Will government intervention in commodity markets be effective?

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Over the weekend, the government changed import and export duties on iron and steel, amid high inflation. The move was aimed at easing the tight domestic steel supply and demand scenario in the country. Although India is not facing any shortage of supply, the export of surplus steel products would mean that the demand-supply scenario remains tight, leading to higher prices in the country.

Imposing export duties would make exports uncompetitive, while reducing import duties would reduce the input costs of steel companies that depend, in part, on imports.

The export duty on iron ore and concentrates was raised from about 30 percent to 50 percent, while the export duty on pellets was increased to 45 percent. Previously, there were no export duties applicable to pellets. Besides iron ore, other key inputs in the steelmaking process, such as coking coal, PCI coal and ferronickel, have had their import duties reduced to make imports cheaper. .

In addition, the government increased the export duty on finished and semi-finished steel products to 15 per cent. These products previously had no export rights. Products include stainless steel flat-rolled products over 600mm wide, stainless steel bars and rods, stainless steel angles, shapes and profiles, hot rolled, irregularly coiled, other alloy steels .

Shares of some Indian steel companies fell more than 10% after the announcement of the government’s decision, indicating that investors are unimpressed with the government’s decision. While the steel body welcomed the decision to remove import duties, it opposed the decision to impose export duties on the goods.

Steel prices had already cooled on falling demand from China and expectations of weaker growth as global central banks tried to contain inflation. The metals industry, including the steel majors, had already announced CapEx plans. But in the current scenario, the future might remain uncertain for the players.

The Engineering Export Promotion Council of India said the engineering goods sector would benefit from the move. The organization expects prices for steel products to fall by 10% for primary producers and 15% for secondary producers. The real estate sector is also expected to experience lower spending as input costs decline due to government intervention.

According to a report, TMT steel bar prices fell by around 8.77% to trade at Rs 52,000 per ton on Monday May 23 while trading at Rs 57,000 the previous day. The decline indicates that the government’s decision has been effective in reducing steel prices in India.

The government has taken similar measures to curb inflation which has surged globally. In order to reduce upward pressure on prices, the government has reduced excise duties on petrol and diesel by Rs 8 per liter and Rs 6 per liter respectively. Another grant of Rs 200 for beneficiaries of Pradhan Mantri Ujjwala Yojna has also been announced.

The government has imposed export restrictions on agricultural products such as sugar and wheat to prevent an outflow of these products from the country. These measures will help keep inflation for these commodities lower in domestic markets as the supply-demand scenario improves in favor of consumers.

Additionally, businesses that have been unable to pass on cost increases to consumers will also be relieved. Some reports have suggested that similar measures would also be implemented on rice. The rise in the wholesale price index outpaced that of the consumer price index, indicating that companies are reluctant to pass cost increases on to consumers, possibly fearing lower volumes of activity.

Shares of sugar companies fell as investors feared lower profits for these companies. Given the cyclical nature of the business, these companies typically make large profits during bull commodity cycles while making losses or breaking even during bear cycles.

Unlike the much tougher measures taken to keep commodity prices in check before, the government has remained quite lenient in the current scenario. Perhaps, if the situation hardens, we could see tougher measures taken on both exports and internal movements of critical commodities.

However, the flip side of the duty reduction would be lower revenue for the government, leading to a higher budget deficit. It has been reported that the decrease in excise duty on petrol will result in an annual income of Rs 1 lakh crore in tax revenue for the government.

Similarly, the gas cylinder subsidy would reduce revenue by Rs 6,100 crore. The reduction in duties on steel inputs would also contribute to a revenue loss of around Rs 20,000 crore. The government would have to borrow to offset the decline in revenue.

The Reserve Bank of India has already said it will continue raising rates to rein in inflation which was previously seen as transitory. While the government’s efforts to reduce the cost pressure on ordinary citizens is commendable, the aid has a side effect in the form of a higher budget deficit.

The government has already planned to increase spending on infrastructure and other sectors to revive the economy – and a loss of revenue at this stage can be painful. Raising funds at higher interest rates to offset the higher deficit could also drain government finances.

Read also : Is the era of discounts over?


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