The finance ministry has imposed an export duty of Rs.300 per tonne on iron-ores.The move is likely to hit the mining industry hard.Exports are likely to fall by about 30-40%.Still unsatisfied , the steel associations want it to be capped at 90 million tonnes per year, with a lowering of cap by 15% every year and eventually a complete phase-out of ore exports by 2011.
The reasons being stated are the iron-ore is limited and should be conserved for the use of domestic steel companies.They project that low-cost iron-ore will be available to the companies which will result in increased production.This will go a long way in the massive infrastructure requirements needed for the country.While this may seem to reason sufficient enough for the move , one might question the fairness as well as efficacy of the policy.
While we can envision the great benefits that the steel companies will probably get, the mining industry is being ignored.One has to understand the losses that the miners would have to burden resulting in massive unemployment - more than 100,000 people employed directly or indirectly in the industry.The bigger miners are likely to withstand these shocks but the moderate and small ones would be put out of business.The state likely to be hit hardest is Goa.In addition it is likely to affect the allied industries like transportation.Iron ore accounts for almost 80% of the total traffic in the Mormugao Port.Such indirect effects have been conveniently disregarded.
And there are doubts as to whether this is effective as well.Low-grade iron ore fines are powdery and have to be processed into pellets before they can be used by steel plants. Most of the domestic steel makers only use big, lumpy ore that do not have to be converted into pellets as they save on costs.
An excerpt from an article in Business Standard-
On an average in iron ore production, 40 per cent is lumps and 60 per cent fines. Further, for supplying calibrated iron ore to all domestic sponge and pig iron plants, lumps have to be crushed to bring them to the specified size, which generated more fines. Indian steel makers do not have sufficient processing capacity to use low and medium grade iron ore-i.e fines that constitute the bulk of exports.
What this means is that miners will end up stocking fines which the steel companies dont want.In addition,as production is discouraged, supply of lumps will be less which will increase prices.Lower margins will also mean less exploration thereby further aggravating the problem.
While moderately efficient miners will be driven out of business or suffer losses(for no fault of their own),somewhat inefficient steel producers will stay in business just because of this move.The negative impact on miners will be more than the positive impact on steel companies.Thus, we have a net loss of efficiency and production.Also one can't guarantee that Indian steel companies would use it only for domestic purposes and not export it.
In addition the policy degrades India's reputation in the export market.China, which is the largest importer of Indian iron-ore will turn to better priced sources like Australia and Brazil.China will most probably enter into long-term agreements with them which is a huge loss to Indian export.Though not exactly in retaliation, China has planned to levy duty on coke imported in large quantities by Indian steel companies.This will hurt them as much as the ore duty hurts Chinese steel makers.
Studies show that we will be depleted of iron ore even if we don't export iron - just by domestic demand.The possible shortage of ore should in fact act as a signal to the industry to search for alternatives.Price signals are specifically meant for this purpose.India's steel companies should try to be competitive with respect to foreign ones.But better performance instead of lobbying is desired.
Robbing Peter to pay Paul is a flawed policy.More so when Peter loses more than what Paul gains.
Sunday, March 25, 2007
Sunday, March 18, 2007
Money cannot teach children
This years budget saw the finance minister increase the funding towards education by 34%.And although it it works out to just under 4 % of GDP , the increased focus is a welcome step.But does increased spending always give results?China has a literacy rate of 91% even when it spends 2.87% of its GDP on education as compared to India's literacy of 59.5%.
As a result of education programs during the 8th five year plan, by the end of 2000, 94% of India's rural population had primary schools within one km and 84% had upper primary schools within 3 km.So the main problem that plagues the primary education system is not accessibility.The major reason , which has been well pointed out by the government itself, is the high drop-out rate.Only 47 out of 100 children enrolled in class I reach class VIII.And this drop out rate increases with the level of education.So the increased enrollment in primary schools does not translate into increased educated population.It also negates the impact of the spending on secondary education as those benefits could have been available to a larger number of students.
The recent budget proposed a scholarship scheme to stem the drop-out rates and help students who leave school due to financial burdens.There is a possibility that most parents of children who get these scholarships may opt for private schools.And that brings us to the second problem - that of quality.Leave alone scholarship winning students- even some of poorer students have started opting for low-budget private schools.In fact, more than 80% of government-school teachers send their own children to a private school.Naveen Mandava points this 'Unknown Education Revolution' in his post.The government had come up with the Sarva Shikshan Abhiyan to universalise education.The signs of lack of accountability and transparency inherent in most government schemes are already showing with its underperformance.Add to it the fact that there has been diversion of funds and financial irregularities in some states and it presents a sad story.The result of poor quality is that majority of students who pass out cannot spell even basic words and do standard math.This results in degraded performance in secondary education.In contrast students from even sub-standard private schools do well.
Another problem with primary education is teacher absenteeism.To offset it the budget promises that 2 lakh more teachers will be employed.A necessary supplement to this should be strict action against irregular teachers.Swaminathan Aiyar points out in this excellent article how teacher unionism and their political clout affects the education system.He rightly points out that teacher salaries eat up a substantial portion(almost 90%) of the allocation (quite contrary to higher education) leaving little for anything else.The other day , CNN-IBN showed the dismal state of a government school in Bihar- a one room school with 5 classes simultaneously running with a drain and a handpump competing for space.The school system needs a massive boost as far as infrastructure is needed and its high time that the primary school system is de-regulated and private participation allowed along with increased accountability on the part of government.
Primary education forms the base for future development.Its necessary to upgrade it if India wants to improve its pathetic Human Development Index(ranked 127th).
A weak foundation is a disaster waiting to happen.
As a result of education programs during the 8th five year plan, by the end of 2000, 94% of India's rural population had primary schools within one km and 84% had upper primary schools within 3 km.So the main problem that plagues the primary education system is not accessibility.The major reason , which has been well pointed out by the government itself, is the high drop-out rate.Only 47 out of 100 children enrolled in class I reach class VIII.And this drop out rate increases with the level of education.So the increased enrollment in primary schools does not translate into increased educated population.It also negates the impact of the spending on secondary education as those benefits could have been available to a larger number of students.
The recent budget proposed a scholarship scheme to stem the drop-out rates and help students who leave school due to financial burdens.There is a possibility that most parents of children who get these scholarships may opt for private schools.And that brings us to the second problem - that of quality.Leave alone scholarship winning students- even some of poorer students have started opting for low-budget private schools.In fact, more than 80% of government-school teachers send their own children to a private school.Naveen Mandava points this 'Unknown Education Revolution' in his post.The government had come up with the Sarva Shikshan Abhiyan to universalise education.The signs of lack of accountability and transparency inherent in most government schemes are already showing with its underperformance.Add to it the fact that there has been diversion of funds and financial irregularities in some states and it presents a sad story.The result of poor quality is that majority of students who pass out cannot spell even basic words and do standard math.This results in degraded performance in secondary education.In contrast students from even sub-standard private schools do well.
Another problem with primary education is teacher absenteeism.To offset it the budget promises that 2 lakh more teachers will be employed.A necessary supplement to this should be strict action against irregular teachers.Swaminathan Aiyar points out in this excellent article how teacher unionism and their political clout affects the education system.He rightly points out that teacher salaries eat up a substantial portion(almost 90%) of the allocation (quite contrary to higher education) leaving little for anything else.The other day , CNN-IBN showed the dismal state of a government school in Bihar- a one room school with 5 classes simultaneously running with a drain and a handpump competing for space.The school system needs a massive boost as far as infrastructure is needed and its high time that the primary school system is de-regulated and private participation allowed along with increased accountability on the part of government.
Primary education forms the base for future development.Its necessary to upgrade it if India wants to improve its pathetic Human Development Index(ranked 127th).
A weak foundation is a disaster waiting to happen.
Thursday, March 8, 2007
Stupidity + Power = Disaster
If there is one thing that prevents India from fully utlising its potential - it is the crumbling infrastructure.Poor infrastructure often imposes additional costs on the industries and areas with weak infrastructure often get neglected.India needs a massive investment in this sector if it has to sustain a growth rate of 8-9%.And already we have embarked upon ambitious projects like the Golden Quadrilateral,the metros etc.
In such a situation of high demand it is but natural that cement prices will climb up.The duties that are imposed on the raw materials add to the costs.It is very much expected that high prices and profits will help them increase future production and stabilise prices.But the government couldnt wait.The budget introduced a ludicrous differential duty on cement bags with a base price of Rs.190.This when it was selling above Rs.200 for months.
A senior official of a leading cement manufacturer said the present prevailing price of the commodity is around Rs 210 to Rs 230 per bag depending on the place. Like in Mumbai it is quoting at Rs 230 per bag.
At Rs 600 per tonne, the excise duty per bag of 50 kg comes out to be Rs 30 per bag. Earlier, the duty was Rs 400 per tonne or Rs 20 per bag. Therefore, in the Budget, the duty per bag has increased by Rs 10.
The official argued that to avail the duty at the reduced rate of Rs 350 per tonne or Rs 17.50 per bag, the manufacturers will have to bring down the price to Rs 190. This means, they will have to reduce the price by Rs 20 to Rs 40.
So he added that even if they absorb the entire increased duty of Rs 30 per bag, his income will be Rs 180 to Rs 200 per bag.
But, if he brings down the price to Rs 190 per bag, his income will be only Rs 172.50 per bag.
Therefore, he said the industry is better off to sell it even at the current prevailing prices. But as the demand for the commodity is hitting the roof, the industry has decided to increase the price.
Thus the incentive to earn by cutting prices was less than the profit that they were already making.The ministry managed to coerce steel manufacturers from raising prices.It is trying to arm-twist the cement manufacturers similarly.It has threatened to ban exports to "stabilise" prices.Forcible control might bring the prices down but it will cause serious side effects in terms of discouraging production.
In fact cement has been one of the better performing sectors this quarter.A healthy cement industry is essential for adequate supplies for infrastructure projects.Some adverse reactions with regards to this matter are already being seen with builders threatening to strike work unless cement prices are brought down or government pays the increase in the price.Whether this is some kind of 'blackmailing' by the builders or not it may surely cause delays and losses in such projects.And what with the real estate prices already towering- it has got one more ingredient. So in trying to reduce inflation the government has aggravated it and possibly burdened the infrastructure crisis.
If only the government had more brains and less brawn.
In such a situation of high demand it is but natural that cement prices will climb up.The duties that are imposed on the raw materials add to the costs.It is very much expected that high prices and profits will help them increase future production and stabilise prices.But the government couldnt wait.The budget introduced a ludicrous differential duty on cement bags with a base price of Rs.190.This when it was selling above Rs.200 for months.
A senior official of a leading cement manufacturer said the present prevailing price of the commodity is around Rs 210 to Rs 230 per bag depending on the place. Like in Mumbai it is quoting at Rs 230 per bag.
At Rs 600 per tonne, the excise duty per bag of 50 kg comes out to be Rs 30 per bag. Earlier, the duty was Rs 400 per tonne or Rs 20 per bag. Therefore, in the Budget, the duty per bag has increased by Rs 10.
The official argued that to avail the duty at the reduced rate of Rs 350 per tonne or Rs 17.50 per bag, the manufacturers will have to bring down the price to Rs 190. This means, they will have to reduce the price by Rs 20 to Rs 40.
So he added that even if they absorb the entire increased duty of Rs 30 per bag, his income will be Rs 180 to Rs 200 per bag.
But, if he brings down the price to Rs 190 per bag, his income will be only Rs 172.50 per bag.
Therefore, he said the industry is better off to sell it even at the current prevailing prices. But as the demand for the commodity is hitting the roof, the industry has decided to increase the price.
Thus the incentive to earn by cutting prices was less than the profit that they were already making.The ministry managed to coerce steel manufacturers from raising prices.It is trying to arm-twist the cement manufacturers similarly.It has threatened to ban exports to "stabilise" prices.Forcible control might bring the prices down but it will cause serious side effects in terms of discouraging production.
In fact cement has been one of the better performing sectors this quarter.A healthy cement industry is essential for adequate supplies for infrastructure projects.Some adverse reactions with regards to this matter are already being seen with builders threatening to strike work unless cement prices are brought down or government pays the increase in the price.Whether this is some kind of 'blackmailing' by the builders or not it may surely cause delays and losses in such projects.And what with the real estate prices already towering- it has got one more ingredient. So in trying to reduce inflation the government has aggravated it and possibly burdened the infrastructure crisis.
If only the government had more brains and less brawn.
Thursday, March 1, 2007
The Tiger meows !!!
The build-up had started- the World Economic Forum at Davos , the mergers and acquisitions ,the improved rating by S&P,the India Poised campaign,the conferences and debates on business channels - everyone started taking notice.Continued development and growth had finally started to seem like reality.And the budget - scrutinized carefully as ever - was meant to boost it further.
Sadly it proved to be an anti-climax.Politics had more of a part to play in the budget than desired.The same finance minister who gave a dream budget a decade ago is now wary of anti-reform sentiment echoed not only by the Left but also from within the party.That they lost the elections in Punjab- mainly due to inability to control price rise- was on the back of the mind.And so came the aam-aadmi budget.
Increased focus on agriculture is a good initiative, however the way it is implemented is doubtful.Increasing fertilizer subsidies hardly proves to be beneficial to the farmers as most of it is cornered by fertilizer firms-most of which are in the public sector.Another anti-inflationary step taken is to ban futures trading in wheat and rice.Banning forwards trading has been much argued as regards to its impact over price rise.It not only has a negligible effect on overall prices but may even stabilise future prices.
The increased allocation to education and health indicates the social nature of the budget and is welcome.However there is a fear that most of the higher education spending will be directed towards quota implementation leaving little for anything else.There was hope that private funding boost would be given to primary education - it remained only a hope.Instead it is levied through a cess indirectly whose efficacy is questionable.
With a view of forthcoming elections in mind, the various 'yojnas' and employment 'schemes' also attracted increased spending.The jury is still out on whether these indeed provide employment and whether its employment that we actually need to focus on.Ironically, corporate sector- which also provides employment- will have to deal with taxes on ESOPs and increased dividend distribution tax.The IT industry- largest employer in the organized private sector - has been now burdened with MAT.
The Finance Minister chose to take the oft traveled route - most probably due to political compulsions.He did say that reform polices would continue outside of the budget.Lets hope he fulfills that promise.It doesn't seem like a budget of a country that has witnessed astonishing growth in the last few years.But then again- its India.
My friend's pet cat got an extra bowl of cat-food today.At least someones happy with the budget!
Sadly it proved to be an anti-climax.Politics had more of a part to play in the budget than desired.The same finance minister who gave a dream budget a decade ago is now wary of anti-reform sentiment echoed not only by the Left but also from within the party.That they lost the elections in Punjab- mainly due to inability to control price rise- was on the back of the mind.And so came the aam-aadmi budget.
Increased focus on agriculture is a good initiative, however the way it is implemented is doubtful.Increasing fertilizer subsidies hardly proves to be beneficial to the farmers as most of it is cornered by fertilizer firms-most of which are in the public sector.Another anti-inflationary step taken is to ban futures trading in wheat and rice.Banning forwards trading has been much argued as regards to its impact over price rise.It not only has a negligible effect on overall prices but may even stabilise future prices.
The increased allocation to education and health indicates the social nature of the budget and is welcome.However there is a fear that most of the higher education spending will be directed towards quota implementation leaving little for anything else.There was hope that private funding boost would be given to primary education - it remained only a hope.Instead it is levied through a cess indirectly whose efficacy is questionable.
With a view of forthcoming elections in mind, the various 'yojnas' and employment 'schemes' also attracted increased spending.The jury is still out on whether these indeed provide employment and whether its employment that we actually need to focus on.Ironically, corporate sector- which also provides employment- will have to deal with taxes on ESOPs and increased dividend distribution tax.The IT industry- largest employer in the organized private sector - has been now burdened with MAT.
The Finance Minister chose to take the oft traveled route - most probably due to political compulsions.He did say that reform polices would continue outside of the budget.Lets hope he fulfills that promise.It doesn't seem like a budget of a country that has witnessed astonishing growth in the last few years.But then again- its India.
My friend's pet cat got an extra bowl of cat-food today.At least someones happy with the budget!
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