http://www.iloveindia.com/economy-of-india/steel-industry.html

http://www.iloveindia.com/economy-of-india/steel-industry.html

Steel Industry in India

The origin of the modern Indian steel industry can be traced back to 1953 when a contract for the construction of an integrated steelworks in Rourkela, Orissa was signed between the Indian government and the German companies Fried Krupp und Demag AG. The initial plan was an annual capacity of 500,000 tonnes, but this was subsequently raised to 1 million tonnes. The capacity of Rourkela Steel Plant (RSP), which belongs to the SAIL (Steel Authority of India Ltd.) group, is presently about 2 million tonnes. At a very early stage the former USSR and a British consortium also showed an interest in establishing a modern steel industry in India. This resulted in the Soviet-aided building of a steel mill with a capacity of 1 million tonnes in Bhilai and the British-backed construction in Durgapur of a foundry which also has a million tonne capacity.

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  Although India has modernised its steelmaking considerably, however, nearly 6% of its crude steel is still produced using the outdated open-hearth process.
  
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  Labour productivity in India is still very low. According to an estimate crude steel output at the biggest Indian steelmaker is roughly 144 tonnes per worker per year, whereas in Western Europe the figure is around 600 tonnes.
  
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  India has to do a lot of catching in the production of stainless steel, which is primarily required by the plant and equipment, pharmaceutical and chemical industries.
  
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  Steel production in India is also hampered by power shortages.
  
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  India is deficient in raw materials required by the steel industry. Iron ore deposits are finite and there are problems in mining sufficient amounts of it. India's hard coal deposits are of low quality.
  
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  Insufficient freight capacity and transport infrastructure impediments too hamper the growth of Indian steel industry.
  

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  Low labour wage rates
  
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  Abundance of quality manpower
  
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  Mature production base
  
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  Positive stimuli from construction industry
  
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  Booming automobile industry
  

The global economic outlook has deteriorated sharply over the last two months. In its World Economic Outlook, published in early October, the International Monetary Fund (IMF) forecast global growth of 3.9 per cent in 2008, and of 3.0 per cent in 2009. The IMF has since revised its forecast for global growth downwards to 3.7 per cent for 2008, and 2.2 per cent for 2009. Many economists are now predicting the worst global recession since the 1970s. Several countries, notably the United States, the UK, the euro area and Japan are all officially in recession. More worryingly, current indications are that the recession will be deeper and the recovery longer than earlier anticipated.

2. Confidence in global credit markets continues to be low, and credit lines remain clogged. The tight and hesitant conditions in the credit markets are precipitating erosion of demand which, in turn, is feeding a recession - deflation vicious cycle. Central banks around the world are responding to the developments by aggressive and unconventional injection of liquidity, monetary easing and relaxation of collateral norms and eligibility criteria for their lending to financial institutions.

3. Contrary to earlier expectations that emerging economies will be affected only marginally, growth prospects of emerging economies have most definitely been undermined by the ongoing crisis with, of course, considerable variations across countries. The transmission to emerging economies is taking place via both trade and financial channels. Reflecting the contagion of the crisis, the IMF revised its growth forecast for emerging economies for 2009 to 5.1 per cent, down from its early October figure of 6.1 per cent.

4. The outlook for India going forward is mixed. There is evidence of economic activity slowing down. Real GDP growth has moderated in the first half of 2008/09. Industrial activity, particularly in the manufacturing and infrastructure sectors, is decelerating. The services sector too, which has been our prime growth engine for the last five years, is slowing, mainly in construction, transport and communication, trade, hotels and restaurants sub-sectors. For the first time in seven years, exports have declined in absolute terms in October. Recent data indicate that the demand for bank credit is slackening despite comfortable liquidity. Higher input costs and dampened demand have dented corporate margins while the uncertainty surrounding the crisis has affected business confidence.

5. On the positive side, headline inflation, as measured by the wholesale price index, has fallen sharply, and the decline has been sustained for the past four weeks, pointing to a faster than expected reduction in inflation. Clearly, falling commodity prices have been the key drivers behind the disinflation; however, some contribution has also come from slowing domestic demand. The reduction in prices of petrol and diesel announced last night should further ease inflationary pressures. To be sure, consumer price inflation for the months of September and October did increase. This is possibly owing to the firm trend in food articles inflation and the higher weight of food articles in measures of consumer price inflation. Historically there has been a correlation between wholesale and consumer price inflation, and given this correlation, consumer price inflation too can be expected to soften in the months ahead.

6. In response to the evolving global and domestic developments, the Reserve Bank has taken a number of measures since mid-September 2008.  The aim of these measures was to augment domestic and forex liquidity and to enable banks to continue to lend for productive purpose while maintaining credit quality so as to sustain the growth momentum. 

7. Measures aimed at expanding rupee liquidity included significant reduction in the cash reserve ratio (CRR), reduction of the statutory liquidity ratio (SLR), a special repo window under the liquidity adjustment facility (LAF) for banks for on lending to non-banking financial companies (NBFCs), housing finance companies (HFCs) and mutual funds (MFs), and a special refinance facility which banks can access without any collateral. The Reserve Bank is also unwinding the Market Stabilization Scheme (MSS) securities roughly synchronised with the Government borrowing programme in order to manage liquidity.

8. Measures aimed at managing forex liquidity include upward adjustment of the interest rate ceilings on the foreign currency non-resident (banks) [FCNR(B)] and non-resident (external) rupee account [NR(E)RA] deposits, substantially relaxing the external commercial borrowings (ECB) regime, allowing NBFCs/HFCs access to foreign borrowing and allowing corporates to buy back foreign currency convertible bonds (FCCBs) to take advantage of the discount in the prevailing depressed global markets. The Reserve Bank has also instituted a rupee-dollar swap facility for banks with overseas branches to give them comfort in managing their short-term funding requirements.

9. Measures to encourage flow of credit to sectors which are coming under pressure include extending the period of pre-shipment and post-shipment credit for exports, expanding the refinance facility for exports, contra-cyclical adjustment of provisioning norms for all types of standard assets (except in case of direct advances to agriculture and small and medium enterprises which continue to be 0.25 per cent) and risk weights on banks' exposure to certain sectors which had been increased earlier counter-cyclically, and expanding the lendable resources available to the Small Industries Development Bank of India (SIDBI) and the National Housing Bank (NHB).

10. To improve the flow of credit to productive sectors at viable costs so as to sustain the growth momentum, the Reserve Bank signaled a lowering of the interest rate structure by reducing its key policy repo rate by 150 basis points from 9.0 per cent as on October 19 to 7.5 per cent by November 3, 2008.

11. Taken together, the measures put in place since mid-September 2008 have ensured that the Indian financial markets continue to function in an orderly manner. The cumulative amount of primary liquidity made available to the financial system through these measures is over Rs.300,000 crore. This sizeable easing has ensured a comfortable liquidity position starting mid- November 2008 as evidenced by a number of indicators. Since November 18, the LAF window has largely been in the absorption mode. The weighted average call money rate has come down from a recent high of 19.7 per cent on October 10 to 6.1 per cent on December 5. The overnight money market rate has consistently remained within the LAF corridor (6.0 per cent to 7.5 per cent) since November 3. The yield on the 10 year benchmark G-Sec has declined from 8.6 per cent on September 29 to 6.8 per cent on December 5. Taking the signal from the repo rate cut, the top five public sector banks have reduced their benchmark prime lending rates (BPLR) from 13.75 – 14.00 per cent as on October 1 to 13.00 – 13.50 per cent presently.

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  It has been decided to reduce the repo rate under the LAF by 100 basis points from 7.5 per cent to 6.5 per cent and the reverse repo rate by 100 basis points from 6.0 per cent to 5.0 per cent, effective December 8, 2008.
  

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  In view of the need to enhance credit delivery to the employment- intensive micro and small enterprises (MSE) sector, it has been decided to provide refinance of an amount of Rs. 7,000 crore to the Small Industries Development Bank of India (SIDBI) under the provisions of Section 17(4H) of the Reserve Bank of India Act, 1934. This refinance will be available against: (i) the SIDBI’s incremental direct lending to MSE; and (ii) the SIDBI’s loans to banks, NBFCs and State Financial Corporations (SFCs) against the latter’s incremental loans and advances to MSEs. The incremental loans and advances will be computed with reference to outstandings as on September 30, 2008. The facility will be available at the prevailing repo rate under the LAF for a period of 90 days. During this 90-day period, the amount can be flexibly drawn and repaid. At the end of the 90-day period, the drawal can also be rolled over. This refinance facility will be available up to March 31, 2010. The utilisation of funds will be governed by the policy approved by the Board of the SIDBI.
  

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  We are working on a similar refinance facility for the National Housing Bank (NHB) of an amount of Rs 4, 000 crore. We will announce the details after consideration of the proposal by the Central Board of the Reserve Bank which is meeting next week.
  

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  On November 15, 2008, the Reserve Bank had announced that proposals by Indian companies for premature buyback of foreign currency convertible bonds (FCCBs) would be considered under the approval route, provided that the buyback is financed by the company's foreign currency resources held in India or abroad and/or out of fresh external commercial borrowings (ECBs) raised in conformity with the current norms for ECBs. Extension of FCCBs was also permitted at the current all-in cost for the relevant maturity. On a review, it has now been decided to permit Authorized Dealers Category - I banks to consider applications for premature buyback of FCCBs from their customers, where the source of funds for the buyback is: i) foreign currency resources held in India (including funds held in EEFC accounts) or abroad and/or ii) fresh ECB raised in conformity with the current ECB norms, provided there is a minimum discount of 15 per cent on the book value of the FCCB. In addition, the Reserve Bank will consider applications for buyback of FCCBs out of rupee resources provided that: (i) there is a minimum discount of 25 per cent on the book value; (ii) the amount of the buyback is limited to US $ 50 million of the redemption value per company; and (iii) the resources for buyback are drawn out of internal accruals of the company as certified by the statutory auditor.
  

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  It has been decided that loans granted by banks to Housing Finance Companies (HFCs) for on-lending to individuals for purchase/construction of dwelling units may be classified under priority sector, provided the housing loans granted by HFCs do not exceed Rs.20 lakh per dwelling unit per family. However, the eligibility under this measure will be restricted to five per cent of the individual bank’s total priority sector lending. This special dispensation will apply to loans granted by banks to HFCs up to March 31, 2010.
  

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  Under the current guidelines, exposures to commercial real estate, capital market exposures and personal/ consumer loans are not eligible for the exceptional regulatory treatment of retaining the asset classification of the restructured standard accounts in standard category. As the real estate sector is facing difficulties, it has been decided to extend exceptional/ concessional treatment to the commercial real estate exposures which are restructured up to June 30, 2009.
  

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  In the face of the current economic downturn, there are likely to be more instances of even viable units facing temporary cash flow problems. To address this problem, it has been decided, as a one time measure, that the second restructuring done by banks of exposures (other than exposures to commercial real estate, capital market exposures and personal/ consumer loans) up to June 30, 2009, will also be eligible for exceptional regulatory treatment.
  

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  In view of the difficulties faced by exporters on account of the weakening of external demand, it was decided that the interest rate on Post-shipment Rupee Export Credit up to 180 days will not exceed BPLR minus 2.5 percentage points. In respect of overdue bills, banks have been permitted to charge the rates fixed for Export Credit Not Otherwise Specified (ECNOS) for the period beyond the due date. It has now been decided that the prescribed interest rate as applicable to post shipment rupee export credit (not exceeding BPLR minus 2.5 percentage points) may also be extended to overdue bills up to 180 days from the date of advance.
  

14. The cumulative impact of the measures in today's package, together with earlier measures, should be to step up demand and arrest the growth moderation. In particular, the reduction in the repo/reverse repo rates should result in a reduction in the marginal cost of funds to banks and enable them to improve the flow of credit to productive sectors of the economy on viable terms. The liquidity support provided to the SIDBI under the refinancing arrangement is expected to alleviate the credit stress/tightening of lending conditions confronting micro and small enterprises and should revive activity in these employment-intensive drivers of growth. The facility for premature buyback of FCCBs will help Indian companies to take advantage of the current discounted rates at which their FCCBs are trading. The special dispensation for treating loans to HFCs as priority sector lending will boost lending to the housing sector. The facilities for restructuring exposures will help soften pressures being faced by the commercial real estate and other sectors in the current environment. The benefit of the concessional rate of interest available to the exporters up to 180 days irrespective of the original maturity of the export bills is intended to benefit exporters who have drawn bills for shorter maturities and are facing difficulties in realizing the bills on due dates on account of external problems.

15. Given the uncertain outlook on the global crisis, it is difficult to precisely anticipate every development. The Reserve Bank will continue to closely monitor the developments in the global and domestic financial markets and will take swift and effective action as appropriate. The Reserve Bank's policy endeavour will be to minimise the negative impact of the crisis and to ensure an orderly adjustment. In particular, we will try to maintain a comfortable liquidity position, see that the weighted average overnight money market rate is maintained within the repo-reverse repo corridor and ensure conditions conducive for flow of credit to productive sectors, particularly the stressed export and small and medium industry sectors.

16. The fundamentals of our economy continue to be strong. Once the crisis is behind us, and calm and confidence are restored in the global markets, economic activity in India will recover sharply. But a period of painful adjustment is inevitable.

1. On behalf of the Reserve Bank of India, it is my pleasure and privilege to welcome all of you international delegates to India, to this wonderful city of Hyderabad, and to this RBI-BIS Seminar on "Mitigating Spillovers and Contagion - Lessons from the Global Financial Crisis".

2. This seminar is the second successive BIS seminar to be organised by the RBI, and marks an important milestone in the intellectual collaboration between the Bank for International Settlements (BIS) and the Reserve Bank of India (RBI).  I want to thank the management of BIS for giving us the opportunity of hosting this seminar.

3. I understand the theme for this seminar, "Mitigating Spillovers and Contagion - Lessons from the Global Financial Crisis" was set several months ago.  The global financial crisis has since become front page news.  It is a tribute to the planners of this seminar, particularly Mr. Mar Gudmundsson of BIS and my predecessor as Governor of RBI, Dr.Y.V. Reddy, that in narrowing down to this topic they foresaw, ahead of many of us, the depth and sweep of the crisis.

Global Financial and Economic Outlook

4. The global financial situation continues to be uncertain and unsettled.  What started off as a sub-prime crisis in the US housing mortgage sector has turned successively into a global banking crisis, global financial crisis and now a global economic crisis.  Text book economics often cite housing as a prime example of a non-tradeable good.  It is paradoxical that a quintessentially non-tradable good as housing has triggered a crisis of global dimensions.  Such is the depth and sweep of financial globalisation.  By far, the most dominant FAQ today is whether the worst in terms of the financial sector meltdown, in particular failure of financial institutions, is behind us.  No one is really willing to take a definitive call on this, which is a sign of the increasing number of unknown unknowns.  

5. The global economic outlook has deteriorated sharply over the last two months.  Many economists are now predicting the worst global recession since the 1970s.  In its World Economic Outlook, published in early October, the IMF forecast global growth of 3.9 per cent in 2008, and of 3.0 per cent in 2009.  The IMF has since revised its forecast for global growth downwards to 3.7 per cent for 2008, and 2.2 per cent for 2009.  Notably, advanced economies, as a group, are projected to contract by 0.3 per cent in 2009.  If this gloomy outcome were indeed to come true, 2009 will mark the first year on record when emerging economies will account for more than 100 per cent of world growth.

Emerging Economies

6. Emerging economies may be the sole contributors to global growth in 2009, but they too are hit hard by the crisis.  Ironically, even as late as six months ago, it was intellectually fashionable to subscribe to the 'decoupling theory'– that even if advanced countries went into a downturn, emerging economies  will at worst be affected only marginally, and can largely steam ahead on their own.  In a rapidly globalising world, the decoupling theory was never totally persuasive; given the evidence of the last few months - capital flow reversals, sharp widening of spreads on sovereign and corporate debt, and abrupt currency depreciations - the decoupling theory has almost completely lost credibility.  Growth prospects of emerging economies have most definitively been undermined by the ongoing crisis with, of course, considerable variations across countries.  The IMF revised its growth forecast for emerging economies for 2009 from its early October figure of 6.1 per cent to 5.1 per cent.  Clearly emerging economies have a painful adjustment to make.

7. India too is having to weather the negative impact of the crisis.  Even as consumption and domestic investment continue to be the key drivers of our growth, India's integration into the world has been on the increase.  Going by the common measure of globalisation, India's two way trade (merchandise exports plus imports), as a proportion of GDP, grew from 21.2 per cent in 1997/98, the year of the Asian crisis, to 34.7 per cent in 2007/08.  If we take an expanded measure of globalisation, that is the ratio of gross current account and gross capital flows to GDP, this ratio has increased from 46.8 per cent in 1997/98 to 117.0 per cent in 2007/08.  These numbers are clear evidence of India's increasing integration into the world economy over the last 10 years.

8. No revolution in human history has been totally benign.  So, it is the case with globalisation; globalisation comes with costs and benefits.  Managing globalisation requires that we minimize the costs and maximize the benefits.  India has undoubtedly benefited from integrating into the world. By corollary, we also need to manage the downside ramifications of integrating into the world, as indeed evidenced by the current context.

9. The Indian banking system is not directly exposed to the sub-prime mortgage assets. It has very limited indirect exposure to the US mortgage market, or to the failed institutions or stressed assets.   Indian banks, both in the public sector and in the private sector, are financially sound, well capitalised and well regulated.  Even so, India is experiencing the knock-on effects of the global crisis, through the monetary, financial and real channels.  Our financial markets – equity markets, money markets, forex markets and credit markets – have all come under pressure mainly because of what we have begun to call 'the substitution effect'.  As credit lines and credit channels overseas went dry, some of the credit demand earlier met by overseas financing is shifting to the domestic credit sector, putting pressure on domestic resources.  The reversal of capital flows taking place as part of the global de-leveraging process has put pressure on our forex markets.  Together, the global credit crunch and de-leveraging were reflected at home in the sharp fluctuation in the overnight money market rates in October 2008 and the depreciation of the rupee.

10. The outlook for India, going forward, is mixed.  There is evidence of economic activity slowing down.  At the same time, headline inflation, as measured by the wholesale price index, has fallen sharply, and the decline has been sustained for the past three weeks, pointing to a faster than expected reduction in inflation.  Clearly, falling commodity prices have been the key drivers behind the disinflation; however, some contribution has also come from slowing domestic demand.  To be sure, consumer price inflation for the months of September and October did increase. This is possibly owing to the firm trend in food articles inflation and the higher weight of food articles in measures of consumer price inflation. Historically there has been a correlation between wholesale and consumer price inflation, and given this correlation, consumer price inflation too can be expected to soften in the months ahead.

11. The Reserve Bank's monetary policy stance has always been to balance growth, inflation and financial stability concerns.  When inflation surged earlier this year, the RBI had moved quickly to tighten policy.  Then again, reflecting the unfolding global situation and expectation of decline in inflation, RBI has adjusted its monetary stance over the last couple of months.  The endeavour of our monetary stance has been to manage liquidity – both domestic and forex liquidity – and to ensure that credit continues to flow for productive activities. 

12. I do not intend to go into a detailed cataloguing of all the measures we have taken, but I do want to mention that we have instituted both aggregate measures as well as sector specific measures.  Although, we remain vulnerable to global financial and economic developments, the measures taken so far have eased the liquidity and credit flow situations considerably.  I must also add that in managing the impact of the global crisis, we have been mindful that no policy initiative is totally costless. Managing this delicate balance between costs and benefits has been one of our challenges.

13. Going forward, developments in the real economy, financial markets and global commodity prices point to a period of moderation in growth with declining inflation.  The fundamentals of our economy continue to be strong.  Once calm and confidence are restored in the global markets, economic activity in India will recover sharply.  But a period of painful adjustment is inevitable. 

14. The Reserve Bank's policy endeavour will be to ensure an orderly adjustment, and to minimise the pain of its impact.  In particular, we will try to maintain a comfortable liquidity position, see that the weighted average overnight money market rate is maintained within the repo-reverse repo corridor and ensure conditions conducive for flow of credit to productive sectors, particularly the stressed export and small and medium industry sectors.  We hope that all economic agents will plan their business activities on the basis of this assurance.