Chapter-7

Organizational and Regulatory Framework of Indian Steel Industry

Steel was under fairly strict regulatory framework till 1992 and the erstwhile policy was

to allocate scarce investment and infrastructure resources for optimum and planned development

of the industry and to make available this scarce industrial intermediate to the users at a

reasonable price. The basic purpose of the Industrial Policy (1948) was to manage a scarcity

driven market towards an announced objective of establishing a fair and equitable distribution of

this product and to keep it affordable as far as possible. The pre-reform steel market in India was

controlled in all relevant areas through direct and indirect way by Government. Direct

intervention took place in the form of government control over distribution of available steel

among consumers and indirect intervention took place in the form of price control and import

levies. The first Industrial Policy Resolution was adopted by Government of India in 1948

wherein steel industry was categorized as „Basic Industry‟. According to the policy government

took full control to set up integrated steel plants under public sector without disturbing the

existing plants in the private sector. Therefore, state ownership of steel plants in independent

India began in 1950s, as some integrated steel plants were established in the public sector and

few steel units in private sector.

Government of India introduced Freight Equalization Policy in 1952 to facilitate equal

growth of steel industry all over the country. But the outcome of the policy was not satisfactory.

The business houses preferred setting up steel production units closer to coastal trade hub and

markets in other parts of the country. In 1959, government formally approved setting up of

privately owned Electric Arc Furnace (EAF) based mini plants by amending the Industrial Policy

Resolution, 1956 because of shortage of steel in Indian economy. There were many problems for
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the newly set up units in respect of their capacity expansion during the controlled regime.

However they managed to produce significant amount of steel which would enable reduction of

the amount of steel import.

Joint Plant Committee (JPC) was established in 1964 by Government of India under iron

and steel control order to regulate together with government the price of different steel products.

All major steel plants and railways became members of JPC. Price of steel used to be fixed by

JPC. Besides price policy, government also wanted to ensure iron and steel availability to

consumers, according to their priority, at reasonable prices throughout the country.

Steel industry in India was passing through a bad phase during the two decades of 1960s

and 1970s because general economic slowdown adversely affected the pace of growth. The

slowdown was caused by different factors like structural deficiencies, war with China (1962) and

Pakistan (1965, 1971), and entry of a huge number of refugees from the then East Pakistan

(1971), droughts (1965-66, 1971-72), currency devaluation (1966) and first world oil crisis

(1973-74) etc. Government of India introduced dual pricing system from 1972 onwards because

of impeded growth in the steel industry. As per this policy, prices of certain steel products like

heavy structural items, flats and railway materials were set low compared to the other steel

products. But the dual pricing system did not show any improvement in the growth of Indian

steel industry.

However, the bleak situation started to change from 1991-92 when Government of India

adopted a new industrial policy. The policy included the following key factors-

1. The iron and steel industry was removed from the list of industries reserved for the public

sector, and was also exempted from the provisions of compulsory licensing under the

Industries (Development and Regulation) Act, 1951.

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2. With effect from 24.5.92, iron and steel industry was included in the list of „high priority‟

industries for automatic approval of foreign equity investment up to 51 percent. The limit

has since been increased to 100 percent.

3. Pricing and distribution of steel was deregulated from January 1992. At the same time it

was assured that small scale industries, exporters of engineering goods would get priority

for their requirements; priority was also ensured for North-Eastern Region and strategic

sectors such as Defence and Railways.

4. The import regime for iron and steel has undergone major liberalization moving

gradually from a controlled import system (import licensing, foreign exchange release,

canalization and high import tariffs) to a totally free environment of iron and steel import:

free from licensing, canalization and lowering of import duty levels. Export of iron and

steel items has also been freely allowed.

5. Duties on raw materials for production were reduced which has resulted into reduction of

capital costs and production costs of steel plants.

6. Freight equalization scheme was withdrawn in January 1992. However, with the coming

up of new steel plants in different parts of the country, iron and steel materials are freely

available in the domestic market.

7. Levy on account of Steel Development Fund was discontinued from April 1994, thereby

providing greater flexibility to main producers to respond to the market.

In the progress of industrial development the government has also provided facilities to

support mini-steel plants. These include the following:

(i) liberal import of melting scrap and sponge iron without import duty;

(ii) free diversification in all grades of carbon and alloy steels, including stainless steel,

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 (iii) installation of captive rolling units;

(iv) addition of balancing facilities like continuous casting machines, heat treatment

furnaces, etc.

After passing through the initial phase of stabilization following economic reforms and

liberalization, the steel industry experienced and growth of 22 percent and 14 percent during

1994-95 and 1995-96, respectively (Mazumdar and Ghosal 2003,pg-65). Indian steel industry

faced a very critical situation since 1997 to 2001 because of severe slowdown in the Asian

economy which led to demand-supply mismatch with potential production capacity being much

higher than demand. Prices of a few types of steel products touched a 20-year low and most of

the Indian steel producers suffered heavy loss. New capacities became surplus and uneconomical

(Joshi 2006, pg-2). However, the new industrial policy gave a fresh boost to the industry and

performance of the industry improved with liberalized policy. The following table is presented to

elucidate the point:

Table: - 153 Growth of Indian Steel Sector after Liberalization compared to Pre-Liberalized
Regime (in percent)

Time period CAGR of CAGR of CAGR CAGR

Production Apparent of of
Consumption Import Export
Overall time period 7.3 7.4 10.1 5.8
(1975-76 to 2010-11)
Pre-Liberalized 5.8 6.4 9.4 -1.99
Regime (1975-76 to
1991-92)
Post-Liberalized 8.1 8.3 10.3 9.1
Regime (1991-92 to
2010-11)

The above table clearly indicates that the performance of Indian steel industry has

improved in the post liberalized regime compared to the pre-liberalized era. The Indian steel
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industry, with a production of about 1 million tonne at the time of independence, has come a

long way to reach the production of about 68.62 million tonnes in 2010-11. Moreover, the steel

industry evinces promising future growth, as major players in the industry have announced their

plans for significant investments in capacity expansion. Impressive development of Indian steel

industry keeping in pace with the global steel industry has also induced the government to come

up with National Steel Policy 2005. Drafted with the aim of establishing a road map and

framework for the development of the steel industry, the National Steel Policy, 2005 (NSP 2005)

was announced in November 2005. The salient features of the policy are as follows;

1. A proposed broad policy road map for the Indian steel industry taking into account issues

linked to sectoral reform, restructuring and globalization.

2. A long term goal for modern and efficient steel industry of world standards that can cater to

diversified steel demand. In order to achieve global competitiveness not only in terms of cost,

quality and product mix but also in respect of global benchmarks of efficiency and

productivity.

3. The goal of adoption of a multi-pronged strategy to move towards the above long-term

policy objective (as stated above).

For this, the strategy, on the demand side, was to create incremental demand through

promotional efforts, creation of awareness and strengthening the delivery chain, particularly in

rural areas. As regards the supply side, the strategy was to facilitate creation of additional

capacity, removal of procedural and policy bottlenecks in the availability of inputs such as iron

ore and coal, higher investments in R&D and creation of infrastructure such as roads, railways

and ports.

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4. The NSP acknowledged the low per capita consumption levels of steel in the country,

especially in the rural areas and the need to boost steel consumption to improve quality of life

and help in meeting the growing aspirations of masses.

5. It also proposed support for developing risk-hedging instruments like futures and derivatives

to contain price volatility in the steel market.

6. It proposed strengthening of the existing training and research facilities available to the

domestic steel industry so as to provide suitable training programs especially for the

secondary small-scale units and also to collect and analyze data on important parameters of

the industry.

7. The policy emphasized aggressive R&D efforts to create manufacturing capability for special

types of steel, substitute coking coal, use iron ore fines, develop new products suited to rural

needs, enhance material and energy efficiency, utilize waste, and arrest environmental

degradation.

8. It acknowledged the important role played by the secondary steel sector in providing

employment, meeting local demand of steel in rural and semi-urban areas, and meeting the

country‟s demand for some special products, and sought to endeavor to provide the necessary

feedstock to these units at reasonable prices from major plants through the existing

mechanism of State Small Industries Corporations.

9. The integration of the Indian steel industry with the global economy requires that it should be

protected from unfair trade practices, which become common especially during periods of

downturn. The policy, though focused on the domestic sector, also envisaged a steel industry

growing faster than domestic consumption, which will enable export opportunities.

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 The National Steel Policy, 2005 laid down the long term Vision of Growth for the Indian

steel industry, which is on the threshold of undergoing a major change, in terms of number,

production, capacity and technology, among others. The industry experienced a remarkable

progress in 2005-06 and 2006-07. During that period many major changes came into the path of

the industry. Inter-firm competition increased because of better performance of the existing firms

in all the fields of competence and the resultant surge in competition for market share. Tata Steel

acquired European steel giant, Anglo-Dutch Company Corus, to strengthen its position in the

European market. Furthermore, due to expectant prospects of the industry in the near future,

newer secondary producers entered the market making competition even more intense down the

line. India has achieved the rank of being the fifth largest producer of crude steel in the world in

2010-11, besides being the world's largest sponge iron producer. In such an environment, JPC,

accredited with the ISO 9001: 2000 certification for its data/ information services, has been

pursuing a charter of jobs, keeping in mind the information needs of a rapidly changing industry.

The focus of the policy would therefore be to achieve global competitiveness not only in terms of

cost, quality and product- mix but also in terms of global benchmarks of efficiency and

productivity. This will require indigenous production of over 100 million tonnes per annum by

2019-20 vis-à-Vis the 2010-11 level of 68.62 million tonnes. This implies a compounded annual

growth of 5.4 percent per annum. In case of foreign trade, India is still a net importer of steel.

The import of steel has to reach 6 million tonnes in 2019-20 but in 2010-11 total import stood at

6.66 million tonnes implying negative compound annual growth rate of (1.1) percent. The target

export is 26 million tonnes in 2019-20 from the level of 3.64 million tonnes in 2010-11

projecting compound annual growth rate of 24.4 percent. Therefore, to accomplish the strategic

goal Indian steel industry has to improve its performance in the area of production, consumption

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and foreign trade. Consumption of steel can be defined as production plus imports minus exports

and adjustment of stock. The following Table-154 shows the figures and the projected

compounded annual growth rates for production, consumption, imports and exports for 2019-20

(projected on the basis of respective figures for 2010-11 and 2019-20).

Table- 154 Production, Consumption, Imports and Exports

Time period Production Apparent Import Export

Consumption
2019-20 110 90 6 26
2010-11 68.62 66.42 6.6 3.64
Projected CAGR 5.4 3.4 -1.1 24.4

Table- 155 Overview of Policies Regarding the Iron and Steel Industry of India (1948-2010)

Period Policy Key Factors

1948 Industrial Policy Steel industry was categorized as „Basic Industry‟
Resolution and Government took full control to set up
integrated steel plants under public sector.
1952 Freight Equalization To ensure balanced regional industrial growth.
Policy
1959 Industry Policy To accelerate the rate of economic growth and to
Resolution, 1956 speed up industrialization and, in particular, to
(Amendment) develop heavy industries like iron and steel, etc.
1964 Establishment of Joint Price and distribution control determined by JPC
Planning Commission (Iron and steel control order). All major steel
(JPC) plants and railways became the member of JPC.
Exempted from price control: rerolling units,
electric arc furnace units, alloy steel producers.
1972 Dual Pricing Price and distribution control for the integrated,
large scale producers in both public and private
sectors, while the rest of the industry operated in
free market. In short, heavy structural items, flats
and railway materials (priority items) at low
prices, prices of other products allowed to
increase significantly.
1982 Review of Dual Pricing Reexamination of Bureau of Industrial costs and
prices.
1991-92 Industrial Policy Abolition of licensing requirements for capacity
Resolution creation;
Removal of steel industry from the reserved list
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 of industry for public sector;
Automatic approval of foreign equity investment
up to 50 percent (now 100 percent), elimination
of price and distribution control;
Withdrawal of quantitative restrictions on
external trade (import and export);
drastic reduction in import duties on capital
goods;
Convertibility of rupee in trade account;
Permission to mobilize resources from overseas
financial markets;
Rationalization of existing tax structure.
2005 National Steel Policy Adoption of multi-pronged strategy to achieve
long term policy goal to cater to diversified
demand,
Creation of demand through promotional efforts,
creation of awareness and strengthening the
delivery chain,
Higher investment in R&D and infrastructure
(roads, railways and ports), strengthening of
existing training and research facilities,
Substituting coking coal,
Utilization of iron ore fines,
Enhancement of material and energy efficiency,
Utilization of waste.

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