rates (83-90%). This raises concerns about whether the domestic industry genuinely faced the “injury” typically required to justify such trade protection measures under WTO rules.
While large, integrated steel producers stand to benefit from reduced import competition and potentially higher domestic prices, the impact on MSMEs appears more precarious. While the government suggests the policy could encourage local sourcing, the immediate effect for many smaller firms reliant on specific imported grades will likely be increased costs and potential supply chain disruptions.
The exemption of most developing countries (excluding China and Vietnam) and certain high-value steel products offers limited relief, primarily targeting specific import sources and high-end applications rather than addressing the broader cost implications for MSMEs using standard-grade flat steel.
The government defends the move by highlighting the global oversupply of steel, particularly from China, and the increasing trend of India becoming a dumping ground for surplus steel. The safeguard duty is presented as a necessary measure to protect domestic manufacturing capacity in this challenging global environment.
However, critics argue that the chosen mechanism, with its high price thresholds, risks creating an artificial and potentially exploitative market for domestic giants at the expense of the smaller players who form the backbone of India’s manufacturing sector. The long-term consequences could include reduced competitiveness for MSME-driven downstream industries and a potential dampening effect on overall economic growth and exports.
The effectiveness of this steel shield in genuinely bolstering the entire domestic industry, rather than just its largest constituents, will be closely watched in the coming months.