Context: The newly-formed coalition government approved a budget substitution bill for the current fiscal year, with certain adjustments.
In this bill, especially a policy decision affecting the steel industries has emerged unfriendly for Nepal’s steel companies since they argue that it has created unfair competition between the country’s existing steel industries.
Issues related to Steel Industries in Nepal: Let us begin by reviewing the existing situation of Nepal’s steel industry.
Steel is manufactured in Nepal using two different processes. One is by using an induction furnace, and the other is by directly importing billet and processing and refining it in domestic industries.
Nepal has a total of 30 steel industries. Six of these industries use the Induction Furnace technology, while the remaining 24 use the second option.
Returning to the subject matter, the new budget, which was enacted through a substitution bill, exempted all taxes, including excise charges, for industries that use induction furnaces (only six), but there is no such exemption for the remaining industries.
As a result, all 24 steel industries have protested the government’s move and have halted production, believing that such a biased policy will result in a massive loss for them.
The government’s argument is that those industries which use induction furnaces are actual manufacturers, whereas the rest of the industry is basically importers.
Moreover, the government’s working culture and revision process before introducing any policy could be questioned and may clearly appear to have been influenced by few interested parties. In this scenario, the government could actually come up with a better and more practical solution.
This logic is hard to support. If this is the case, why does the government refer to those industries that assemble bikes in Nepal as “industries”?
Or, why is it that the government refers to those enterprises which assemble household appliances as “industries”?
It should be noted that under the current policy any business that adds 30% value is classified as an “industry”.
This reasoning does not appear to be persuasive because the rest of the industries import just the billet, while they refine and process it in-house.
Similarly, due to the unfavorable market competition, the current provision may force these 24 industries to close permanently.
Similarly, it should be noted that Induction Furnace technology is a globally discarded steel-making technology as the quality of steel produced through the induction furnace route doesn’t meet the quality of standards.
Not only that, but this practice poses environmental and health risks to the personnel at the production facilities.
Countries such as China have already outlawed induction furnaces as a cause of low-quality steel and pollution.
Regardless of these facts, the government’s decision to provide zero tariffs on the raw material ‘sponge” used to make billets in these industries and to prioritize them appears surprising.
As previously stated, this policy could result in the closure of 24 industries, which could have the following consequences:
The possibility of shutting down the existing 24 industries is just the beginning of a long list of consequences.
Each industry’s average investment is about Rs. 5 Arab. If this scenario plays out, the country will suffer a significant loss of capital, which will have a negative impact on the country’s financial institutions and financial system as a whole.
These industries employ significant employment. If these industries close, many people will lose their jobs, which can push the country towards institutional unemployment, especially during this time of pandemic which has already reduced employment.
The government’s revenue loss is the second issue. The potential revenue will be reduced if the provision of 0% duty on raw materials imports is implemented, and the government may experience difficulty to generate adequate revenue.
How feasible is it to provide the industry with a tariff of zero percent? How will the government be able to collect enough revenue in this manner? Well, it will be quite interesting to know the real arguments behind this incentive.
Similarly, if the rest of the industries close, only the remaining six will struggle to meet steel demand, which could lead to price inflation, which would be detrimental to the economy.
Similarly, this can be used to the benefit of the aforementioned industries by creating an artificial shortage of items.
Apart from this, promoting the Induction Furnace industry may have a negative impact on the country’s environment, causing us to fall behind on our global commitment to net-zero carbon emissions.
In this light, Nepal’s commitment to the SDGs and participation in the upcoming COP26 may be questioned. We should also look at every opportunity to leapfrog into efficient and cleaner technology.
Moreover, the government’s working culture and revision process before introducing any policy could be questioned and may clearly appear to have been influenced by few interested parties. In this scenario, the government could actually come up with a better and more practical solution.
Suggestion: One of the alternatives could be as follows.
Shifting to Electric Arc Furnace industries could be the greatest solution here. Rather than establishing a zero-tariff system for induction furnace industries, the government could have offered tax incentives to industries that switched to electric arc furnaces.
The government would have fostered local manufacturing in a clean and environmentally friendly manner in this approach.
Electric Arc Furnace is a reliable steel-making technique used around the world as an alternative and refined technology.
This technology produces high-quality steel with a composition that can be properly regulated. The steel quality generated by an electric arc is completely purified and contains no impurities. Furthermore, this is both energy-saving and environmentally friendly.
The government should, therefore, encourage the existing steel industries to shift towards electric arc furnaces and give benefits to the ones adapting this.
And as a priority, the government should also review its policy to ensure that the steel industries could flourish in Nepal.
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