By Saurabh Chaturvedi
NEW DELHI--India's steel ministry is trying to block tax-cut
moves aimed at reviving India's falling iron-ore exports and
boosting foreign exchange inflows.
A proposal by the trade and mines ministries to cut a 30% tax on
iron-ore by as much as one-third was opposed by the steel ministry
and steelmakers who said the raw material should be kept at home to
fuel an expected three-fold growth in domestic steel output
capacity. This illustrates how policy gridlock in India damages
investor confidence and slows decision-making at a time when the
economy is struggling.
It is unclear how long it will take to resolve the infighting
over the tax in recent government consultations, and whether
worries about the trade balance and its impact on the rupee will
outweigh steel sector interests.
India's widening current account deficit has helped drive the
rupee to a new low against the U.S dollar of 61.80 on Tuesday.
The government is "under tremendous pressure" to cut the duty to
boost foreign exchange earnings, but that should not happen at the
cost of the steel industry, where companies plan to invest billions
of dollars in growth projects in coming years, said a senior steel
ministry official, who did not want to be identified.
That argument has been weakened by decisions in July by
ArcelorMittal (MT) and South Korea's Posco (005490.SE) to scrap
plans for two steel plants, some of the country's biggest foreign
investment proposals, due to deteriorating market conditions,
land-acquisition problems and uncertainty over iron-ore
supplies.
Even if the government eventually cuts export taxes, India will
struggle to boost import earnings because as much as 40% of
production capacity is shut due to mining bans imposed over alleged
illegal mining, and as ramping out output will take months or
years. A Supreme Court ruling is pending on a production ban in the
western state of Goa, which previously accounted for most of
India's iron-ore exports.
Also, global iron-ore prices have tumbled due to overcapacity,
and with major mine projects in producers like Australia still to
come on line, analysts are forecasting further falls, which will
erode India's ability to cash in on future exports.
India's was the world's third-largest iron-ore exporter three
years ago, when it shipped out around 100 million tons. But due to
the bans and a hike in export taxes to 30% from 20% in late 2011 to
increase local ore availability, these fell to 62 million tons,
then to about 18 million metric tons in the 2012-2013 financial
year which ended in March.
This amounted to a loss of potential earnings of around $17.5
billion since 2010-2011, Federation of Indian Mineral Industries
Secretary General R.K. Sharma said. The federation, India's main
mining industry body, says the export tax has cost the country
thousands of jobs.
Write to Saurabh Chaturvedi at saurabh.chaturvedi@wsj.com