Riding atop on an upward slope of prices of manufactured goods the govt. has attempted to give relief to the consuming segments by announcing duty reduction on imports. It has come not as a great surprise except the timing. It was already in the air that time was ripe for bringing down the peak rate of customs duties on non-agricultural goods. Thus it is a mini-budget and the revised rates of duties are applicable from the midnight of 8th of January 2004. Broadly the philosophy behind the duty cuts (bringing down the peak rates from 25% to 20% and withdrawal of SAD 4%) can be summarised as:-

• The govt is committed to bring down the tariff rates in conformity with the ASEAN levels over a period of time. A 5 percent reduction in each year would make the peak rates as 10% by 2006-07.

• This combined with proposed FTAs (free-trade agreements) with SAARC countries would lead to a substantial increase in the flow of goods amongst the countries in the South East Asian region. India as a largest steel producer has a big role to play.

• Kelkar's recommendations on the duty rates have not been accepted primarily on account of difficulties in implementations. The break-up of goods as raw materials, intermediates and final goods was thought to be compounded with a host of inter-commodity definitions, which lack simple interpretation. Thus Cold Rolled Coils have been slapped a duty rate of 20%, the same as HR Coils.

• The withdrawal of SAD implies that the govt is serious on implementing the VAT regime with a much lower and uniform sales tax all over the country possibly within two years.

• A reduction of excise duty from 16% to 8% on some specific goods indicates that govt. is seized with the problem of cascading impact of internal duties and levies on the prices of the final goods which has, over a period of time, led to the use of alternate poor substitutes and also massive loss of revenue due to misreporting. Kelkar report also supports this logic. However, use-based exemptions on excise are still not favoured.

• A duty cut would automatically result in reduction of DEPB rates for exports and may prompt the manufacturers to look more for the domestic market, now that the price realisation appears attractive.

To find out the quantitative impact of the duty cuts on a few major steel import categories, the following examples may be considered.

Thus for an importer (full duty paid) there is an advantage of approximately Rs.2000-2500/- per tonne on an average after the duty revision. As a major part of the import of HR Coils takes place through duty free Advance Licence route, there is no difference in cost of imports in post 8th scenario. At the current level of comparison, the revised landed cost of imports in flat products is lower than the ruling domestic prices. However, the rising trend in international prices of flat products may not sustain the differential too long. On the other hand, the revised landed cost of imports of Billets is still higher than ruling domestic prices. Taking together these two facts, it is apparent that the upward pressure on the domestic prices, particularly of the flat products, would ease in the coming period.

The most significant implication for the duty cut relates to DEPB rates. These are slated to come down by an average 7-8 percent from the existing levels. This implies that for HR, CR, GP, the main export components from India, the DEPB rates would be settled at an average 11-13 percent, from the current levels of 19-21 percent. The Ministry of Commerce is already seized with the issue of revising the value-addition norm for exports from the current 35 percent to 50 percent. If this takes place without changing the Standard Input Output Norm for the flat products, further reduction of DEPB rates to a level of 8-9 percent is a distinct possibility.

There is likelihood that DGFT may announce the revision of DEPB rates by 1st February 2004. It may be quite pertinent in the next couple of days to compare the export realisation alongwith DEPB benefits with the domestic realisation. For the last few months the rising price trend in the international market with high DEPB benefits had made export option quite attractive. The question, one may look for is whether further rise in global prices would compensate the exporters for the cut in DEPB benefits and gradual exchange appreciation of the Indian rupee. Further, it must be kept in view that current FOB export prices from India were booked at least two months before and the current booking prices are likely to be higher by $20-25 per tonne.

As mentioned earlier, the upward pressure on domestic prices, albeit mitigated by the current announcement, would be sustained. There is already a downward adjustment in the supposedly high market premium for the flat categories. There is a likelihood that this trend would accentuate with every diversion of export component to the domestic market. In case that happens with a resultant dip in the domestic prices, it would only strengthen the premise that all that growth in the flat market recently observed is purely export-led. The indications are a bit contrary.

There is a rise in domestic demand emanating from infrastructure sector and higher government spending on Irrigation, water, gas and sewerage pipelines, airports and ports. Like in long products the demand for flat steel has indeed risen and would continue in the coming months. The lagged impact of a good monsoon has already reflected in gradual boom in the consumer durable segment. The feel-good factor, so emphatically talked about, has resulted in higher growth of non-food credit component from the banks. Private capital investment in plant and machinery has at last seen the light and this would never allow the drying up of domestic demand in the coming months.

Exports of steel products would continue for two reasons:-

• It would enable the domestic steel producers a higher capacity utilisation leading to a drop in the total cost of production. This would further strengthen their export competitiveness.

• It would prevent excess supply scenario in the domestic market, an unforgettable and painful memory for many of them.

Among other things the duties on Project imports have been brought down from 25 to 10 percent. The same level of duty cut has been affected for Power Transmission and Distribution Projects. These two steps, while encouraging FDI and other multilateral aids for power projects would create tough competition for the domestic power equipment manufacturers and may adversely affect steel demand from Heavy Machinery segment unless they win International Competitive Bids. The duty reduction from 25 to 15 percent for Electricity Meters may lead to global competition for the domestic electric meter manufacturers with consequent negative impact on demand for electrical steel. However in both these cases the competitiveness of the domestic capital goods manufacturers would determine the extent of adverse impact on steel demand.