Will PLI scheme for specialty steel deliver ?

Last month India’s steel sector got a booster shot when the government announced inclusion of ‘specialty steel’ under the Production Linked Incentive (PLI) scheme. Bit late in the day, but better late than never it is. What does the government have to say about it?

With a budgetary outlay of ₹6,322 crore, the scheme is expected to bring in investment of approximately ₹40,000 crore and generate employment both direct and indirect. The duration of the scheme is for five years from 2023-24 to 2027-28. The benefit of this scheme will accrue to both big players — integrated steel plants — as well as to the smaller players (secondary steel players).

India’s steel sector is dominated by six big players — four in private sector and two in public sector — and as the Union Minister for Steel, Ram Chandra Prasad Singh, puts it, “Steel is a de-regulated sector, and the role of the Ministry is that of a facilitator to the steel industry. One has to see the contribution of these players in steel production too. If you see the private sector, it is contributing about 86 per cent of steel production and the public sector is contributing about 14 per cent...”

If this be the case then how will this scheme attract smaller players, particularly MSMEs? The Minister is confident that the scheme will benefit not only big players, but also secondary steel manufacturers and MSMEs. “The PLI scheme doesn’t discriminate,” he said.

‘Specialty steel’ is a downstream, value-added product of the steel manufacturing process. According to the Steel Ministry, it was chosen as the target segment because out of the production of 102 million tonnes of steel in India in 2020-21, value-added steel/specialty steel produced in the country is only 18 million tonne.

Apart from this, out of the 6.7 million tonnes of steel imported in the same year, around four million tonne was specialty steel, resulting in forex outgo of approximately ₹30,000 crore. By becoming aatmanirbhar in producing specialty steel, India will move up the steel value chain and come at par with advanced steel-making countries like Korea and Japan.

Specialty steel is value-added steel wherein normal finished steel is worked upon by way of coating, plating, heat treatment, etc, to convert it into high value-added steel which can be used in various strategic applications such as defence, space, power, apart from automobile sector, specialised capital goods, etc.

The chosen categories

The five categories of specialty steel which have been chosen in the PLI scheme are: coated/plated steel products; high strength/wear resistant steel; specialty rails; alloy steel products and steel wires; and electrical steel. It is expected that after completion of the scheme, India will start manufacturing products in these product categories.

There are three slabs of PLI incentives, the lowest being 4 per cent and highest being 12 per cent which has been provided for electrical steel (CRGO). The scheme will ensure that the basic steel used is ‘melted and poured’ within the country, which means that raw material (finished steel) used for making specialty steel will be made in India.

From this, it appears there should be no room for worry. But there are concerns and they come from the basic structure of the scheme. The areas of concern include the cap of ₹200 crore on an eligible company across product categories, threshold on minimum incremental production and minimum investment.

The quantum of investment requirement for high strength and electrical steel is such that smaller players are ruled out, say industry observers. For smaller players, even ₹200 crore is tough. In fact, some say even big players may find it difficult to meet the target of incremental production on an annual basis.

Another worrying component is a provision of statutory audit.

As Sidhartha Jain, Partner at EY, puts it, “PLI limits per company group has been set at ₹200 crore annually (total entitlement — ₹1,000 crore) and hence the expectation considering the overall budget of ₹6,322 crore seems to be to encourage large players to incur capex and drive the agenda for specialty steel. MSMEs will likely have only a limited space to participate and that too largely in coated/plated steel and some products in alloy steel/wires.”

“Another aspect is the condition of annualised incremental production prescribed in the PLI scheme. Our discussion with companies reveals it is too high a requirement. If the requirement was across the tenure, it could still be better,” he said, adding “besides, if the company doesn’t meet the commitment, then for that year, the incentive will be at risk.”

“A company may have to make upfront investment to set up the capacity. Hence, to meet the criteria of incremental production year on year as prescribed in the PLI may be a challenge. Once the detailed guidelines are out, things would be clearer,” he pointed out.

New development stage

To compete globally, the Indian steel industry has to enter into a new development stage in keeping with changing dynamics. The rapid rise in production has resulted in India becoming the second largest producer of crude steel during 2018 and 2019, from its third largest position in 2017. The country was also the largest producer of sponge iron or DRI in the world and the second largest finished steel consumer in the world after China and the US in 2019, based on rankings released by the World Steel Association.

“… We believe that it will bring a complete change as far as domestic production of specialised steel is concerned, our import will go down and we will be able to export also,” the Minister said.

MSMEs can take advantage in the downstream side of the sector. Even today, MSMEs are producing alloy products, and this allows enough opportunities to them, he felt.

But critics feel that the government’s thinking is that only larger players can attain the objective, as in the steel sector the capex itself is so huge.

Some industry observers believe that most companies that opt for the scheme will seek deferral in the first year, as it will be difficult to meet the set targets. Also, the statutory audit clause is worrying, and it could impact the actual disbursement.

While the government is working on the rules for implementing the scheme, the actual success of the it will depend on the intent. If the intent is clear, then it is indeed a booster dose for the steel sector.