Steel Sector in India is better off without PSUs

Steel is the backbone of an industrial economy. How India does well on production of steel matters, a lot. Compared to its peers like China, India is unfortunately far behind. Compared to the private sector, India’s public sector undertakings (PSUs) are far behind. India’s poor performance in steel and the poor performance of its PSUs are interlinked. For India’s steel industry to perform better, reducing the role of government can help.       

In 2022, the world crude steel production reached 1,885 million tonnes (MT). China had the largest share in production at 54% with India at just 6.6% of global production (World Steel Association, 2022). Government owned SAIL produces steel only within Indian borders. It produced 18 MT in 2022. JSW Steel produced 27.7 MT and Tata Steel produced 21.6 MT, just domestically. Both corporations have a global presence with significant levels of steel manufacturing taking place outside Indian borders.

But the worker productivity of government owned SAIL and privately owned JSW Steel and Tata Steel vary considerably. SAIL in its annual report boasted of a workforce of over 50,000 employees, while JSW Steel reported a workforce of 15,000 direct employees. This is a considerable difference that shows a large difference in worker productivity. 

On a closer examination one finds that Steel manufacturing is full of constraints that the private sector can balance better than government owned firms. The two largest  constraints are, high capital intensity of production, and high volatility.

On capital intensity, it takes an investment of roughly Rs 7,000 crore to establish a steel plant with a capacity of just one tonne (PwC). This is a huge investment that the private sector can mobilise faster and efficiently compared to PSUs that rely on state funding.

On volatility, steel demand is subject to seasonal fluctuations and is part of the cyclical industries that are highly responsive to business cycles. During an economic upswing when there is increased demand for automobiles and real estate, the steel demand also rises. When there is a downturn, like a decrease in real estate construction during the monsoon season, it can have a negative impact on steel demand. These cyclical trends often present significant challenges.

Apart from tough constraints, state run enterprises have limitations that make them worse off when compared to their private peers. There are two limitations worth highlighting.

First, lack of competition stagnates innovation and prevents technological upgrades. Private firms like Tata Steel have made significant efforts in the past two decades to gradually replace older facilities, something that state enterprises are yet to catch up on. The fact that the government extends purchase guarantees through other PSUs to procure sub-standard steel as raw materials, removes incentives to maintain quality standards further. Steel manufacturing PSUs do not invest in research and development, either. They are overly dependent on foreign technology from companies such as Mannesmann Demag, Siemens, and L&T.

Second, public officers lack accountability. The Comptroller and Auditor General (CAG) of India in its report on Central Public Sector Enterprises (CPSEs) for FY 2019 revealed significant lapses in financial reporting and internal controls, signalling a lack of accountability.

When PSUs in major sectors like steel manufacturing do badly, they impose costs on firms downstream that use steel as raw materials. Key sectors, such as real estate and automotive, are particularly reliant on steel. In India, steel accounts for about 2.5% of GDP and employs 2.5 million persons, directly or indirectly. Any stagnation within the steel industry affects the state of the overall economy and various sectors related to it.

There is a close consensus that is worth repeating here, that a big push needed to improve the steel sector is to privatise PSUs. To know why, we can look up to the insight offered by economist Friedrich Hayek. Knowledge, as he pointed out, is dispersed. Knowledge of the most efficient and cost-effective way to produce steel too, is dispersed. Bureaucratic processes hamper the proper coordination of such knowledge by preventing deep localised knowledge from rising up. PSUs operate by a simplistic centralised policy to address the many regional nitty-gritties of coordination required in steel production. Private incentives and knowledge far outweigh that of government run steel manufacturing companies.  

Privatising steel producing PSUs will not only push for increased competition, but also free up resources to offer increased roles to producers who are able to do it better than them.