Budget 2021 expectations | Steel industry pitches for lower duty on inputs, steps to fast-track infrastructure projects

After facing weak demand in Q1 FY2021 due to the pandemic-induced lockdown, the domestic steel sector witnessed a rebound in recent months on the back of a healthy rural consumption and strong sales in the auto and white goods sectors. However, demand from the infrastructure and the construction sectors is yet to pick up appreciably. Hence, a higher budgetary allocation towards these sectors remains a key expectation, especially of the secondary steel players, which have taken longer to recover from COVID-19 than the primary steel producers and have a lion’s share in long steel production in India.

National infrastructure pipeline (NIP), which entails an investment of Rs 111 lakh crore over FY2020-2025, remains an expected key driver for the construction sector. While the state governments were projected to finance a major part of the NIP (40 percent), the pace of revenue revival post-COVID, and the recommendations on tax sharing as well as deficit levels made by the Fifteenth Finance Commission, will influence the space that the state governments have available over the medium term to finance infrastructure. Hence, the Central government and the PSUs may have to pitch in with higher spending in this period by way of higher budgetary allocation to the NIP projects. Apart from infrastructure, real estate is also a key end-use sector for long-steel products,  where a demand slowdown was witnessed even before the pandemic. Any budgetary measure that could accelerate the recovery of the real estate sector would therefore be welcomed by the steel industry. Measures announced by a few states including Maharashtra and Karnataka in this regard are encouraging for steel players.

Raw material availability is critical for the steel industry and the government has taken various steps to ensure smooth raw material availability for the steel sector such as (1) auction of several iron ore mines in Odisha in Q4 FY2020 (2) amendment in the Mines and Minerals (Development and Regulation) Act (MMDRA) in January 2020 allowing the transfer of existing forest and environment clearances of expiring mining leases to new lease holders for a period of two years (3) permission to SAIL to sell 25 percent of its captive iron ore production and 70 mt of iron ore dumps in the open market and (4) approval for commercial coal mining to private companies in June 2020. However, recent iron ore supply disruption in Odisha and the resultant spike in input costs for steel mills remain a concern. Any budgetary announcement to alleviate these concerns would be welcomed by the steel industry. In this context, given the shortage in domestic iron ore supplies, removal of the 2.5 percent import duty on heavy metal ferrous scrap could help secondary steel producers bring down the cost of input materials by increasing the sourcing of ferrous scrap over sponge iron in the steel-making process. Moreover, policy decisions to encourage more private sector participation in mineral exploration, increase rake availability, and a higher budgetary allocation to strengthen logistics infrastructure in mineral-rich belts can go a long way in addressing such concerns of the entire metals industry, including steel, in the long run. This will also be consistent with the government’s strategies as reflected in the Atmanirbhar Bharat scheme for the mining sector.

Moreover, domestic blast furnace operators suffer from the structural disadvantage of being largely dependent on imports for procuring coking coal. Till date, government policies have not been able to incentivise the setting up of adequate coal-washing capacities to partly substitute imported coking coal with up to 10-15 percent of the domestic washed coking coal. This has led to India’s 35 billion tonne of low-grade coking coal reserves being largely untapped. Any incentives in the upcoming budget for setting up of coking coal washeries could help domestic blast furnace operators to partly reduce their import dependence over the medium to long term.

Any measures in the Union Budget 2021-22 towards speedy implementation of the production-linked incentive (PLI) scheme announced in November 2020 for the speciality steel manufacturers, which entails a financial outlay of Rs 6,322 crore over a five-year period, would help reduce India’s dependence on imports of certain value-added steel products going forward. Despite a number of globally leading steel companies being present in India, some of the special grade steels are not being produced in the country currently. To supplement the efforts to substitute steel imports with domestically manufactured steel, the government could encourage the industry to set up state-of-the-art R&D facilities. These facilities can enable domestic steel companies to gain technological know-how in developing some of these specialised grades in India, thus not only substituting imports, but also supplying to the global markets.

As the world emerges out of the pandemic, the 2021 Union Budget assumes significance as it would set the foundation which can help Indian companies seize new opportunities emerging out of the post-pandemic world order. Given the structural disadvantages in the quality of our infrastructure, the government’s ability to mobilise adequate resources towards building a world-class infrastructure would be a key lever to enable India leap to a higher rate of economic growth over a sustained period. With steel accounting for around 30 percent of the overall cost of infrastructure, accelerated investments in infrastructure assets would help India come closer to its aspirational target of doubling its domestic steel capacity to 300 million tonne in the next one decade.