This year's rise in the current account deficit, the associated impact on the economy and subsequent measures to control the deficit beg the question: apart from oil (and gold), are there other import categories that could derail us in the short-to medium term?
One can't help but think about steel as a possible candidate. On the face of it, this hypothesis is untenable. While both oil and steel are expected to witness continued demand growth, the comparison ends there. India is among the lowest-cost producers of steel and has the potential to emerge as a regional hub.
Sample this: India is home to the fifth-largest reserves of high-grade iron ore and has vast reserves of coking coal. Together, these minerals form the key inputs into steel-making, accounting for over 50% of the total cost of finished steel. With access to cheap labour and technically qualified engineers, and with over half a century of iron- and steel-making expertise in the nation, certainly India should be expected to have a vibrant, not to mention selfsufficient, steel industry.
Strong domestic demand is expected to underpin the growth of the industry in India. While the current demand growth is below the trend in recent history, given India's stage of economic development, we estimate India has the potential to consume about 250 MT of steel per annum by the middle of the next decade. However, will India be able to feed the demand through local production and build a thriving steel industry? The period between 2005 and 2008 witnessed a series of capacity announcements — over 50 million tonnes — which seemed to support the theory of India emerging as a steel hub and being self-sufficient in steel.
However, several large greenfield projects have not taken off and several others have been severely delayed. At around 96 million tonnes per annum (MTPA) of current capacity, India would have to triple its capacity by the middle of the next decade to meet the expected demand. About 60% of this additional capacity is expected to be greenfield projects that take longer to implement due to challenges related to land acquisition, clearances and financial closure. At eight to 10 years to commission a steel plant, India already takes twice as much time as China to put up these capacities. This will only go up due to the changed regulatory and business context.
In a business-as-usual scenario, India is likely to fall significantly short of the capacity required to feed its domestic demand. Assuming no dramatic fall in demand, we estimate a shortfall in capacity of 60-70 MTPA by 2025. We would have no choice but to import steel or curb the rapid development we aspire to achieve.
In an economy already strained by oil and other imports, such a magnitude of import would increase the current account deficit by about $20 billion, or anywhere between 25% and 30% of this year's expected deficit. Differently put, in such a scenario, steel imports would be second only to oil imports. If this were to happen, it would have far-reaching consequences well beyond the strain on our national finances.
Not only is a vibrant domestic steel industry important for a developing economy as it builds its infrastructure and manufacturing, it also has a significant multiplier effect in terms of jobs and economic growth.
It is estimated that for every unit increase in steel output, the economy has a multiplier effect of about five times. Up to eight million additional jobs will be created if India is able to meet its steel demand of 250 MT through domestic production.
Several large economies like the US and Germany to China and South Korea have developed a thriving steel industry during their developmental stages. India is at the crossroads of a similar opportunity and the stakes are high. The window of opportunity is limited before we are compelled to find a solution possibly less optimal.
Source:- economictimes.indiatimes.com
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