Union Budget 2021: Why customs duty cut on steel imports may not impact steelmakers

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The reduction in customs duty and waiver of anti-dumping and countervailing duties on certain products may not impact the domestic steel industry as much as it was feared.

"I don't perceive any problem," JSW Steel's Jt Managing Director and Group CFO Seshagiri Rao told Moneycontrol.

He lists two reasons. One, domestic prices, despite the recent increase, are below the international rates and thus imports from other countries may not lead to a reduction in prices.

Here is the math: If one looks at the prices in China, it is at $680 a ton. Adding freight charges and the reduced custom duty, the price goes to $758, or Rs 55,334 a ton. On the other hand, domestic prices hover around the Rs 53,000- Rs 55,000 a ton, range. In other words, unless international prices fall steeply in the coming months, there is no risk of imports hurting domestic steel players.

Chances of imports from Europe and the US are slimmer as prices here are even higher, at $800 a ton and $1,150 a ton, respectively.

Finance Minister Nirmala Sitharaman in her Budget presentation on February 1, reduced customs duty on several steel products, including primary/semi-finished products of non-alloy steel,  flat products of non-alloy and alloy-steel and long products of non-alloy, stainless and alloy steel.

In addition, the Budget also revoked anti-dumping and countervailing duties on straight length bars and rods of alloy steel, high-speed steel of non-cobalt grade flat-rolled product of steel, plated or coated with an alloy of
Aluminium or Zinc. This will be in effect till October.

The second reason why the domestic market may not be hit, according to Rao, is the imports from FTA countries. "These won't have an impact as already 60 percent of the imports are from countries such as Japan and  South Korea, with whom India has a free trade agreement," Rao said.

Tata Steel CEO and MD TV Narendran agreed. "The reduction of customs duty on steel products will have no significant impact on the steel industry as most of the steel imported into the country today comes from countries with whom we have an FTA (Free Trade Agreement) and hence they enjoy zero import duty," he said in a statement released after the Budget was presented.

Rao said the lower of customs duty on steel scrap will help MSMEs and secondary steel producers, who use the scrap as an alternative to iron ore in steel making. India imports about 6.5 million tons of steel scrap a year.

The revised duty on import of coal, to 1 percent, will have little impact as the government has also proposed to levy a cess of 1.5 percent. "Net, there will be no impact on the market. But as it is a cess, the central government won't have to share it with the states," Rao noted.

Investment in infrastructure, a plus

Prior to February 1, Rao had stressed on the need to have a growth-oriented budget that would stress on increased government spending on infrastructure to boost demand. 

The Finance Minister seemed to have heeded it. Among several initiatives for the sector, Sitharaman announced a National Bank for Financing Development (NaBFID) to help in the process of infrastructure financing in the country. As much as Rs 5 lakh crore will be lent by developmental finance institution over three years, the FM said.

"The need has been addressed," Rao said. He also gave the government a pat on its back for the road to fiscal consolidation.

"Notwithstanding that fiscal deficit is close to Rs 15 lakh crore, the net market borrowing is only Rs 9,50,000 crore,  which is lower than last year. It won't disturb the market," he said. Otherwise, increased government borrowing may have pushed up the interest rate, adding to the cost of companies. It could also have been inflationary.

At the same time, the veteran finance veteran pointed out that the government has budgeted for a 22 percent increase in the direct tax collection, much higher the growth trend in recent years. It will be important to understand how the government plans to increase its tax collection, to keep the fiscal deficit at Rs 15 lakh crore.