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Textile & Steel Industry: Policy, Behavior and Demographic – Are they related?

, January 15, 2015, 0 Comments

textile steel india policy behavior demographic-MarketExpress-inThis article focuses on two industries: textiles and steel, to stress on the fact that policy-makers need to take into account the behavior of consumers and producers as well as demographic characteristics of the consumers, before making any major policy decisions affecting the industries. The topicality of this article stems from the major industrial policy shifts being considered the new government in India.

In the previous article, we discussed the issue of trade policy focusing on two industries in India: textiles and auto.

First let’s have a look at the textile and apparel sector in India. Generally, it is expected that changes in fiscal structure have a direct impact on prices of commodities, which gets translated into changes in demand and hence a change in the commodity-mix. A close look at fiscal structure and consumption behaviour of textiles inIndia helps us understand the complexities involved in this economic phenomenon and the policy lessons arising from them.

Textile sector may broadly be classified as natural/conventional fibres (NF) and man-made/unconventional fibres (MMF). Decades ago, the excise and customs duties relevant for the MMF were set much higher than NF and this trend has been continuing till today, supposedly to protect the declining conventional sectors. However, the recent Indian budgets have been reducing the gap gradually. Excise duties for MMF are still quite high: 8-16%. This analysis will point out what more is needed in this direction and why.

Textile consumption contributing to about 6-7% of an average Indian’s consumption basket (calculations based on NSS 60th Round, 2005-06), by itself is vital for enhancing the economy, in addition to the fact that textile sector accounts for a major part of employment, GDP and exports of India. Of late, textile sector is becoming demand-constrained domestically, though the external constraint is far less than the MFA quota regime. Given these factors, enhancing domestic textile consumption, as a whole, is an important policy outcome.

The basic premise behind high excise duties for MMF is that without them, low prices of MMF products might destruct the NF market, owing to substitution. However, an empirical analysis using a huge reliable household-level survey data on Indian textile purchases from 1994 to 2003, proves that demand for MMF is more elastic to its own price and also that MMFs and NFs do not any more substitute each other, as seen from their negligible cross-price elasticities, which reflect the extent to which the demand of NF falls with a fall in price of MMF.

So, a fiscal-measure-induced fall in MMF prices will lead to a greater expansion in MMF demand than the one in NF prices. What this means to a policy-maker is: If you decrease the excise/customs duties for MMFs, you are not harming NFs because they are not substituted and in fact, you are facilitating an expansion of the textile consumption, which is in the interest of the entire textile industry and economy as a whole. Fortunately, this has been one step that is almost never missed by any Finance Minister of India in the Annual Budget.

Let’s now shift our gears and move to Indian steel industry. India is the seventh largest steel producer in the world, producing about 45 million metric tons of finished carbon steel. Its domestic consumption stood at over 40 million tons in 2005-06, holding sixth position in the world. Indian steel exports are mainly to the USA, EU and South East and East Asia. Indian steel production has been growing for the past 15 years at a rate of 7% per annum and is projected to grow at a faster pace. India exported over 5 million tons of steel and imported nearly the same amount.

In the meantime, various demographic changes are taking place in India. Rural population in India in 1991 is thrice that in 1901, while urban population in 1991 is nine times that in 1901. About 400 million Indians comprise the working population in 2001 as against 314 million in 1991. At the same time, number of enterprises and employment have grown more rapidly in rural areas. India has the highest youth population (Aged 15-35 years) in the world. People aged between 15 and 59, who have the potential to contribute to the economic activity, comprise around 60% of Indian population and this is likely to increase in future. Further, the middle and higher income-classes have been expanding in India in the recent years and are expected to retain the momentum, thanks to increased economic activities in the country.

The number of people living in urban areas has risen to 27.8% in 2001 from 25.7% in 1991. Urban population in India is 285 Million, which is close to the US’ total population of 300 Million people. Further, the urban sector contributes 50-60% to GDP of India. Moreover, number of towns and cities in India has increased from 3891 in 1981 to 4378 in 2001. Number of migrants from rural to urban India has grown from 229 million in 1991 to 307 million in 2001. Of course, things have moved further along this direction over the past decade till now.

All these trends point towards the fact that the country is at the threshold of a huge urbanization and consumption spree. This may lead to massive surge in steel demand along with urban construction and associated change in the lifestyle of the population. Facing such a steel demand surge, India has a recoverable reserve of 13460 million tons of iron-ore. However, reduced iron ore exports from India have grown a lot, despite fluctuations over years, necessitating a huge import of pig iron.

On the other hand, iron-ore mining leases might not be given to the new steel capacities in many Indian states. Further, tribal people need to relocated for the expansion of mining activities in the Eastern states. All these socio-economic and demographic aspects affect both supply and demand of Indian steel industry. This needs to be scrutinized further by both the industry and the government for any policy or strategic decision.