Steel policy for 2047 needs to shift focus — from protection to competition

The Ministry of Steel has just released the Draft National Steel Policy: Vision 2047 with several objectives. These include making Indian steel globally competitive and increasing steel exports to 45 million tonnes (Mt). These are admirable objectives, but they do need clarity on what globally competitive means.

In one sense, the industry has done well. From producing less than 5 per cent of global steel and ranking ninth in 2000, India has become the world’s second-largest steel producer at 170 Mt. Of course, we are very far behind China at 961 Mt.

The steel industry certainly looks good if competitiveness means profitability. The average profitability (EBITDA over sales) for the period 2000-25 was around 15 per cent, which is 3-4 per cent higher than the rest of Indian manufacturing. The profitability of the top three Indian steel firms is also 3-4 percentage points higher than their biggest global counterparts (2015-24). But does this profitability reflect greater efficiency or high protection? The answers to this are instructive.

One reason why profitability is high is because we keep iron-ore prices low. An export duty of 30 per cent on iron ore with more than 58 per cent iron content makes the domestic price of the ore 30-40 per cent lower than global prices. In effect, our iron-mining resources are underpaid to benefit the steel industry. This also lowers the incentive to mine, causing economic loss for mineral-rich regions.

India’s steel industry also benefits from tariff protection through a 7.5 per cent import tariff, with an 11.5 per cent safeguard duty, which makes the duty rate 18 per cent. The comparable tariff in ASEAN is between 3-4 per cent. There are also non-tariff barriers in the form of Quality Control Orders (QCOs) on 228 steel products. The Gauba Committee has reportedly recommended the removal of 122 steel products from the QCO list. However, thus far, only 59 products have been suspended.

Consequently, domestic firms sell steel (hot-rolled coil) at a 6-7 per cent premium over a high-cost country like Japan. This has a detrimental impact on downstream industries. In the construction sector, steel accounts for around 15 per cent of total project cost. In the automobile sector, steel and steel-related products constitute roughly 5 per cent of the raw material. Smaller- and medium-scale industries, which are critical for exports, also face high domestic input costs.

What would happen to the steel industry’s profitability if this policy largesse is withdrawn? The table shows the impact on profitability for the largest steel firms under two alternative scenarios.

In Alternative 1, tariffs are reduced so the price of domestic steel drops by about 6 per cent, broadly equating it with Japanese levels. The profitability of the largest private sector steel firm reduces by 25 per cent, that of the largest public sector firm drops by 50 per cent, and the fastest-growing large private firm drops by 40 per cent.

In Alternative 2, export duties on iron ore are removed, and the steel players buy all their iron-ore requirements at the global price. Here, the profitability of the largest private firm reduces to approximately 7 per cent, that of the fastest-growing private firm drops by 95 per cent, and that of the largest public-sector firm becomes negative.

It is a no-brainer that if India is to emerge as a competitive steel producer by 2047, the protection extended to the steel industry must be phased down. The industry may need to be helped but the ministry would have done well to spell out what needs to be done. It will not happen if it remains shielded by protection. Some solutions are offered below.

Reduce tariffs and non-tariff barriers: Duties should be reduced in a calibrated way over five years to the level of Southeast Asian Nations (ASEAN). We should also immediately remove the QCOs from steel products as reportedly recommended by the Gauba Committee.

Other industries such as pharmaceuticals and auto components have shown that reduction in protection does not hurt the industry. Import tariffs on pharmaceuticals and automobile parts and components dropped from around 40 per cent in 2000 to 10-15 per cent in 2023. However, the share of India’s exports of automobile parts in global exports increased from 0.2 per cent in 2003 to 1.5 per cent in 2024, and the share of pharmaceuticals increased from 0.7 per cent to 2 per cent.

The large difference in profitability between the largest private-sector firms and the largest public-sector firm also suggests that privatising some of the plants in the latter should be seriously considered. Since 2000, there have been three dominant steel players: SAIL, Tata Steel, and JSW. Interestingly, the market share of SAIL has declined from 30 per cent to 10 per cent, while that of JSW has increased from 1 per cent to 12 per cent by 2025. TATA Steel has maintained a 11-13 per cent share. Privatising will improve efficiency, governance, and fiscal outcomes without compromising strategic oversight.

Remove the export duty on iron ore: Abolish the 30 per cent export duty on high-grade iron ore to unlock value creation and increase its export revenues. This will expose domestic steelmakers to global ore prices, improving efficiency. It was the case earlier; we need to go back to that regime.

Overhaul the mining policy: Removal of export duty on iron ore will encourage exports of ore which will encourage further exploration of the resource. Unfortunately, the current mineral policy regime discourages exploration because those who find new mines have to surrender the newly discovered mines and try to get them back in a future auction, or get a share in the future auction proceeds. This is completely out of line with what successful mining nations do. It is one of the key reasons why only 10 per cent of India’s obvious geological potential has been explored so far. We should adopt the policy followed in Australia and other mineral-rich countries to accelerate new mine development and boost mining’s contribution to GDP.

The steel industry in India began with Jamsetji Tata in 1912, applying to the imperial power to set up a steel plant. This led to a sneering comment by the British official that Indians simply couldn’t set up a steel plant. Permission was given, and Tata succeeded. Would Jamsetji have asked for the mix of duties and QCOs we now have?

Ahluwalia is distinguished fellow, CSEP, and former deputy chairman of the Planning Commission. Gupta and Sachdeva are senior fellow and associate fellow respectively, CSEP. Views are personal