India's paranoid economic history: The steel story

In my earlier piece (here) on India’s paranoid economic history: The cement story , I wrote how our young, impatient voters are infuriated and mystified by stalled economic reforms. Why, they bemoan, can’t we take bigger risks, make bolder policies? Why are we so deeply suspicious of market forces? Why, to use their Twitter lingo, are we such losers? Now here is a snappy answer from the tortured evolution of India’s steel industry. Ironically, steel production began in the private sector in British-ruled India when Tisco was set up by the Tatas in Jamshedpur in 1907. But independent India aborted that incipient revolution. Unfortunately, the industrial policy resolutions of 1948 and 1956 reserved all new steel capacity for the public sector. Four plants had come up in Orissa, West Bengal and Bihar (now Jharkhand) with Soviet and German help. [caption id=“attachment_1481025” align=“alignleft” width=“380”] Tata Steel plant in Jamshedpur. AFP[/caption] In 1973, Steel Authority was set up as a public sector holding company. In 1982, administered prices were terminated and a Joint Plants’ Committee was set up to decide on prices. The freight equalisation policy ensured that steel was available at the same price across the country, to the industrial disadvantage of states that were rich in coal and iron ore. Besmirched by shortages and crises, partial sense dawned on our policy makers in 1990, when the industrial policy resolutions were diluted, although the curse of micro-management survived. Private steel mills were allowed, first of 2.5 lakh tonnes capacity each, and when that turned out to be too low, of one million tonnes capacity per year. As we saw in the cement story, for 40 long, crucifying years, it was a saga of a price snitch here, a distribution ban there, a partial relaxation followed by an equally whimsical roll-back, an astonishing pantomime of controls, controls and more controls. Mercifully, on 17 January 1992 the steel industry was decontrolled. By then, there was a 2 million tonne shortfall between steel demand and supply. The premium on some grades of steel was as much as Rs 2,500 a tonne. Import duties were in the range of 100 percent. India’s cost of production was among the highest in the world. Since the government had no money to invest, its “showpiece” Steel Authority had to tap the markets to finance its modernization. ‘Decontrol is necessary to ensure self-sufficiency – we have enough raw material,’ said the golf-playing Minister of State for Steel, Santosh Mohan Dev. ‘As there will be no more new plants in the public sector we need to attract private investors.’ Understandably, the private sector was excited. The wheel had come full circle for Tisco. ‘Decontrol will lead to greater capacity creation because more investments will flow in,’ Aditya Kashyap, a senior marketing executive at Tisco, told India Today magazine . ‘There will be modernization and competitive energy will be released.’ But Tisco had to weather one more twist of fate before it could play to its decontrolled potential. On 3 January 1992, at an extraordinary general body meeting of Tisco (later Tata Steel), a shareholder asked cheekily: Ratan Tata has been named Businessman of the Year by a leading publication, Jamshed J Irani (later managing director of the company) had been called Steelman of the Year, what award have you got Mr Russi Modi?. ‘I got Bamboo of the Year,’ was the reply. Modi was a satrap in the Tata Empire, and a powerful one at that. An affable and playful gourmand, he had excellent people skills. But while reshuffling the top deck to ensure a preferred line of succession, he had ruffled feathers by not consulting the board, and ignoring the claims of worthy colleagues. He was also said to be unhappy about Ratan Tata being named JRD’s successor to the chairmanship of Tata Sons, the Tata holding company. But he was forced to fall in line and apologise to the board. Within a few months he quit Tisco. Meanwhile, import duties were slashed to five percent, throwing Tisco to the vagaries of cut-throat international and domestic competition. India’s steel industry had no option but to restructure ruthlessly. At Tisco’s Jamshedpur facility, workers were an aristocracy who enjoyed post-retirement welfare benefits and inheritable jobs. Over the next decade it was forced to cut its workforce by half, with voluntary separation schemes. Jamshed Irani, who was managing director in 1993, recalls: ‘I was talking to a big union gathering about the need for our slimming exercise when one fellow from the back stood up and shouted, ‘All this is fine, but you have taken away the jobs of our sons.’ I shot back, ‘Don’t worry about your son’s job; worry about your own and mine, because if we don’t change this company will shut down. Then neither you nor I will have a job.’ Because of the pain it endured, Tisco has become one of the lowest cost producers of steel in the world. It ranks among the top ten companies in the globe with a capacity of 29 million tonnes. India’s own steel-making capacity is now 95 million tonnes. Another 15 million tonnes will be installed by next year (as much as the total capacity at the time of decontrol!). All of which simply begs one wistful question: what if the industry had never been controlled? In Twitter lingo, we would not have been such losers! Next: The gold story