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DEPARTMENT OF ECONOMICS COMPETITIVENESS OF THE FIRMS IN INDIAN IRON AND STEEL INDUSTRY BY L. G. Burange Shruti Yamini WORKING PAPER UDE33/2/2010 FEBRUARY 2010 DEPARTMENT OF ECONOMICS UNIVERSITY OF MUMBAI Vidyanagari, Mumbai 400 098. Documentation Sheet Title: COMPETITIVENESS OF THE FIRMS IN INDIAN IRON AND STEEL INDUSTRY Author(s): External Participation: L. G. Burange ----- Shruti Yamini WP. No.: UDE33/2/2010 Contents: T 29, F 23, R 35 Date of Issue: February 2010 No. of Copies: 100 Abstract The paper examines the performance of Indian iron and steel industry in the pre and post-liberalisation periods in terms of primary indicators such as production, consumption and foreign trade. It also studies growth in capacity utilisation, prices and employment. It is deduced that the industry has grown manifold in all the aspects, especially after the liberalisation of the economy except employment, which shows a substantial fall during post-liberalisation when competition among the Indian manufacturing firms has increased. Therefore, that leads us to investigate the competitiveness of the sample firms in the industry through composite competitiveness indices. On the basis of overall competitiveness, as well as financial and non-financial aspects of competitiveness, the industry is mostly dominated by Tata Steel Ltd., even though SAIL has a greater market share and proves to be superior with respect to non- financial indicators. JSW Steel Ltd. stands tall on the index for ‘major producers’, whereas Bhushan Power & Steel Ltd. leads the ‘other secondary producers’ index of competitiveness. Key Words: Competitiveness, Indices, Financial and Non-financial Indicators. JEL Code(s): L61 THE PERFORMANCE OF INDIAN IRON AND STEEL INDUSTRY AND COMPETITIVENESS OF THE FIRMS* L. G. Burange Shruti Yamini 1. INTRODUCTION It can apparently be stated that iron and steel has little or no competition because of its ideal combination of strength, rigidity and workability and the relatively high cost of alternative materials. Moreover, the steel industry has very strong forward and backward linkages in terms of material flow, income generation and employment creation; hence the economic prosperity and growth of an economy is very closely related to the quantity of steel consumed by it. The Indian iron and steel industry has traversed a long path since the first steel plant went into operation in 1907. Starting at 1 million tonne (m. t.) capacity at the time of independence, India has now risen to be the fifth largest crude steel producer in the world and the largest producer of sponge iron. Moreover, India is expected to become second largest producer of steel in the world by the year 2015. That the industry has started to mark its presence world-wide is also evident from the fact that its share in world production of crude steel has been constantly on a rise since the industry‟s liberalisation, at a healthy compound annual growth rate (CAGR) of 2.86 percent between the period 1991 to 2007 and at astounding 14.44 percent in the last eight years (World Steel Association 2008). As per an official estimate, the industry contributes around 2 percent of the Gross Domestic Product and its weight in the Index of Industrial Production is 6.20 percent (GOI 2008a, p.10). Further, with a share of approximately 10 percent, the industry is amongst the largest contributors to the central excise duty. * The inputs of an anonymous reviewer are greatly acknowledged. However, the authors are solely responsible for any remaining errors. 2 The first large scale production of iron and steel in India was made in 1829, when Josiah Heath ventured on his famous enterprise of mining and smelting iron ore at Salem and Porto Novo. However, due to high capital requirement the works was wound up in 1867. Therefore, the credit of finally initiating the iron and steel industry in India on a full-fledged scale goes to late Jamshedji Tata who in 1907 organised the Tata Iron and Steel Company (TISCO, now Tata Steel Ltd.). The iron and steel production increased quite rapidly following Independence as India attempted to strategically invest in this core sector to bring about national industrial transformation (D‟Costa 2006, p.8). According to the first Industrial Policy Resolution adopted in 1948, new production units of iron and steel were to be started exclusively by the government in the public sector without disturbing the existing ones in the private sector. Therefore, state ownership of steel plants in independent India began in the 1950s as some integrated steel plants were set up in the public sector and few steel units in the private sector. The first push to this industry came during the first three five year plans (1952-1970). Massive injections of investment in the public sector coupled with a protected market environment laid the foundations of a viable and competitive indigenous iron and steel industry. Unfortunately, India's steel capacity was not augmented to any appreciable extent over the next two decades as the economic slowdown adversely affected the pace of growth. Many factors contributed to the slowdown. Most important were related to structural deficiencies, such as the need for institutional changes in agriculture and the inefficiency of most of the industrial sector. Wars with China in 1962 and with Pakistan in 1965 and 1971; a flood of refugees from East Pakistan in 1971; droughts in 1965, 1966, 1971, and 1972; currency devaluation in 1966; and the first world oil crisis, in 1973-74, all jolted the economy. However, this phase was reversed from 1991-92, when the country replaced the control regime by liberalisation and deregulation in the context of the New Economic Policy. The Indian iron and steel industry was freed from the shackles of control and liberalised in July 1991, which led it to grow in several dimensions. The main policy measures taken with regard to the industry include (GOI 2007): 1. The industry was removed from the list of industries reserved for the public sector and also exempted from the provisions of compulsory licensing. 3 2. The industry was included in the list of „high priority‟ industries for automatic approval for foreign equity investment up to 51 percent. This limit has recently been increased to 100 percent. 3. Price and distribution of steel were deregulated from January 1992. 4. The trade policy was liberalised where import and export was freely allowed. 5. Levy on account of Steel Development Fund was discontinued from April 1994, thereby providing greater flexibility to main producers to respond to the market. After passing through the initial phase of stabilisation following the economic reforms and liberalisation, the steel industry experienced a growth of 22 percent and 14 percent during 1994-95 and 1995-96, respectively (Mazumder and Ghoshal 2003, p.65). The industry however experienced a difficult phase between 1997 and 2001. This was due to the severe recession in the global economy which led to demand- supply mismatch with potential production capacity being much higher than demand. Prices of a few types of steel during this period touched a 20-year low and most producers in India made heavy losses. Many firms were forced to shut down leading to loss of jobs. New capacities became uneconomical and surplus (Joshi 2006, p.2). As noted by Muthuraman (2006), the industrial recovery in India really began to be seen in 2002-03; was consolidated during 2003-04; gathered momentum during 2004- 05; and scaled new heights during 2005-06 and 2006-07. Consequently, the competition between the firms within the industry has increased. This is mainly on account of the better performance of the existing firms in all the fields of competence and the resultant surge in competition for market share. Furthermore, due to the expectant prospects of the industry in the near future, newer secondary producers have entered the market making competition even more intense down the line. The accompanying outcome is worth examining through the analysis of the current scenario of competitiveness among the firms in the industry in the following sections. The paper is organised as follows: Following the introduction, the second Section deals with the performance of the industry in terms of some key indicators. The third Section discusses the concept and measurement of competitiveness along with the methodology and the data. Section four analyses the results of the study 4 while Section five examines the competitiveness of the firms in different segments of the industry. The last Section concludes the paper. 2. PERFORMANCE OF THE INDUSTRY The performance of the industry in key indicators such as production, consumption, export, import, employment etc. has been studied by analysing their growth rates. For the purpose, compound annual growth rates (CAGR) are computed for the 32 years, from 1975-76 to 2006-07, as per the semi-log method (Appendix table 2). Besides, the CAGR is estimated for two sub-periods, i.e. pre-liberalisation period (1975-76 to 1991-92) and post-liberalisation period (1991-92 to 2006-07), using the kinked exponential growth model (Boyce 1986, Goldar and Seth 1989, Burange 2000). The main data sources used here are SAIL (2008), Joint Plant Committee (2007) and Government of India (2009). 2.1. Production The finished steel production in India has grown from a mere 1.1 m. t. in 1951 to 50.20 m. t. in 2006-07. During the first two decades of planned economic development, i.e., 1950-60 and 1960-70, the average annual growth rate of steel production exceeded 8 percent. However, this growth rate could not be sustained in the following decades due to lack of demand. During 1970-80, the growth rate in steel production came down to 5.7 percent p.a.