State Of The Economy 2020

What’s ailing Mandi Gobindgarh? | Steel Industry | State Of The Economy

Rust, from neglect. A century-old industrial town, which remains an important centre for secondary steel industry, is facing ruin


Mandi Gobindgarh still retains the charm of a pind, a quintessential Punjabi village. There’s the occasional farm, a splash of green in an otherwise black and grey landscape. The winter sun is kept out by thick smog, which falls like a blanket over a line of locked steel mills. It calls to mind a ghost town, an antithesis of the bustling Ludhiana barely 60 km away. Once known as the ‘Tatanagar of Punjab’ and still known as the ‘loha mandi’, Mandi Gobindgarh has become a symbol of Punjab’s dwindling business sentiment, done in rust.

If we journey back 100 years, to 1902, Mandi Gobindgarh would have seemed a different place. It was set up as an industrial area in Nabha state by Maharaja Hira Singh, the successor of the Phulkian Dynasty under the British. It was a time of battles and weapons were necessary, and one story goes that this led to the founding of this loha mandi. The landlocked town must have seemed ideal and it once was walled in, with four doors, which have now been brought down. There are legends attached to its glory, even that a warrior saint had blessed the town with never running out of iron. 

“The Sirhind-Khanna-Mandi Gobindgarh cluster was extremely prosperous,” says Vinod Vashisht, president, All India Steel Re-rollers Association (AISRA) and chairman, Lakshmi Steel Rolling Mills — one of the biggest medium-sized enterprises in the area. The first steel re-rolling mill was set up here in 1940 and Mandi Gobindgarh remains the largest cluster of MSMEs in the secondary steel industry. The secondary industry, which includes re-rolling mills that turn scrap metal into products and are spread across the country, meets 57% of India’s steel requirement. This town has always adapted to its changing masters and their demands, but today, when its contribution could have been crucial, it stands on the verge of irrelevance. Its share in India’s steel production has fallen to 40% in 1970 to 15-20%, now. Meanwhile, the industry with roughly 1,200 units across India is moving east to Jharkhand and Odisha, west to Gujarat and Maharashtra and south to Karnataka.

The units in the cluster neither have enough information about the various government schemes nor do they have enough capital. They are also battling a cash crunch since their GST refunds are slow in coming through due to a poor grievance redressal mechanism. Mandi Gobindgarh is part of this struggling whole and has to deal with its peculiar trials.

Problem of plenty

The first blow came in 1992. Ironically, it came from government’s efforts to boost steel production, through decontrol. Private players were invited, licencing was made easier, foreign equity investment was allowed up to 74% and import duty on raw materials was lowered. Many steel rolling mills soon popped up, till the Goldilocks balance was found and lost. There was excess capacity, and nearly half of the 300 mill owners had to shut shop within ten years. The new units that were coming up were also being built near the ports in Maharashtra and Gujarat, while those in landlocked Mandi Gobindgarh had to bear 10% more freight charges. “This cluster was established against the law of economics,” says Sushil Sharma, proprietor, RK Plate and secretary, AISRA (north zone). In 2012-13, demand nosedived and daily output tumbled to 12,000 tonne from 16,000 tonne in 2010. Around the same time, the government also implemented the e-TRIP policy, which mandated that dealers and manufacturers in Punjab were required to submit information about transactions even before goods were transported from one region to another. Since many could not adhere to the new rules diligently, tax officers would take advantage of the dealers. “Close to 50% of MSMEs were declared as defaulters due to the misuse of the policy by local excise and tax inspectors,” says Rajiv Sood, president of Small Scale Steel Re-Rollers Association. He adds that “every second house was repossessed by banks”.

Just as small enterprises were dealing with rampant corruption, a shortage of raw material set in. In May 2014, India imposed 2.5% duty on scrap metal imports, which power 60% of the country’s steel capacity. This just added to their woes as the units near the ports cornered the little raw material that was available. “It continues to the biggest issue,” says Rajan Garg, vice-president, Steel Roller Association, Mandi Gobindgarh and owner, Beepur Steel Industries, which was shut the day we visited. “The scrap from ship-breaking has completely come to a halt. There is no scrap coming in from Alang and Bhavnagar. We are running at 50% capacity utilisation.” He adds that there is shortage of nine million tonne of steel scrap across India. Sharma of RK Plate says, “I might have to lock up and leave in the next five years. We are running at a capacity utilisation of only 45%. We are putting out only 80-90 tonne, while we are equipped to do close to 200. Our unit is running only five days a week.” 

Negative charge

Another input that is causing the MSMEs much heartache is electricity. In any steel unit, the cost of electricity is a major expense, accounting for 10-15% of the total. Since the new state government has been elected in 2017, the fixed charges have gone up dramatically, say traders. Punjab charges industries Rs.8 to Rs.8.5 per unit, while neighbouring states such as Himachal Pradesh and Madhya Pradesh levy approximately 25% lesser. This is one of the states that charges customers extra for access to the spot electricity market. The added fee is to discourage high-paying buyers from moving away from state’s power distribution companies. “Despite repeated promises by the state government to lower the rates, they have not done so,” says Vashisht, adding, “Since Punjab is primarily an agriculture economy, farmers get most of the sops on offer.” While the state government dug its heels in on this one, they had beaten a retreat earlier when the MSMEs protested against e-TRIP, or Electronically Transporting Information within Punjab. This taxing system had been an attempt to curb tax evasion but the businessmen argued that it was simply making their products costlier than competitors’. That was a rare victory for the traders.

While the twin weights continue to drag the units down, the MSMEs are unable to invest in their future. The businesses are not able to afford the latest technology, since they are short of money and the banks are wary of lending to these businesses. Sharma says that they are charged higher interest rates. Vashisht adds, “We remain labour-intensive because we do not have the technology to automate processes.” This means they are not able to keep up with the quickly-changing demands of the industry. For example, new products come out every month, and each has different specifications. Help with technology upgradation was meant to come from the central government, under the National Steel Policy (NSP) 2017, but nothing has moved on that front. Garg says, “The NSP specifically states that testing facilities would be set up in steel re-rolling hubs and established facilities would be upgraded to cater to possible rise in demand, but that has not happened.” 

In 2018, the steel ministry made another promise. It announced that steel products from MSMEs would be used in infrastructure projects backed by the government. At the event, representatives of the Steel Re-rollers Association of Maharashtra were ecstatic and had listed the benefits of supporting the smaller players. They said that by sourcing from MSMEs, the government would be able to save Rs.100 billion annually. Every tonne of good quality steel could be had Rs.10,000 cheaper. But, all the good intentions remained on paper, say the entrepreneurs. 

Tender specifications — such as, in projects completed and minimum revenue over the past three years — continue to be in favour of large-sized steel manufacturers. The smaller facilities are left to fight it out in the market against biggies such as SAIL and TISCO, who have access to “unlimited” supply of raw material from the mines awarded to them earlier. MSMEs, meanwhile, have to go through brokers and e-auctions from other miners, which is more expensive.

A recent anti-dumping policy implemented by the Centre has been a big help though, they say. Since October 2018, custom duty, in the range of $44.89 to $185.51 per tonne, has been imposed on the import of various steel and steel products from China. “Their products were always 10-15% cheaper,” says Sharma. 

This is but small comfort, given the otherwise dismal environment. It is hard to miss the anger in Sood’s voice as he says. “It is a crime to own a business here, because micro and small units are dying a slow death. I have seen nearly 250 units closing down over the past six years. Friends of mine, who come from businesses that are two to three generations old, have migrated,” he says. Sood still runs his Royal Steel Industries. 

“MSMEs helped the country move away from overdependence on imports, but the attitude of the ministries does not reflect that,” he says. In December 2019, Minister of Steel, Petroleum and Natural Gas, Dharmendra Pradhan spoke about the importance of the secondary steel sector. He said that his government has made raw materials more easily accessible to the industries and the next on their list is to make energy affordable, and cited Urja Ganga Yojana as an example. This will be a 2,540 km pipeline that supplies natural gas to households and later industrial clusters. But this pipeline will traverse through Uttar Pradesh, Bihar, Jharkhand, Odisha and West Bengal. Mandi Gobindgarh will be left waiting for its turn, once again.