India - Certain aspects of the Indian steel industry

RESTRICTED FILE COPY Report No. AS - 1 1 la This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION CERTAIN ASPECTS OF THE INDIAN STEEL INDUSTRY June 29, 1966 South Asia Department  CURRENCY EQUIVALENTS U.S. $1 Rs. 4. 76 until June 6, 1966 Rs. 7. 5 from June 6, 1966 Rs. 1 U. S. $0. 21 until June 6, 1966 U. S. $0. 133 from June 6, 1966 WEIGHTS Most of the tonnage given in this report are expressed in metric tons. Some of the data are also expressed in long tons but as the difference is small no attempt has been made to distinguish between the two or to convert to a uniform basis. FINANCIAL YEAR The Indian financial year begins on April 1.  TABLE OF CONTENTS Page PREFACE SUMMNARY i I. HISTORY 1 II. PLANT PERFORMANCE AND PROBLEMS ARISING 4 FROM RECENT EXPANSION III. THE CONTROL SYSTEM 11 IV. SUPPLY AND DEMAND 20 V. PLANNING FOR THE FUTURE 25 VI. CONCLUSIONS AND OUTLOOK 30 ANNEXES I. DATA ON INDIAN STEEL PLANTS (including Details on Plant Performance) II. RAW MATERIALS AND TRANSPORT III. STEEL CONTROL A. Government Directive of Feburary 29, 1964, regarding the revisions in the Control System B. History of the Retention Price IV. STEEL SUPPLY V. STEEL CONSUMPTION A. Consumption in 1960 B. Forecasts MAP  PREFACE This report is based on the findings of a mission consisting of Mr. Hans Pollan of the Bank, who made several visits to India in the period 1963-1966. Mr. George Thomas (Consu:Ltant to the Bank) also contributed to its preparation. While in India, the mission had the opportunity of visiting the country's five large-scale integrated steel works. The object of the report is to provide a perspective and an assessment of the context in which the projects of the two private Indian steel companies, which the Bank has been asked to help finance, are expected to be carried out. The report contains a review of the industry's recent expansion, the problems that arose, the effects of the steel control system, and the outlook over the remainder of the decade with particular reference to the further expansion of the Indian steel industry.  SUV24ARY i. The authorities responsible for the planning of India's economic development have been preparing a program for another major expansion of the country's steel industry to be carried out during the Fourth Five-Year Plan (April 1, 1966 - March 31, 1971) and beyond. During that period of time, two of the Bank's borrowers in India, the Indian Iron and Steel Company and the Tata Iron and Steel Company, are expected to participate in this effort through the execution of expansion and balancing works. Since some of the companies' additional facilities, which the Bank is considering for financing, would be erected in the context of a further expansion of the Indian steel industry, it would be desirable to review the present intentions in this regard. ii. The next round of expansion would follow on a major capacity build-up undertaken a few years ago and still underway at some plants. Between 1956 and 1962, India nearly quadrupled her steel-making capacity to a level of six million ingot tons. This was done by building three new government-owned plants and substantial capacity expansion in the two older private plants, previously the only steel producers of importance in India. Carrying out a capacity build-up of that order in about six years, in a country which had only limited experience in constructing and operating large steel plants, was a major accomplishment, indeed. However, the massive capacity additions also led to many costly strains, including the need to ensure a stable supply of appropriately prepared raw material, and the building up of a staff, suffi- cient in number and experienced in depth, to meet the industry's present and expanding requirements. Considerable progress has, however, been made, especially recently, in resolving these problems. The principal problems which the industry will face in the years ahead are to carry out a major expansion at a time when it has to consolidate the recent advances in its operations, and to reduce substantially its production costs. The area of raw material preparation seems to offer considerable scope for the latter. iii. The industry has also suffered from the limitation on its freedom of maneuver, stemming mainly from governmental influence over decisions which in other countries are normally within the power of steel companies, and from the steel control system in force since World War II because of chronic steel shortages. They have served as disincentives to make the industry's operations more efficient. About two years ago, the industry was given more leeway by participating, together with Government representatives, in a body that has responsibility for establishing production programs and for the setting of prices of several steel categories in which the supply position has improved. Since the supply position has become increasingly comfortable since then, except for persisting scarcities of certain flat products, direct Government controls would no longer seem necessary, except for ensuring the supply of narrowly defined high-priority requirements. There are recent signs that a competitive situation is developing in respect of sales of sections that are relatively plentiful. This will probably help most to focus the industry's attention on the quality and the cost of its output. A further impetus may come from various consumers' easier access to imported flat and special steel sections, expected as a result of the import liberalization measures which have just been announced.  - ii - iv. Indian requirements of finished steel have been growing steadily and further substantial increases are expected. Against apparent consumption of about 5.4 million tons in 1965/66, the Indian forecasts, which guided instrumentally the planners in framing a further steel expansion, put steel demand in about five years (the end of the Fourth Plan) in the range of about 12 million tons. These forecasts were based on expectations of economic growth which seem over-optimistic in light of recent performance. There is no doubt, however, that there is a need for a further expansion, especially in the capacity for flat products. v. The Government is now contemplating an expansion program with under- standably strong emphasis on flat products. It is thinking in terms of bringing the industry's capacity to over 12 million ingot tons in about five years with most of the Fourth Plan additions involving flat products. Con- sideration is also being given to starting work during the Fourth Plan on further capacity for nearly 6 million ingot tons which is hoped to become operational in the Seventies. The achievement of a capacity of over 12 million ingot tons rests on an expansion of the three Government plants, and to a lesser degree of IISCO's, and on the construction of a new public sector plant. Although a series of arrangements have yet to be made for procurement, personnel and financing, this achievement would not appear unrealistic. Output near that level could, however, only be expected in the early years of the Fifth Plan. The human factor would also seem to impose a limitation on an early successful operation of new facilities. vi. Since the existing plants are likely to have better prospects for mmeeting the additional requirements for experienced manpower and since, moreover, additional output can be obtained more quickly and with a smaller investment than through the construction of new plants, the decision to expand the present plants seems to offer the best scope for obtaining sub- stantial additional steel output by the end of the Fourth Plan. There also appears to be room for starting the construction of additional flat capacity during the Fourth Plan. However, if all the new flat capacity now being contemplated yields substantial output in the mid-Seventies, it is possible that supplies will temporarily exceed Indian requirements. This should strengthen the challenge to reduce the industry's production costs in order to make possible sustained exports in the future without the help of subsidies. vii. Better planning than in the past will be needed if the industry's expansion is to be undertaken on sound lines and at minimum cost.  I. HISTORY 1. India has five large-scale integrated steel works today with a total capacity of over six million tons of ingots per year. The plants are located in the eastern part of the country where coal and iron ore deposits principally occur. Two of the plants are privately owned and three are owned by the Indian Government. The private producers are the Tata Iron and Steel Company (TISCO) which operates a two million ingot ton plant at Jamshedpur, and the Indian Iron and Steel Company (IISCO) which has a one million ton plant at Burnpur. Hindustan Steel Limited (HSL), a government enterprise, owns and operates three one million ton plants located at Durgapur, Rourkela and Bhilai in which expansion works are underway. The plant locations are shown on the attached map. 2. TISCO was the first to produce steel on a substantial scale in India. It began producing steel in 1911, and almost until the outbreak of World War II was India's only significant steel producer. The company's initial capacity was about 100,000 tons of finished steel; successive ex- pansions raised it to about 800,000 tons by 1939. IISCO's Burnpur plant!/ began making steel only in 1939, after having produced pig iron for about twenty years, and produced at an annual rate of 250,000 tons for some years. The only other integrated plant in existence before World War II was a small plant (30,000 tons capacity) built in 1936 at Badhravati by the Mysore State Government. Besides the integrated plants, there were a number of small steel-making units with electric furnaces, foundries and re-rolling mills which sprang up in the Thirties and Forties, mainly in the hinterland of Calcutta and Bombay. 3. Prior to World War II, the Government's role in the industry was limited to being an important customer and to providing tariff protection. On the outbreak of the war, however, in order to ensure the use of the limited supplies of steel for essential purposes, the Government intro- duced controls over distribution and prices of steel. In 1941, the control system was tightened with the issuance of the Iron and Steel (Control of Distribution) Order: it authorized the Government to fix prices and to regulate the production, distribution and consumption of steel; it also established the office of the Iron and Steel Controller. Since steel con- tinued to be in short supply, the system remained in effect for over twenty years without any significant change in its aims or basic features. A dis- tinctive aspect of price control was the existence of two prices for steel --the "retention price", the amount the producers were permitted to retain from the sales proceeds, and the higher "selling price" which the consumer 1/ IISCO's Burnpur steel plant was originally owned by the Steel Corpora- tion of Bengal (SCOB). This company and IISCO were closely inter- locked through common managing agents, a profit-sharing arrangement, and physical integration of facilities. SCOB was merged into IISCO in 1952 pursuant to the Iron and Steel Company Amalgamation Act.  - 2 - paid. The difference, except for taxes, was paid into the Iron and Steel Controller's Equalisation Fund, which was used initially mainly to make possible the sale of higher priced imported steel at the lower domestic price. In March 1964, Government controls were modified significantly and the industry was given considerable responsibility in the pricing and dis- tribution of those steel categories (mainly structurals and bars) in which the supply position had become more comfortable. Direct Government con- trols have been reduced further since then. 4. In 1947, when India acquired independence, it was apparent that pent-up needs unsatisfied during the war, and the development works which the Government was proposing to carry out, would lead to a considerable growth in demand for steel. Since imported steel was expensive and diffi- cult to obtain on a regular basis in the post-war period, the Government decided that domestic production must be substantially expanded so that Indian steel needs could be met from domestic sources as far as possible. The Government's intention was to enter steel production itself in order to strengthen its influence over the pace and pattern of economic develop- ment. However, the Government was unable to begin building steel plants at that time because of the many claims on its investment resources. Since, moreover, capacity could be increased at less expense by expanding exist- ing facilities than by building entirely new plants, the provision of addi- tional capacity fell to TISCO and IISCO. The Government assisted them financially, since neither could raise the funds required for expansion from their retained earnings (limited by government-fixed retention prices) or through borrowings from financial institutions. The Government's as- sistance included advances with no fixed maturities of Rs. 100 million made to each of the companies from the Equalisation Fund. IISCO's program was intended to raise its finished steel capacity to about 700,000 tons and substantially increase its production of pig iron, partly for sale. TISCO's capacity was to be raised to 930,000 tons. Work on TISCO's program started in 1951 and on IISCO's in 1954, but well before their completion both companies were asked by the Government to expand their capacity fur- ther - TISCO to about 1.5 million tons and IISCO to about 800,000 tons of finished steel. Both expansions formed part of India's Second Five-Year Plan (1956/57-1960/61) and were assisted by IBRD loans. 5. At the same time that the Government asked the private producers to undertake their second rounds of expansion, the Government itself began to carry out its plan to build its own steel plants. In 1956 it signed contracts for the construction of three one-million ingot ton plants. Pre- paratory work at the Rourkela site had already begun in 1955. Plant con- struction at all three sites began in 1957. German credits were provided for Rourkela, U.K. credits for Durgapur and U.S.S.R. credits for Bhilai. The Government's decision to build new steel capacity of its own had its roots in pressures of demand, which built up rapidly in the mid-Fifties, and also in policies relating to industrialization which evolved after independence. These policies, as stated in the Industrial Policy Resolu- tion 1956, are as follows: "It is essential to accelerate the rate of economic growth and to speed up industrialisation and, in particular, to develop  - 3 - "heavy industries and machine-making industries, to expand the public sector, and to build up a large and growing cooperative sector. These provide the economic foundations for increasing opportunities for gainful employment and improving living standards and working conditions for the mass of the people. Equally, it is urgent to reduce disparities in income and wealth which exist today, to prevent private monopolies and the concentration of economic power in different fields in the hands of small numbers of individuals. Accordingly, the State will progressively assume a predominant and direct responsibility for setting up new industrial undertakings and for developing trans- port facilities. It will also undertake State trading on an increasing scale. At the same time as an agency for planned national development in the context of the country's expanding economy, the private sector will have the opportunity to develop and expand ..... " 6. The expansion program begun in the mid-Fifties was practically completed in 1962, about two years behind schedule. India's steel-making capacity was almost quadrupled and the range of its products broadened. Each of the two private plants has a fairly wide range of output, produc- ing both heavy and light sections and flat products. The HSL plants are more specialized; Bhilai concentrates on heavy structurals and rails; Durgapur on light structurals, merchant sections (including bars and rods) and railway materials; Rourkela, the only plant in India to use the L.D. steel-making process, is an all-flat plant with the first wide strip mill and cold rolling facilities in India. 7. In addition to the expansion of the two existing large-scale steel works and the construction of three new ones, there was a consider- able growth of the re-rolling industry, especially during the Second Plan; this development enjoyed strong government support. At the beginning of the war there were 40 re-rollers, including some in areas now included in Pakistan; there are now 191 registered units with most of the new capacity having been built up during the Second Plan. The re-rollers roll mainly merchant sections. About WO%a of the units, for the most part small family undertakings, are in the Punjab; the balance is concentrated in West Bengal, Maharashtra and Uttar Pradesh. 8. As part of the Third Five-Year Plan (1961/62-1965/66), further expansions has been undertaken at the HSL plants. Bhilai's ingot capacity is being raised to 2.5 million tons, Durgapur's to 1.6 million tons and Rourkela's to 1.8 million tons. In addition, IISCO is to begin work soon on a balancing scheme to increase its production of crude steel by 300,000 tons a year to permit greater utilization of existing rolling capacity. These programs, when completed, will give the five main producers an aggre- gate annual capacity of 9.2 million tons of ingots, or about 7 million tons of saleable steel. A construction of at least one new steel plant, and further expansion of the HSL plants, and possibly TISCO's, are planned for the Fourth Plan (1966/67-1970/71).  -h - II. PLANT PERFORMANCE AND PROBLENS ARISING FROM THE RECENT EXPANSION 9. The build-up of steel capacity under the Second Plan program is viewed with pride in India and rightly so. But plunging into steel production on a massive scale also produced many costly strains, some of them still evident. There had been little time to learn from experience and problems of advance planning, personnel and coordination of raw material supplies and transport facilities were therefore particularly difficult. A review of the principal problems which arose in connection with the recent expansion may provide a useful starting point for an evaluation of the plans for a further expansion of the industry. Responsible circles in India are quite aware of these problems and their implications for the future of the industry. 10. Plant Performance: The Government's original assumption that, as a result of the Second Plan expansion, the industry would be able to operate at close to capacity level (4.3 million tons of saleable steel) by 1960/61 proved completely unrealistic. Production did not reach that level until early in 1963, when the initial teething problems of the new plants were over- come. The break-in was particularly troublesome at Rourkela, the most sophisticated plant in India; it was less difficult at Durgapur and relatively smooth at Bhilai. There still exist considerable variations in the operating rates of the individual plants. Rourkela produced until about a year ago considerably below rated capacity, but has shown significant improvements since then. IISCO, which has previously achieved capacity output, and Durgapur now operate below that level. TISCO's output at capacity levels dates only from 1963/64. Bhilai has produced in excess of rated capacity for about three years. However, the strides towards increasing the plants' output were made at the expense of quality of output and, at times, of considerable wear of equipment. 11. The Third Plan expansion at the HSL plants have been delayed because of the time required to secure foreign exchange financing and the completion behind schedule of the three plants' "one-million ton" phase. Except at Bhilai, which is ahead of the other two plants, production of saleable steel from the new facilities cannot be expected to be near capacity levels before 1967/68, the second year of the Fburth Plan. Details on the recent performance of each of the five plants and their output estimates for 1967/68 are given in Annex I. The Annex also includes data on plant facilities, Third Plan and balancing works, as well as a summary of the position of the re-rolling industry. 12. Investment Cost: The original estimates of construction costs were considerably exceeded, particularly at the new HSL plants. The cost of the three plants' "one-million ton" phase had originally been estimated at Rs. 3.5 billion ($735 million). Actual costs to March, 1962, when the plants were practically completed, amounted to Rs. 4.8 billion (roughly $1 billion). With towns and ancillaries, which had to be built for the new plants, total  investment amounted to about Rs. 6.2 billion ($1.3 billion); the foreign exchange component was nearly $700 million. The actual costs of TISCO's Second Plan expansion were about 23 percent higher than the original estimate. Part of the cost overrun was attributable to modification of the original plans, but the main cause appears to have been the significant underestimation of construction and civil works costs. Furthermore, any advantage of com- petitive bidding could not be realized at Bhilai and Durgapur because the sponsoring arrangements made that procedure impracticable. In connection with the Third Plan expansions which are still underway, the original project estimates are being exceeded again, though the overruns are unlikely to be of the proportions which characterized the Second Plan program. 13. Plant Desig: Foreign organizations were largely responsi le for design and construction supervision for the Second Plan program.- Only IISCO's consultants had had prior experience in building steel plants in India. On the whole, the works were competently engineered except fcr cer- tain plant units. The original layout and some of the facilities of the HSL plants provided for further expansion of blast furnace, steel-makimng and finishing capacity. The three plants, as well as IISCO, now have excess rolling capacity. Indeed, the size of the Third Plan expansion of the HSL plantf. was primarily determined by their surplus blooming mill capacity. The plant designs naa, however, been based on ratner definite expectations, partly due to unverified assumptions regarding the quantity, quality and timing of the availabilities of raw materials, transport and other facilities. Varia- tions in these, and delays in planning for complementary activities, especially the coal washeries program, therefore had repercussions on operating the new facilities. 14. Raw Materials and Transport: India has the base for an expanding steel industry, but her resource position is not free of problems. There are extensive iron ore deposits of good quality, but deposits of limestone and coking coal are more limited in magnitude, at least on present findings. Moreover, most of India's coking coal has too high an ash content to be used in its raw state without affecting the performance of blast furnaces on present operating practices. Since the coal washeries program has been delayed, coking coal of suitable quality has been in chronic short supply. In the case of iron ore and limestone, the great increase in requirements necessitated the introduction of mechanized mining which, unless performed competently, results in the extraction of material with impurities, undesirable sizes, and other unfavorable characteristics. The delivery of raw materials of poor and uneven quality has led, in terms of iron output, to the use of blast furnaces below their available poten- tial. Work is now underway to put up agglomeration and beneficiation facilities for iron ore and limestone to ensure that delivered material will be more consistent in quality. However, though considerable research in raw material preparation to find ways to improve iron output has been going on in India for some time, the endeavor to determine the most economic solutionsfor each plant, and to translate them into actual instal- lations, still has a long way to go, Raw material problems were compounded 1/ Design and construction supervision of the Third Plan expansion of the HSL plants is now the responsibility of HSL's Central Design Bureau in respect of Durgapur and Rourkela, and of a special Design Cell of HSL as to Bhilai.  - 6 - a few years ago by the irregularities in the railway transport. Aggregate carrying capacity now meets the plants' requirements. Although there are still occasional complaints of the plants about inconveniently timed train arrivals and the type of wagon furnished, this situation has noticeably improved. Further details on raw material problems and on transport are given in Annex II. 15. Personnel: Staffing three large new steel plants at the same time was a crucial problem, and although a good deal of progress has been made, the problem still exists. The Government estimated the combined needs of the new plants at about 2,000 engineers (including 350 senior engineers), and approx- imately 19,000 skilled workers. A number of these positions still have to be filled. Moreover, the expansions now underway at these plants are expected to increase requirements for engineers and skilled workers by about 30 and 60 per cent respectively. 16. TISCO and IISC0 were virtually the only Indian sources for experienced steel personnel, and well over one-third of the senior production personnel at the HSL plants today are veterans of the two companies. However, the companies could not possibly meet all the requirements. Extensive training programs were initiated abroad and in India at the beginning of the Second Plan. About 1,600 engineers anj,over 500 operatives were sent abroad, the Soviet Union taking nearly 800.- But these programs could not produce the experience in depth, the 8-10 years' practice it takes to make a good "steel man", by the time the plants were completed. It was clear from the outset that foreign personnel would be needed to help./ in both construction and plant operations. The record of operational assistance has been varied. It has probably been best at Bhilai. The Russians sent in about 200 experts at the beginning of production; furthermore, at Bhilai the proportion of Indian personnel who had been trained abroad was higher than at either of the other two new plants. At Durgapur, and particularly at Rourkela, which is the most sophisticated Indian plant, there were probably too few foreign experts at first, about 60-70 at each. Arrangements materialized only after the plants had been running for some time to increase the number at Durgapur to about 120 and at Rourkela to about 210. The peak involvement of foreign experts assisting in operations has meanwhile been scaled down to the numbers shown in Annex I. The degree to which the foreigners' advice or direction has produced act;ion greatly depended on the personalities of the indivicual experts. 1/ Foreign training in connection with HSL's Third Plan expansion is expected to involve only about 220 persons. 2/ This repeated the private plants' experience. At one time, TISCO employed 250 foreigners; it has only one today. IISCO's senior plant management still includes several foreigners.  - 7 - 17. To help in building up a qualified staff, HSL has been operating a management training program for four years, so far with about 700 partici- pants ranking from foremen to superintendents (department heads). I/lore recently, HSL has instituted a technical training scheme capable of pro- cessing about 300 trainees per year and designed to attract and prepare upperclass students and graduates in engineering with a view to joining the company's staff. (The private companies also operate training programs, IISCO's mainly addressed to junior and middle-level technicians.) The par- ticipants in HSL's program, have, by all accounts, responded well and these activities may be broadened. 18. While these programs are very useful and the proficiency in steel production of HSL's staff has increased, the company will continue having personnel problems for some time. The need to strengthen senior management at the new plants is still a critical factor. Several top positions are still filled by civil servants whose performance would require a stronger orientation to the task of running an industrial enterprise. There is also considerable room among senior ranks for a wider and deeper spread of reso- luteness and attitudes favoring cost-consciousness and the willingness to take quick, and at times risky, decisions. Shortages are also likely to continue in experienced technical staff in the middle grades. There has, how- ever, been an encouraging growth of competent Indian staff at this level - engineers of 35-45 years who have shown a high degree of conscientiousness and adaptability tjo modern steel-making and rolling processes - but more time is needed to build up a middle level management force sufficient in number and experience. The same applies to the skilled work force. Skilled maintenance workers are particularly scarce, since maintenance, as in the private plants, is apparently less highly regarded and requires longer t-raining than direct production activity. The imbalance between the need and availability of ex- perienced Indian personnel will continue, possibly sormiewhat beyond the Sixties. It may be accentuated in the meanwhile as a result of the present expansions. This may be offset by further employment of forei.ners, but the understandable desire to make use of Indian manpower is an elem-at to be reckoned with in the making of decisions whether or not outside expertise is required. 19. Although experienced personnel are scarce, the Indian plants carry a high proportion of unskilled labor. This has helped inflate employment in comparison to plants of similar size outside India. Employment in the HSL plants ranges between 14,000 and 19,000; IISC0 employs nearly 18,000 and TISCO 32,000. Surplus labor, generally unskilled, has been difficult to dis- miss. The expansions now underway at the HSL plants should, however, reduce over-employment of unskilled or semi-skilled labor at these plants. Manage- ment-labor relations have been precarious at times, especially at Rourkela, and discipline is not easily enforced. 20. Management: In addition to the shortage of qualified managerial personnel, HSI, had problems in its early years attributable to the fact that the Government and HSL's Board of Directors retained too much responsibility for the plants' management and day-to-day operations. After an initial step in 1962, considerable powers were vested into the plant managements about two years ago, starting with Durgapur and then extended to the other two plants. The plant managements received authority to appoint, promote and dismiss personnel, and greater maneuverability in setting remuneration of  - 8 - workers. A move in this direction was important because morale had been affected by cases where workers were hired or promoted as a result of pressures from outside the plants. However, elements of this remain in evidence, as well as the influence of external, mainly governmental, salary and promotion schedules. The plant managements were also given greater discretion over purchases and other expenditures for which they previously had to obtain the consent of higher authorities in HSL, the Steel Ministry or the plants' Financial Advisers who look, to a considerable degree, for guidance to the Ministry of Finance. The system now in effect has certainly laid the ground for the exercise of greater managerial freedom, and in fact there are indications that plant managers have at times over-reacted to its possibilities, especially in respect of relations with the HSL head office in Ranchi. It still suffers on the plant level from the fact that the Financial Advisers and the resident staff of the Auditor General remain involved in the regular operations. Also, the word of New Delhi still carries great weight at HSL's head office, and at the plants. The role of the company's top management at Ranchi is complicated by the fact that the Government exercises more than the usual rights and responsibilities of a shareholder, for instance by retaining the power to appoint the general manager of the plants, and by its important influence over HSL's financial affairs. Within these limitations, the key to the success of HSL's present management system is the sagacity with which it is being, and will be, used by the company's principal officers and the individual plant managers. The management problems at the private plants consist mainly of achieving a smooth transition,' when replacements have to be made in the present experienced top cadre, members of which have in several instances carried responsibilities for a considerable length of time. 21. The managements of all Indian plants, public and private, would be helped greatly if they had recourse to a better cost accounting system. In present circumstances, the plants have difficulties, though in varying degrees, in ascertaining with precision those of the several hundred sections now being rolled by them which they produce most economically and, conversely, those which are their high-cost items. This is partly an inheritance from the times when nearly all steel sections were scarce in India and from the costing procedures underlying the steel price fixation system in effect until recently. Furthermore, the available cost data, based on actual performance, reach the managements, especially at the HSL plants, often with delay. It is therefore difficult to make the decision in time which the analysis of the data would suggest. HSL is aware of these problems and has already taken some steps to strengthen its plants' cost accounting system. Further efforts will be needed at all plants, especially in light of the upward pressure in production costs which the Indian steel industry has experienced in the past few years, and the recent appearance of a more competitive situation in the marketing of certain steel sections. 22. Production Costs: When the Bank made its first loan for an Indian steel project to IISCO in 1952, the company's average net works costs (including cost of labor, raw materials and spares) for one ton of ingot steel were estimated at Rs. 160 ($34). These were among the loweat steel production costs in the world at that time. Ten years later, the corresponding figures for IISCO and TISCO were Rs. 212 and 203 respectively. 1/ The increase reflects rising costs of raw materials, transport and labor during 1/ Exclusive of the ingot excise duty of Rs. 40 abolished on February 29, 196h.  - 9 - that period. IISCO's net works'costs per ton of saleable steel amounted in 1964/65 to Rs. 386; total costs, including depreciation and capital charges, came to about Rs. 530 per ton of saleable steel with the plant having operated at about 94 percent of rated capacity. TISCO's costs were somewhat lower than IISCO's. 23. Although production costs in the HSL plants cannot be discussed thoroughly without a detailed financial analysis of each plant, available figures on plant investments (see Annex I) and data on works costs provided by HSL, permit some observations. As a general point, production costs at the HSL plants are higher than those of the private plants because the investment per ton of capacity in the one-million ingot stage and the public sector plants was considerably greater. Works costs for comparable products do not appear to vary greatly from those in the private plants. Net works costs per ton of saleable steel at Bhilai and Durgapur, neither of which roll the costly flat products, were of the order of Rs. 330 in 1964/65. The corresponding costs of Rourkela, an all-flat producer, amounted to about Rs, 430. Adding 13 percent of gross fixed assets for depreciation (which accounts for five percent) and capital charges 1/ would indicate average production costs in 1964/65 of Rs. 545 at Bhilai, Rs. 630 at Durgapur, and Rs. 790 at Rourkela. If the costs of the town and ancillaries are included, costs would be even higher. lIoreover, there are good reasons for believing that the capital charges do not reflect the true costs of capital in India. A better reflection of depreciation and capital charges may well be of the order of 15-17 percent. 24. The Third Plan expansions will lead to a greater utilization of certain plant facilities which are already available. The extent to which this will reduce production costs - without taking account of the recent change in the par value of the Indian rupee - cannot be assessed at present because there are indications that plant investments now under way will again exceed the earlier estimates. 25. Although a direct comparison of foreign and Indian production costs is not feasible, it is worth noting that in mid-1965 certain continental and Japanese steel products were being delivered in India at prices (c.i.f. Calcutta) varying from well below to a little above domestic production costs. 2/ For example, import prices of bars and structurals, an important part of Bhilai's, Durgapur's and IISCO's product mixes, ranged from Rs. 477 to Rs. 613 per ton; plates and black sheets, both of which are produced by TISCO and Rourkela, were quoted in the range of Rs. 480-590 and Rs. 566 respectively. It should be noted that export prices charged at that time by continental and Japanese producers were below the home prices for certain items, but the fore- going figures suggest that, at the exchange rate then in effect, India's steel industry, even operating at or near rated capacity levels, did recently not 1/ This in general in line with the formula recommended by the Tariff Commission in 1962. 2/ The same general pattern also obtained early in 1966.  - 10 - appear to have the cost advantage of earlier years. 26. In spite of the rise of raw material, labor and transport costs since the Fifties, there are practical prospects for reducing production costs through savings in works costs by improving productivity, especially in the yield of blast furnaces, by concentrating on the output of those saleable categories which the individual plants can roll most economically, and by lowering the proportion of defectives in output. There is no technical obstacle to such developments, but more accurate knowledge of costs will be necessary to ascertain precisely where reductions are feasible. The determination of standard costs would be of great help. This applies to all Indian plants. There is also scope for a reduction in the share of fixed costs in total production costs by increasing the plants' operating rates. (Bhilai has done it.) The costs of the Indian steel industry have been a subject of growing concern to the Indian Government, which is currently investigating the possibilities for reductions through a committee chaired by a member of Parliament. Until recently, there has been little, if any, pressure on the industry to reduce production costs because pressures for output of "tonnage" have been strong in the face of steel shortages and the setting of prices has been based on costs. However, the recent changes in the control system, and the appearance, as well as the prospects, of a comfortable supply position in many steel sections, offer hope that cost reductions through better performance will have the attention at the plant level which they deserve.  - 11 - III. THE CONTROL SYSTEM 27. Until March 1964, the Government maintained far-reaching controls over steel consumers and producers. The control system, introduced during World War II, had survived without significant changes until then because steel had remain- ed in short supply. Its aims were: to ensure the use of steel for purposes considered important for the common good; to keep prices from rising in response to scarcities; and to ensure that all consumers in India, no matter how far from the steel plants, could obtain steel at the same prices. To achieve these objectives, the Government allocated steel to users, prescribed production programs of individual plants, set the prices of steel and regulated distribution. 28. The control system was established when India consumed about one million tons of steel per year. In 1963, consumption was five times as great and the attempt to control in detail had become increasingly ineffective. In view of the growing dissatisfaction with the working of the system, the Steel Minister initiated in September 1&2 an investigation by the Raj Committee which disclosed in its report - numerous shortcomings and inequities. After considera- t4on of the Committee's recommendations, and of proposals invited from the steel producers, the Government withdrew on March 1, 1964, its direct controls over the allocation, production and pricing of those steel products in which the supply position had eased, principally merchant sections, structurals and railway materials. In respect of these categories, most of the functions, previously exorcised by the Government were taken over by a Joint Plant Committee (JPC) under the chairmanship of the Iron and Steel Controller and composed of representatives of each of the five steel plants and the Raj),ways. The balance of steel categories have remained under control since then _, except for a few items. They represent about hO percent of India's 1965/66 output of saleable steel. In discussing the system now in force, the principal features and effects of the previous control system must be noted, especially since they have remained for a large part, in existence with resoect to a sizeable proportion of steel products. (The Government directive on the procedural aspects of the system introduced in iiarch 1964 is reproduced in Annex III-A.) 30. The Iron and Steel Controller, with head offices in Calcutta, is responsible for administering Government controls over steel. However, important policy decisions are made elsewhere. The Steel Ministry authorizes the capital investments of the main producers, approves the prices and the usually semi-annual allocations of controlled steel categories among various sponsoring authorities (Ministries, State agencies, etc.), which in turn issue quota certificates to individual consumers. The authority of the Ircn and Steel 1/ A report issued in October 1963 by a Committee chaired by Dr. K. 1N. Raj of the Delhi School of Econoraics, it included Dr. Raj Krishna of the University of Delhi and Dr. K. S. Krishnaswamy of the Planning Conmission. 2/ Pricing and distribution of pig iron for sale, which does not fall under this classification, was under control until August 20, 1965,.and was at that time transferred to JPC.  - 12 - Controller is also limited in respect of steel imports, because the value of steel allocated to "actual users"!, to whom the bulk of steel imports has been routed in recent years, is determined by one of several sponsoring authorities in the context of their allocation under India's annual foreign exchange budget; the most important is the Directorate General of Technical Development. However, the import license itself is in most instances issued by the Iron and Steel Controller, often after considerable delay following the determination of import allocation. 31. Regulation of Demand, Production and Distribution: Until March 196h, orders, or "indents" to be placed with producers, had to be processed through the Iron and Steel Controller, who accorded them one of several priority ratings established by the Steel Ministry. This procedure was designed to enable the Controller to "plan" indents on producers, bearing in mind their capacities and their outstanding orders. Plants were permitted to roll only what was "planned" on them and to sell their output only to designated con- sumers. One purpose of "planning" was to ensure that plants produced sections considered difficult or inconvenient to roll. 32. Consumers purchasing controlled steel in amounts of at least one wagon load may buy Indian-made steel directly from a producer. Orders of less than a wagon load have to be placed with a "controlled stoclist", a wholesaler, at Rs. 50 per ton over the producer's sales price, or with a "registered stockist" or retailer, at Rs. 65 per ton over the producer's price. There were until recently over 200 controlled stockists, and nearly 2,000 regis- tered stockists, the latter being licensed by the State Governments. 33. According to the Raj Committee, processing of the nearly 50,000 indents, which the Iron and Steel Controller received each year, took reportedly two to six months or longer and even that required pushing by the indentors. End-use was not always the criterion for priority classifications of indents; priorities were often based on the standing of the indenting party and on pressures of all kinds. Even after priorities for individual indents were assigned, the timing of delivery was highly uncertain, since the Controller's office had no breakdown of outstanding orders on producers by priority ratings. Even under the best of circumstances, it took a minimum of six months to obtain steel deliveries against indents "planned" on the producers. 34. Administrative imperfections in the face of steel scarcities resulted in disorderly distribution and permitted the development of a thriving black market. Steel consumers frequently placed orders simultaneously with both producers and stockists in the hope that one would deliver. The results were, on the one hand, untimely cancellation of orders and, on the other, deliveries of steel - when they occurred after an uncertain time - no longer needed for the originally intended use. Part of the delayed deliveries flowed into the black market. Further leakages occurred through the recognized stockists, the channel for about 40 percent of domestic production in recent years. Scarcity made for quick turnover and minimized the pressure to build adequate storage and service facilities; some stockists received a "privilege rent" for steel ostensibly destined for them but really going elsewhere. The Raj Committee found that small consumers, who must look to the stockists and whom the control system was supposed to protect, generally obtained only about one- quarter of their supplies at controlled prices. Large consumers, presumably excluding Government, managed to get over two-thirds on this basis. Incom-  - 13 - plete control over that portion of steel imports coming through "established importers" 1/ and barter imports also facilitated sales outside recognized channels. 35. While the Raj Cormmittee did not favor the abolition of controls, it recommended a number of steps to help remedy the distortions in operating the system. Among these were a considerable reduction in the number of priorities, and the planninig of production by an industry body with a more realistic view as to how best to utilize available production facilities and as to the relative costs of producing specific sections in each plant. The Committee also made the welcome suggestion to abandon the officially recognized network of distributors and of privileged importers. The Government of India, acting on a number of the Committee's recommendations, introduced the following measures in March 1964: (a) Priorities are limited to defense (A) and important projects (B) including the Railways, transport and communications, basic and small-scale industries, and agriculture. A Steel Priority Committee chaired by the Secretary in the Steel Ministry and including senior civil servants is to make semi-annual priority allocations of Indian- made steel, and to determine the foreign exchange allocation to priority users of imported steel. (b) JPC, with offices in Calcutta, is the channel to which all indents (of at least one wagon load) for both the freed and controlled cate- gories, rolled by the main producers, have to be presented. It is also responsible for the "planning" of these indents on the main producers. (c) Licensing of stockists was terminated in respect of freed categories. Anyone authorized by the producers or JPC can trade in these products 2/ However, controlled and registered stockists continue to be the only outlets for the controlled categories. The Government indicated at that time that it was considering the possibility of routing steel imports either through JPC or the Minerals and Metals Trading Corporation (1015TC), a Government body. In 1965, it was decided to entrust to MMTC the handling of transactions for the major portion of flat product imports, which also account value and tonnage-wise for the bulk of India's steel imports. 36. JPC's initial preoccupation was setting prices for the freed steel categories. It started getting itself organized only in the summer of 196h1, at a time when the main producers' output was fully booked, in some instances years ahead, for the controlled and the more desirable freed sections. Since then, JPC 1/ Namely those who imported steel before 1957. 2/ JPC has authorized only 34 stockists to deal in special sections. It is apparently not planning to authorize stockists for more general categories.  - 14 - has built up a staff, mainly drawn from the steel companies; this has helped instill a much more professional atmosphere in JPC than in the Steel Controller!' Office. JPC also expects soon to have a computer to facilitate the "planning" process. JPC's principal contribution to date has been the acceleration in the processing of, and the follow-up on, indents "plamned" on the main producers and in matching this activity with the related working out of the industry's quarterly rolling programs. While customers can now generally expect speedier delivery of many steel items, the works orders (into which the indents are translated at the plants) for scarcer categories which do not have priority rating take up to a year or, in some instances, considerably more, for delivery. There have also been general improvements in the composition of the plants' rolling programs, but the criterion of relative production costs, as recommended by the Raj Committee has not yet featured in the regulation of production by thc JPC. This is principally due to the absence of appropriately detailed cost data for the industry as a wahole, but JPC is now trying to tackle this problem. It is also attempting to obtain a better view about the likely short-term developments in the steel market. 37. On balance, JPC has completed its shake-down phase with credit and has evolved as a body in which the industry representatives have increasingly found a common viewpoint, which at times has prevailed over, and at others been balanced out by, the views taken by the Controller and the Railways' represent- ative. It would be difficult for JPC to neglect the important influence of the Government, both as the leading steel consumer and through its decisions affecting the whole economy. This reflects itself in preferential accommodation of Government indents in the rolling program and in the priority classification ("JPC status") of orders for freed categories patterned partly on the priority system effective before March 1964 and influenced by the decisions of the Steel Priority Committee. 1/ In fact, JPC has given ad hoc priorities, on the instruction of the Iron and Steel Controller, to specific works orders, thus "bumping" others included in a rolling program. 38. With the partial liberalization of distribution, a sizeable number of new steel traders appeared and entered the queue of indentors at the JPC. Quite a few among them had little or hardly any storage and processing facilities, nor sufficient financial backing, and have therefore tried to off-load steel quickly, sometimes even at a loss. This has been occurring at a time characterized by a fairly ample supply position in various structural and merchant sections (as well as in coils due to insufficient de-coiling installations), and by a "credit squeeze" and foreign exchange shortages affecting steel consuming activities. As 1/ This Committee has as a matter of practice only addressed itself to the controlled categories and worked on the basis of "priority" or "no priority" as determined by the judgment of its members and not based on a specific priority list. Priority classifications are given to existing works orders, not to indents. They cover currently the bulk of existing orders for controlled categories except for thicker plates and galvanized corrugated sheets. The Committee has not concerned itself with priority allocations of imported steel, nor with the related foreign exchange allocations. There is no evidence that priority allocations of domestic steel and allocation of imported steel have been coordinated with one another.  - 15 - a result, it is possible nowadays to buy from the plants and the stockists the relatively plentiful steel sections at the official price and quite often below that level, when transactions with stockists are involved. This has produced the phenomena of the "tied deal" by which stockists, including some- times those of the main producers, condition the sale of scarcer categories on the associated sale of the amply supplied sections. In general, the steel companies' sales offices can no longer content themselves with the processing of transactions, but have to make an effort to push the sale of their "easier" sections. This is a relatively novel symptom in the Indian steel market which should help focus increasing attention on the quality and costs of steel production. 39. Prices: A good deal of the difficulties in regulating steel demand, production and distribution, resulted from the attempt to set prices at a "fair" level for both consumers and producers, and the involved character of the price-fixing procedure. 40. In setting the retention price (the amount the producers were permitted before March 1964 to retain from the sales proceeds), the aim was to enable the producers to earn enough to cover works costs, overheads, depreciation, capital charges and a "fair" return. The retention price was computed on the basis:of an assumed though feasible production volume and mix, in the main (especially in the last pricing period) using TISCO's plant as the basis. Works costs were calculated for the 26 principal categories and depreciation and return were related to the "gross block", the historical value of gross fixed assets. This basic approach was modified in certain respects but was generally followed since its adoption in 1948. It guided the inquiries of the Tariff Commission made prior to the establishment of retention prices which were usually announced in the form of an average price for the whole industry. (The changes in the approach to the determination of the retention prices are summarized in Annex III-B). 41. The announced average retention price per ton of saleable steel rose from Rs. 252 in 19h9 to Rs. 550.5, the level applicable on February 29, 196h. The average retention prices for each plant varied, however, depending on the plants' actual production patterns. 42. Basing retention prices on an assumed product mix and volume of one plant (namely TISCO's) has not helped the development of an output pattern in line with the needs of the Indian economy. When the plants had to roll difficult and time-consuming sections, overheads and works costs were bound to rise over the officially recognized levels. The same thing occurred when the plants had to roll small quantities of individual sections and small orders were not infrequent in India because the plants were conmmitted to roll a few thousand sections and sizes. 1/ The "extras" (special price allowances) established by the Iron and Steel Controller for difficult sections did not seem to compensate the plants. In view of the large backlog of priority orders and the inability of the control organs to follow them up, the plants were at times able to resist the imposition of rolling programs that were uneconomic under sanctioned price differentials. In such cases, the plants may have kept their volume of output up, but their production pattern has not been in tune with demand. In fact, fabricators complained vocally in recent years about the shortage of "matching 1/ A rationalization and reduction of sections, covering a sizeable proportion of steel output, was introduced early in 1965, together with new steel certifications worked out by the Indian Standards Institution.  - 16 - sections". This tied up other types of steel in inventories and held back production. 43. As a result of the Government's desire to keep steel prices down, retention prices were below real production costs in most plants. For the last retention price period, a gross block was used which corresponded after some adjustments to TISCO's block, about 30 percent of which represented plant installed before 1955. TISCO, which furnished the base, therefore managed reasonably well under the last average retention price. But at the HSL plants, which have a gross block per ton of rated saleable steel capacity well in excess of Rs. 2,000, retention prices did not even cover works costs plus allow- able charges (13% of gross block). It was not surprising therefore that HSL showed until recently only losses which through March 1964 1/ amounted cumulat- ively to Rs. 684 million. (HSL made for the first time a net profit in 1964/65). Even in the older private plants, real costs are understated because fixed costs are linked to the historical value of assets, not their replacement costs. 44. The determination of sales prices, even more than the retention prices, has been dominated by the aims of achieving "fairness". Since 1956, sales prices have been the same at all Indian railheads. They equalled the producers' retention prices, plus excise duties on saleable steel, and surcharges and a freight element payable to the Equalisation Fund. 2/ In general, sales prices for individual items were about Rs. 100-150 higher than their retention prices. They did not change significantly between 1957 and the introduction in 1964 of the pricing system now in effect. 45. The Raj Committee, aware of the shortcomings, did not suggest lifting price controls over producers, but recommended that the producers' prices should cover replacements of equipment, reflect more realistically the cost of producing the several categories and be adjusted from time to time in line with changes in demand for specific items. Furthermore, it called for an abolition of price controls over steel handled by distributors. Some of these proposals were incorporated in the pricing system in effect since March 1, 1964. 46. With the advent of the new pricing system, the distinction between retention prices and sales prices was dropped. There are now ex-works prices, including excise duties, and sales prices. The difference is a fixed freight element, at first Rs. 63 and now Rs. 67 per ton for all steel categories, to permit the continuation of freight equalization which is administered by JPC for all steel sold by the main producers. Ex-works prices for controlled cate- gories were raised by an average of Rs. 30 per ton of saleable steel, including an average increase of excise duties of about Rs. 25. (Excise duties on steel 1/ Long term capital employed in HSL amounted on March 31, 1904, to Rs. o.Oh billion, accounted for by Rs. 4.47 billion of equity capital and loans of Rs. 3.57 billion, mainly from the Government. Since then, the Government has made another equity contribution of Rs. 810 million. 2/ Originally, the main function of the Equalisation Fund was to make possible the sale of higher-priced imported steel at the lower domestic prices. Later on, import prices were falling, while retention prices went up. Payments to the Fund were therefore adjusted to a level principally to permit freight equalization.  - 17 - products have since been further increased through the initial and supplementary 1965/66 budgets.) JPC, which is now responsible for posting prices for the freed categories established a similar average increase for the products under its jurisdiction. There was no conscious attempt in setting the prices of the freed categories to take account of the different costs of producing, nor of the demand and supply of, various items. The initial increase in excise duties replaced the surcharge on saleable steel which ceased to be payable to the Equalisation Fund. The manner of the Fund's liquidation has not yet been settled. Except for establishing prices for categories now falling under the Indian Standard Institute specifications 1/ (mainly bars and structurals), prices posted sub- sequent to the spring of 1964 were for all practical purposes designed only to take account of increased excise duties. The three steel companies have made several representations to the Goverrunent of India to allow the offsetting in the price for controlled categories of external escalation factors which have meanwhile intervened, principally in respect of raw materials, labor and trans- port. The Government declined these, however, in November, 1965. The companies have tried the same through JPC for the freed categories but have not succeeded due to the general reluctance in official circles to put the existing price relations out of line between controlled and freed categories. The main pro- ducers seem, however, to have succeeded in bettering their sales realizations, through the "extras" on freed categories which were modified by JPC in September 1965. 47. There is no price control over stockists in regard to free categories. Controlled prices continue to govern the distribution of the controlled cate- gories. The re-rollers fall outside the scope of JPC. They can book orders directly and sell at prices listed periodically by the Steel Re-Rolling Mills Association. (Not all of them observe the latter, however.) Those of the re-rollers who process billets, receive their semis at controlled prices and under official bulk allocations. 2/ I/ i.e. "standard" (formerly "tested"), "commercial" and "off-grade" (formerly "untested"). 2/ While many re-rollers have complained about insufficient billet supplies due to the main producers' preference to "finish" their intermediate products, continued protection is unlikely to help bring into reality the worthwhile suggestions of the Raj Committee that the re-rollers, who can generally change rolls frequently with less loss of output than the big plants, fill orders for time-consuming and inconvenient sections. This would enable the main producers to concentrate on orders which they could turn out in large volume to assure the full utilization of their large capacity high-speed rolling facilities. At present, the "bread and butter" of the re-rollers consists mainly of bars and rods which are also produced by four big plants. The Iron and Steel Controller has to ensure that prices charged by the main producers for bars and rods (which are freed) do not cause hardship to the re-rollers. It is likely that, as long as their billets supply is assured up to a point and obtainable at controlled prices, many re-rollers will be reluctant to change their present output pattern and, furthermore, that uneconomic units will be kept in operation.  -18- 48. Until import duties were increased on August 19, 1965, controlled and "freed" sales prices for several of the big plants' products were somewhat above the price (including duty) of imported steel. Only steel imported from the United States - an important supplier of sheets and plates under AID deliveries - was significantly more expensive. While prices of Indian-made steel were also. raised somewhat in August 1965, they were then generally below the price of imported steel after payment of duty. A black market for scarcer steel products, which command a premium over the posted prices of Indian-made steel, has continued to persist, mainly in controlled flat items. Since devaluation on June 6, 1966, the discrepancy has widened significantly between posted Indian prices and current estimates of prices of imported steel to the Indian user. This is shown in the Table below in respect of selected products; the Table also shows the range of black market prices charged in March-April 1966 in Bombay, Calcutta, Delhi and Madras. Table 1 (Rs. per metric ton) Indian Producers' Black Price of Imports Landed at Calcutta Category Sales Price (FOR) Market after Payment of Duties ("standard or Price Japan Belgium U.S. tested") July Est. July Est. July Est. April 1966 April 1966 1965 Jun.'66 1965 Jun.'66 1965 Jun.66 Controlled: Black sheets 947 1250-1400 n.a. 1388 816 1350 987 1620 Galvanized corrugated sheets 1205 2000-2300 1346 1995 1153 1860 1408 2242 Plates (10 mm.up) 842 1000-1300 813 1118 693 1125 1022 1703 Free: Bars 730 800-1000 703 1147 674 1080 1093 1837 Structurals 760 800- 850 825 1365 641 1013 loh1 1785 Source: Controlled and Black Market Prices - Iron and Steel Controller; Freed Indian Sales Prices - JPC; Import Prices - TISCO, based on data in Metal Bulletin (UK) issues of July-September 1965 and April-March 1966. (Estimates for June 1966 made by Mission on basis of March 1966 c.i.f. quotations adjusted for devaluation and new import duties in effect since June 6, 1966.) C.i.f. quotations for steel imported from the European continent and Japan now appear to be in the vicinity of posted Indian steel prices. Before devaluation Indian prices were significantly higher than these c.i.f. quotations; therefore, exports of Indian saleable steel, even after excise duty concessions, had to be subsidized in the range of rupees 210 -. 280 per ton. 49. To avoid paying higher prices, Indian consumers have naturally made every effort to obtain., steel at the posted prices, especially controlled steel. The businessman is interested in the average cost of all the steel he purchases, officially and on the black market. In some cases, moreover, the user may have been able to offset the higher cost of black market purchases by profits obtained  -19- through sales on the black market of delayed official deliveries. It is doubtful to iThat extent controlled prices below the real value of scarce items, hold down the general price level. Prices for most end products, in which scarce steel is used, are not controlled and reflect their true market value. Manufacturers wiho have been buying black market steel and making products which are in demand can still compete. It is practically impossible to estimate how much industrial capacity built up in the (later unfulfilled) hope of securing official steel supplies has not been utilized nor how many inefficient industrial enterprises or other consumers have been making a profit because of an inside track to controlled scarce steel. But it is clear that the opportunity of obtaining scarce steel products, at posted prices below their scarcity value, encourage both the use of these categories and the over- stating of officially registered demand. Buyers of controlled scarce steel have in fact been getting a "rent" from the steel producers and the Government which, if the steel companies had higher earnings, would have fewrer difficultie in taxing them than in taxing high profits realized by a great number of steel consumers. There is also reason to believe that freight equalization does not result in the most efficient utilization of resources. Very possibly some areas, as for instance in Punjab, are using more steel than they would if sales prices of Indian steel reflected true transport costs. 50. It can now be expected that, as a result of the very recent import liberalization measures combined with the prospects for larger non-project assistance from abroad, more of those steel sections, which are now scarce in India, will be imported. If price and distribution controls on steel were abolished, not all steel prices are likely to rise because of the comfortable supply position in a great number of steel sections, which is likely to continu Only the prices of scarcer sections will;go up to the levels at which imports of the same items have to be bought by the Indian user. On present estimates, as Table 1 illustrates, these levels are still higher than the posted prices now in effect for the same Indian-made item. Lifting of controls, supported by easier access to steel imports, would discourage the registering of excess demand induced by controls, flush out inventories of scarce items built up by users ranging from industries to governmental project authorities, and help overcome the black market. 51. The abolition of price controls is also desirable from the producers' viewpoint, since increased earnings arising from possibly higher prices for scarce sections will be needed to finance the substantial expansion and balancing works they are expected to undertake in the Fourth Five-Year Plan. The prospect of higher earnings due to the lifting of controls should not, however, give the plants freedom to let their internal production costs run up. The potential oligopoly position of Indian producers can be minimized by steel imports, the price of which can be influenced by appropriate variations in excise and import duties. If prices were freed, they would in due course reflect the market for individual products and the relative cost of their production. This would probably also lead to a fuller utilization of available capacity in line with market demand. 52. To sum up, there is strong justification for having users pay for the true value of steel In India. To the extent that real priority users narrowLy defined according to the importance of their actual steel use, require protec- tion, the Government has the power to take specific measures on their behab.. This would be preferable to affording protection through price and distribution C-rtrolJ to a wide range of consum3rs in rcespect of scarce steel.  - 20 - IV. SUPPLY AND DEMAND 53, Past Developments: Consumption of finished steel mill products amounted ia 1965/66 to about 5.4 million tons. Domestic production provided nearly 4.6 million tons. Exports of finished steel are still negligible - they amounted to about 120,000 tons in 1965/66. There are no reliable data on inventories, but, although there is considerable hoarding of scarce sections, total inventories are apparently not very significant. It does not seem unreasonable therefore to assume that, in the last few years, actual consumption has been roughly equal to domestic production plus imports, i.e. apparent consumption. 54. The two main areas of steel use are West Bengal/Bihar and Maharashtra, which include respectively the industrial centers of Calcutta and Bombay. In the past 5-6 years these areas have consistently taken about 25%-30% and 15%-20%, respectively, of the available saleable steel. Uttar Pradesh and the Punjab (an area with many re-rollers) each account for about 10% of con- sumption. Madras State, where industry has recently developed considerably, takes about 6 percent. 55. At the close of World War II, apparent consumption of finished steel amounted to only one million tons and in 1954 it amounted to only 1.5 million tons, The next year saw the beginning of a great rise which has continued with fluctuations since that date. Import restrictions on steel were dropped in 1955, and imports rose to 900,000 tons in that year from 300,000 tons in 1954. In 1956, they rose to over 1.8 million tons. Since 1958, when a foreign exchange crisis made necessary a cut in all imports, including steel, imports have remained fairly stable, remaining generally in the area of one million tons a year. Apparent consumption has continued to rise, however, as a result of increasing domestic production, as shown in the table below. Table 2 (in thousand tons) Calendar Year a/ Production Imports Total 1955 1,260 900 2,160 1956 1,356 1,854 3,210 1957 1,409 1,720 3,129 1958 1,398 1,173 2,571 1959 1,768 819 2,587 1960 2,210 1,212 3,422 1961 2,799 988 3,787 1962 3,564 820 4,384 1963 4,257 950 5,207 1964 4,343 1,007 5,350 1965 4,529 880 (prov.) 5,409 (prov.) a/ The figures for 1960-64 are not exactly comparable with those given in Annex IV which gives data for fiscal years 1960/61, 1962/63, 1963/64, 1964/65 and 1965/66 for comparison with estimates for the year 1967/68. Source: National Council of Applied Economic Research (NCAER) Reappraisal of Steel Demand (September 1963); for 1962-1965: Steel Ministry.  - 21 - 56. Actual consumption almost certainly fluctuated less than the consumption figures given above suggest. Part of the large imports in the early years of the Second Plan period probably went into stocks and were drawn clown in the following years of the Plan. The sudden rise in consumption is, however, undoubtedly attributable to the steel requirements engendered by the - dustrial boom which occurred during the Second Plan, particularly in newer industries in the private sector - e.g. motor vehicles, food processing and textile machinery, and machine tools; production of machinery practically doubled during this period. The Railway program was another contributing factor. 57.. The Indian planners had hoped that domestic output of saleable steel Wrould reach about 4.5 million tons by the end of the Second Plan (1960/61) and thus virtually meet domestic demand for that year as originally estimated. 1,. wever, actual production amounted to only 2.4 million tons and imports were, cf necessity, continued. Apparent consumption was over 3.4 million tons. That .-.gure differs from the detailed estimate of consumption of finished steel by various consuming sectors:at the end of the Second Plan, made by the Planning Cc!nmission, which shows total finished steel consumption of about 4.3 million tons -in 1960. Even excluding the nearly 0.5 million tons for unspecified uses and stocks, estimated consumption in identified uses amounted to 3.8 million tons, as *;mpared with the figure for apparent consumption of somewhat over 3.4 million tons. In view of the pressing shortages at that time, it is doubtful that the x3-0.4 million tons difference could have come from inventory reductions. The difference between the Planning Commission's estimate and the figures for apparent consumption are more probably due to the fact that steel use data for .he past are not reliable. (The Planning Commission's estimate is summarized in lnnex V-A). Only one-half of apparent steel consumption in 1960 can be traced -o output data or reports on progress of construction - consumption in construc- tion by the Railways and other means of transport, in the manufacture of transport, industrial and electrical equipment, and in a variety of other items such as pipes, containers and structural fabrication. The difference between the estimate of steel consumption and the figure for apparent consumption can probably be at;-ributed to errors in the estimates for consumption in agriculture, small-scale zidustry, and industrial and residential construction. 58. Demand Forecasts: In view of the apparent unreliability of the past estimates of steel consumption, estimates for the future must be regarded with ^-me reservations. There are three detailed Indian estimates 1/ of future steel requirements in the country. They were prepared some years ago and calculated by the so-called end-use method - that is, by multiplying the output target for each major sector of the economy at a given date by a factor represent- ring the steeL content of an average unit of output in that sector. The steel content factors were developed on the basis of Indian experience supplemented, 1;. re necessary, by foreign experience, mainly British and Japanese. The output i Planning Commission (Perspective Planning Division), Sept.-Oct. 1961; M. N. Dastur & Company, June 1962 (this estimate forms part of Dastur's report dated July 30, 1963, on the Bokaro steel plant project); and NCAER, September 1963.  - 22 - targets naturally rest on expectations as to the future growth of the economy. All three estimates were based on the same growth model, pre- pared by the Perspective Planning Division of the Planning Commission, which assumed that the economy would expand at the rate of about 5-6 percent per annum during the Third, and at about 7 percent during the Fourth, Plan. The Indian demand estimates were geared only to the last year of the respective Plan periods, i.e. 1965/66 and 1970/71, and assumed that the Plan targets would be achieved. They assumed further that there would be no significant change in controlled steel prices effective at the time of the estimates' preparaticon. 59. The Indian estimates foresaw a domestic demand for finished steel products in the range of 7-8.5 million tons in 1965/66 and 12-14 million tons in 1970/71. 1/ (The NCAER estimate for 1970/71 also makes an allowance for export possibiliti'es, namely 1.5 million tons.) The breakdown of the Indian estimates, showing estimated requirements of steel-using sectors, is summarized in Annex V-B. The United States Steel Corporation, which sub- mitted a techno-ecbnomic survey of the proposed Bokaro plant in March 1963, estimated requirembnts in 1965/66 at 6.9 million tons and in 1970/71 at 11.2 million tons. Its estimates were based on the expectation that, with a few exceptions, only 80 percent of the growth targets would be fulfilled. 60. The expectation regarding India's economic growth on which the de- tailed Indian estimates are based seems to be over-optimistic. This has already become apparent in respect of the past fiscal year, i.e. 1965/66, when effective demand for finished steel seemed to amount to somewhat below six million tons despite persisting scarcities in a number of sections, especially certain flats. Instead of the envisaged rate of 5-6 percent per amnum, national income (in real terms) grew during the first twio years of the Third Plan at a rate of only 2-1/2 percent. This rate improved in 1963/64 (1h.5 percent) and particularly in 1964/65 (almost 8 percent) when, following its stagnation in earlier Plan years, agricultural output rose by 10 percent. Industrial production in the organized sector, which accounts for roughly one-eighth of national income, rose at an average of about 7.5 percent per annum in the first four years of the Third Plan instead of the forecast rate of 11 percent. Aggregate investment seems, however, not to have experienced significant shortfalls, Performance in the past year was affected by the drought, a credit squeeze, and the atrcphy in the availability and use of imported production materials in industrial output. The latter was aggravated by the uncertain prospects of external assistance following the Indo-Pakistani hostilities last September and the husbanding of scarce stocks. It would therefore not be surprising if national income arnd industrial output declined in 1965/66. In vieu of the aforementioned developments, finished steel requirements have not come up to expectations, and forecasts for the Fourth Plan have therefore to be viewed from a / iore recent, though more global Indian demand estimates, including a working paper (April 1964) of the Perspective Planning Division which estimated 1965/66 requirements of finished steel at 6.7 million tons, put steel demand in the range of over 6 million tons for 1965/66 and about 11 million tons for 1970/71.  - 23 - 1965/66 base which is about one million tons below the one assumed in the earlier Indian estimates. 61. It is hazardous at this stage to attempt making a realistic estimate for 1970/71, because major planning decisions concerning the size and shape of many Fourth Plan investments and production targets have not yet been made. It now appears likely that the Fourth Plan will be ready in a few months. Recent efforts, however, have focused only on the preparation of a program for 1966/67. While it appears safe to assume that the Indian economy will experience further growth in the Fourth Plan, flagging Third Plan performance, and the uncertain outlook for 1966/67 are bound to affect the level of economic activities during the next five years. Taking this into account and realizing the risks inherent in predictions, it would appear plausible to expect that aggregate requirements for finished steel during the Fourth Plan will grow at a rate which is only somewhat faster than the rate of increase experienced during the Third Plan. This would imply an annual growth by close -to 12 percent per annum, putting Indian steel requirements not much beyond 10 million tons in 1970/71. 62. Even the foregoing figure warrants caution because weight savings may be achieved as a result of the rationalization and standardization of sections. 1/ With the increasing cost in recent years of various inputs in the production process, there may very well be considerable pressure on design engineers and the steel producers to make such savings possible. Indian users of industrial raw materials have shown considerable responsive- ness to prices as evidenced by wide-spread consumer preference for the lower priced "commercial" grade steel sections, and particularly by the marketing difficulties in the first half of 1965 for a sizeable proportion of pig iron imported from the U.S.S.R. (The iron was imported in response to the reported pig iron scarcities and sold at a price of about Rs. 80 per ton over the controller price, a fact which created considerable sales resistance among hoped-for buyers and contributed in the end to the decontrol of pig iron last August.) None of the available demand forecasts, having been computed only on the basis of physical steel use norms, take changes in cost and price relationship into account. Wfhile macro-economic variables and end-use estimates will continue having an important place in estimating future steel requirements, there is increasing urgency that reactions to possible varia- tions in steel prices feature strongly in such an assessment, using reasonably detailed and representative sample surveys. In fact, such an exercise would be needed soon to establish a better founded criteria for the planning of future capacity than the ones available at present. 63. India's steel industry has export prospects, especially in the nearby countries where India would have an apparent location advantage. At present, however, it is doubtful that the Indian steel industry can expect sustained large-scale exports at the end of the Fourth Plan in view of the likely pre- emption of supplies by the Indian market. However, this may change in subse- quent Plan periods. In the intervening period, there may, of course be some exports of items in which output temporarily exceeds domestic requirements. 1/ A recent study of the NCAER indicates that savings in structural steel may amount to as much as 25% as a result of standardization and the increased use of tubes and welded sections in construction.  64. Future Supply Position and Need for Expansion: The Third Plan called for an increase in domestic output of finished steel to 6.8 million tons in 1965/66. The increase was to come mainly from the Third Plan expansions of the HSL plants, although some output was expected from a new flat pro- ducts plant to be built by the Government at Bokaro in Bihar. (Construction of this plant has begun only very recently and finished products are not likely to be available in appreciable quantities until the early years of the Fifth Plan.) The five steel works' output of saleable steel in 1965/66 amounted to about 4.8 million tons, the equivalent of nearly 4.6 million tons of finished steel, with the recent increase in output coming principally from Bhilai. The full effect of the Third Plan expansion in the HSL plants is expected to be felt in 1967/68, when India's output of finished steel should amount to about 6.4 million tons. This should meet a major proportion of India's steel requirements at that time though imports would still appear necessary. 65. In subsequent years, however, domestic output is likely to lag behind rising Indian steel requirements unless further capacity is added. Even now, due to insufficient Indian capacity, the demand pressures for a series of flat products are acute; flats account for the bulk of current finished steel imports and about 34 percent of apparent consumption. (Only about three-quarters of apparent flat consumption in 1965/66 were met from Indian output.) If, as now expected, the next Plan will emphasize the use of underutilized industrial capacity already available (or capacity soon coming to fruition) as well as the production of agricultural implements, the share of flats in India's steel requirements is likely to rise. This devel- opment is likely to continue in the Seventies as India's industrial base expands. While the proportion of flats in steel needs may by 1970/71 not come to about h0 percent, as some Indian planners expect, it is clear that additional flat product capacity must loom large in a further expansion of the Indian steel industry. Capacity expansions for other sections would also be desirable. (The principal exception to this appears to be railway materials, capacity for which should after completion of the current expansion at HSL meet the Indian Railways' needs for some time to come.) 66. The Government of India is preparing a program for the construction of new steel capacity during the Fourth Plan and beyond. Understandably it has strong emphasis on flat products. Some, but not all, of this capacity might be in operation by 1970/71 for reasons explained in the next chapter. India's demand for steel will probably continue to exceed domestic output a few years beyond the Sixties. Until sizeable additional output is available from new facilities early in the Seventies, India may have to go on importing finished steel, probably at the rate of nearly one millicn tons per year. With imports at that level, India's foreign exchange bill for steel imports would continue for some time to amount to about $150-$200 million per year, since most of the imports would probably be in the form of thin flats which are expensive steel products.  V. PLANNING FOR THE FUTURE 67, Planning work for the Fourth Plan program has been underway, though intermittently, for about four years. 63. Approximate Goals: The steel planners were for a considerable time gilded by the Indian demand estimates referred to in paragraph 59. For planning pturposes, they chose the lower range (12 million tons) of estimated domestic -: quirements of finished steel in 1970/71. To meet a demand of that order from Comestic production would require raising the present ingot output of about 6.5 million tons to nearly 16 million tons. In fact, until last year an ingot capacity target of 16.5 million tons by 1970/71 has been considered in India. Hio)wever, in view of the likelihood that resources and time may not suffice to aThieve capacity of that order, and because demand was no longer expected to reach the earlier estimated levels, recent discussions of the next Indian steel expansion program have focused on a lower capacity range for the end of the -,Yurth Plan. The present plans are to raise the capacity of the HSL plants, ..o build the proposed new public sector plant at Bokaro, and to expand IISCO's -.-pacity to make use of available rolling facilities. In addition, TISCO has been requested by the Government to examine a doubling of its present capacity, and considerable work has been done on the proposal of building a fifth public ,;ector steel plant. (Various sites for this project were reviewed last year !:y an Anglo-American group in the vicinity of the Goan and Bellary-Hospet iron cre fields,and in the area of Visakhapatnam near the Bailadilla ore deposits; the areas are shown in the attached map.) According to the planners, not all cf the contemplated installations, particularly the fifth public sector plant and TISCO's expansion, could be completed by the end of the Fourth Plan. The following table summarizes the expansion program now under consideration in ,.idia. Table 3 (million ingot tons) Rated Capacity on Tent. Est. Completion of Proposed Capacity Production Third Plan Program Additions Total in 1970/71 A. "Core"of Program Bhilai 2.5 1.0 ) 3.2 3.0 Durgapur 1.6 1.8 ) . 3.4 2.5 Rourkela 1.8 0.7 ) Epansions 2.5 2.0 IISCO 1.0 0.3 ) 1.3 1.3 Bokaro - 1.7 (new plant)-/ 1.7 - 5.5 12.1 8.8 o Possibilities TISCO 2,0 2,0 (expansion) 4.0 2.0 Fifth Public - 1.5 (new plant) 1.5 - Sector Plant 3.5 5.5 2.0 T' tal A + B 8.9 9.0 17.6 10.8 7 Capacity buildup to continue, without interruption, to 4 million ingot tozis. rce Ministry of Iron and Steel, May 1966  - 26 - The Indian planners also foresee that integrated steel plants may have to meet a substantial share of pig iron required outside the works. (Indian estimates put these requirements in the vicinity of 2.5-3.5 million tons by 1970/71). The Government has, in fact, decided to advance the construction of blast furnaces well before associated steel making and rolling facilities are installed, as for instance at Bhilai and Durgapur. 69. Preparatory work is furthest advanced on Bokaro, IISCO and Durgapur. The U,ISoSOR concluded an agreement with India in January 1965 for a loan of 190 mi'llion roubles for the foreign exchange cost of the initial stage of the Bokaro plant and has since then presented a project report (up to the four million tons stage) to the Indian Government. The United Kingdom indicated its willingness to provide