India's Plans To Cut Iron Ore Export Tax Hits Steel Roadblock

  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 [e-mail]