Last week, the Union Cabinet approved the privatisation of Rashtriya Ispat Nigam Ltd, the Public Sector Undertaking that runs the Visakhapatnam Steel Plant, VSP or Vizag Steel as it is called. As I write this article, VSP union workers are organising massive protests in front of the plant shouting slogans against the Narendra Modi government. There are other rallies too being organised across the city of Visakhapatnam.
Usually, mobilising so many people against such decisions takes time. So, to the younger generations outside of Uttarandhra, this swift and loud response by the people may seem unusual. There is a unique history behind Vizag Steel, the landmark that gave the city the epithet of Ukkunagaram (Steel City).
The historic agitation for Vizag Steel Plant
At the outset, the reader must understand something about Telugu identity. The Indianness of Telugu people is mediated through their Telugu identity and pride in all things Telugu. It is the kind of identity that requires that its unique cultural space and agency be respected, as it respects the space of others. It is also characterised by a readiness to defy the establishment. This is exactly what the Telugu Desam Party (TDP) founder N.T. Rama Rao later gave voice to — ‘Telugu atma gouravam’.
So in 1966, when Indira Gandhi decided against having a steel plant in Vizag despite an Anglo-American consortium’s recommendation, it was seen as an insult to the Telugus. Led by freedom fighters T. Amrutha Rao and Tenneti Viswanadham, thousands of students, workers and commoners started an agitation that shook the entire state. The protests turned violent when 12 unarmed persons were killed in police firing, which included minors. Sixty-six MLAs and seven MPs even resigned in support of the demand to have the steel plant in Vizag. In 1970, Indira Gandhi finally gave in and announced the establishment of a steel plant at Visakhapatnam, making it India’s first coastal steel plant.
In all, 32 persons sacrificed their lives, 64 villages were evacuated and 22,000 acres of land was acquired to build this gigantic steel plant. Even today, the people who lost their lives in the agitation and their leaders are remembered as martyrs and tributes paid to them publicly. It is this history of struggle — sacrificing land, villages, and even lives — that makes the privatisation of Vizag Steel an emotional issue for the Telugus.
Debunking the privatisation rationale
Vizag Steel’s losses and debts are the most common justifications given for privatisation. However, this is misleading for several important reasons:
a) No captive mines
Being the only steel-manufacturing PSU without captive mines, the Vizag Steel Plant spends significantly higher on raw material than other steel plants in the country. While firms with captive mines spend Rs 1,500 per tonne on iron ore, VSP spends Rs 7,000. Hence, the raw material expenditure of SAIL and Tata Steel, which have captive mines, is 48 per cent and 35 per cent respectively of the total cost. For VSP, it is a whopping 65 per cent (Figure 1). By making VSP operate without captive mines, it is being forced to bleed to make it look like a loss-making company to shareholders.
b) Forced to borrow
VSP was debt-free in 2011-12, that is before it started its expansion. Today, burgeoning interest payments are eating into its earnings (Figure 2). These payments are made to pay off debts that the VSP took to fund its expansion plan to become the largest single-location plant by 2032. With the Center not providing any funds for expansion, VSP was forced to rely on a 10-year Rs 22,500 crore debt plan for this expansion.
c) High input costs
VSP faces high iron ore costs, high freight costs, industrial power tariffs, high credit costs, import duties and cess on coking coal. These are market conditions that are common to the entire industry — whether private or public companies — and simply not in the control of VSP. Disinvestment will not change these market conditions.
d) Anti-growth move
Hasty disinvestment, especially during an economic slowdown, is counterintuitive. It will reduce net private investment coming into the economy. The private investment that could have gone to creating new enterprises or taking risks would be drawn away to buying “safe” projects having government backing. This affects growth opportunities and new capital formation, which is badly needed to recover from the current ‘recession’.
What is the solution?
Privatisation must only be considered for government enterprises that report losses for a long time, like Air India. It might seem like the easy way out but a government handling the budget of 1.3 billion people should be able to manage critical PSUs. This is especially the case in steel-making, which was identified as one of India’s strategic sectors by the Narendra Modi government. Vizag Steel is a Navaratna company and one of India’s largest steel-making plants. It is a highly strategic asset for the nation that must not be sold to private interests.
My father, Yerrannaidu Garu, previously raised his voice against VSP’s privatisation in Parliament in March 2000. Perhaps the approach of the then Central Government under Atal Bihari Vajpayee shows the way forward for VSP today. Instead of privatising VSP, the Vajpayee decided to turn it around and suggested that loans be converted into equity. VSP also developed new products, new niche markets, negotiated an interest rate reduction, waiver of penal interests, pre-payment of scheduled principal amounts, availed lower interest products against working capital and got a Government of India guarantee for working capital loans.
The plant started to perform well to the extent that it became debt-free by repaying all long-term debts in 2003-04. It has had only three loss-making years since the Vajpayee government’s fiscal intervention. The Modi government must not only inject fresh capital but also consider allocating captive mines to VSP. Both VSP and mines come under the Ministry of Steel. We need the kind of political will today that the Chhattisgarh Assembly showed by unanimously passing a resolution to purchase the Nagarnar Steel Plant if the Centre disinvests it.
Vizag Steel Plant is an emotional issue and privatising it would hurt Telugu sentiments. Beyond sentiment or history, it is also about sound economic policy. It made huge profits these past decades, and continues to provide livelihood for thousands of families directly or indirectly. It being in losses and debt recently is a misleading justification for privatisation because the lack of captive mines leads to high raw material costs, and VSP’s debt burden leading to high interest payments is the result of the Centre not providing funds for VSP’s expansion. Note that even private steel companies have been allocated captive mines. Expecting a company to run profitably without a level-playing field is like asking someone to run after tying up their legs. Steel is one of the eight core industries of India. It is critical that Vizag Steel Plant, on its way to being India’s largest single-location, coastal steel producer, remains in the hands of the people.
Rammohan Naidu Kinjarapu is Member of Parliament, Srikakulam, Andhra Pradesh. Views are personal.