India's Plan to Cut Tax on Iron-Ore Exports Hits Roadblock.

NEW DELHI—India's steel ministry is trying to block tax-cut moves aimed at reviving the country's falling iron-ore exports and boosting foreign-exchange inflows.

A proposal by the trade and mines ministries to cut a 30% tax on iron-ore exports by as much as one-third was opposed by the steel ministry and steelmakers who said the raw material should be kept at home to fuel an expected threefold expansion in domestic steel-output capacity.

It is unclear how long it will take to resolve the infighting in recent government consultations over the tax, and whether worries about India's trade balance and its impact on the rupee will outweigh steel-sector interests. This also illustrates how policy gridlock in India damages investor confidence and slows decision-making at a time when the economy is struggling.

India's widening current-account deficit has helped drive the rupee to a new low of 61.80 against the dollar Tuesday.

The government is "under tremendous pressure" to cut the duty to boost foreign-exchange earnings, but that should not happen at the cost of the steel industry, where companies plan to invest billions of dollars in growth projects in coming years, said a senior steel ministry official, who didn't want to be named.

That argument has been weakened by decisions in July by ArcelorMittal and South Korea's Posco to scrap plans for two steel plants, which were among the biggest foreign-investment proposals in India, due to deteriorating market conditions, land-acquisition problems and uncertainty over iron-ore supplies.

Even if the government eventually cuts export taxes, India will struggle to boost earnings because as much as 40% of production capacity is shut due to mining bans imposed over alleged illegal mining, and as boosting output will take months or years. A Supreme Court ruling is pending on a production ban in the western state of Goa, which previously accounted for most of India's iron-ore exports.

Also, global iron-ore prices have tumbled due to overcapacity, and with major mine projects in producers like Australia still to come on line, analysts are forecasting further falls, which will erode India's ability to cash in on future exports.

India's was the world's third-largest iron-ore exporter three years ago, when it shipped out about 100 million metric tons. But due to the bans and an increase in export taxes to 30% from 20% in late 2011 to boost local ore availability, exports fell to 62 million tons in the fiscal year ended on March 31, 2012 and about 18 million tons the following year.

This amounted to a loss of potential earnings of around $17.5 billion since 2010-2011, Federation of Indian Mineral Industries Secretary General R.K. Sharma said. The federation, India's main mining-industry body, says the export tax has cost the country thousands of jobs.

Source : online.wsj.com