A PRODUCTION

ANALYSIS

ON THE

STEEL INDUSTRY

OF

INDIA
SUBMITTED BY
Madhuri Daga (PRN NO-19060242029)
Rhea Pradeep (PRN NO-19060242048)
Subiksha (PRN NO-19060242067)
Tejashwini Kuna (PRN NO-19060242073)
 CONTENTS
SERIAL PARTICULARS PAGE
NO. NO.
1 ABSTRACT 3
2 INTRODUCTION 3
3 OBJECTIVE 4
4 Section 1: LITERATURE SURVEY 4
5 Section 2: DATA AND METHODOLOGY 7
6 Section 3:RESEARCH AND ANALYSIS 7
7 Section 4: CONCLUSION 10
8 Section 5: BIBLIOGRAPHY 11
ABSTRACT

In this paper, we have observed panel data for the steel industry in India for the 10 previous
years from 2009-2019 which determines the relationship between production and two of the
inputs namely Labour and Capital using a Cobb-Douglas Production Function. And following
that we run a simple regression and find about goodness of fit of our model and the test
statistics also show that it is violating the assumption of heteroscedasticity and creating a
problem of multi-collinearity and therefore policy is suggested to avoid the same as well.

Key Words – The Steel Industry of India, Cobb-Douglas production function, Regression,
heteroscedasticity and Multi-collinearity.

INTRODUCTION

Iron and Steel industry of India is nearly a century old. Before 1947, India’s producing
capacity stood 1.3 million tonnes where one million was produced by TISCO and 0.3 million
by IISCO. The implementation of the New Economic Policy created new channels to the
steel makers like greater access to information on global operations and techniques in
manufacturing and also gave competitive prices for their inputs. SAIL (Steel Authority of
India) was the platform through which public sector undertakings could market their steel.
Tata Iron and Steel Company (TISCO) was one of the first modernised large-scale industries
which were established in Jamshedpur in 1907. Before TISCO, there were two other small-
scale private industries which were established but failed to exist due to high competition
from foreign producers. The steel industry of India was de-licensed and decontrolled in 1991
and 1992 respectively. There are two important factor which can be considered as the back
born for the growth of the Indian steel sector are availability of raw materials such as iron ore
and cost-effective labour. We can say that the steel industry is contributing a majorly to the
Indian manufacturing output. Rapid industrialisation of the country makes it necessary for
iron and steel industry to develop. Thus, steel industry has been continuously concentrating
on upgrading the older plants and installing energy efficient machines. Steel industries in
India is divided into three categories namely major producers, main producers and secondly
producers. During 1950-51, the total production of finished steel rose from 1.04 million
tonnes to 4.64 million tonnes in 1970-71 and by 1991-92 the finished steel production stood
up to 14.3 million tonnes and 87.67 million tonnes in 2013-24. From 2014-16, India was the
2nd largest producer of raw steel and largest producer for sponge iron in the world. The total
finished steel and raw iron produced by the industry was 82.68 million and 9.7 million
respectively. For the year 2017-18 the production of steel increased to 104.98 million tonnes.
By 2030-31 the capacity of production of steel is expected to be 300 million tonnes.

OBJECTIVE
This paper analyses the impact of labour and capital on the production in the steel industry of
India. Our main objective is to find out the relationship of the production in the steel industry
with its inputs. We analyse this by taking labour and capital, the independent variables as
inputs for forming a Cobb Douglas production function and analyse further by running a
regression model.

LITERATURE SURVEY

Shrabanti Pal (August 2013) tried to access the performance of steel industry in terms of
Production, Consumption and Foreign Trade & exhibited the trend for a period of 20 years
from 1991-2011. The study found that India witnessed a tremendous growth during 2004-05,
where the consumption of steel exceeded production. The finished steel production grew at a
CAGR of 7.94%. During the twenty years India also become a net importer of steel due to the
high demand prevailing in the country. The study concluded that India had the potential to
become a top producer of steel in the near future. It also showed that CAGR of production,
consumption and foreign trade present an attractive picture which further predicted India to
become the second largest producer of steel in the world by 2015-16.

The paper by Dr Suresh Vadde and G Srinivas aims at presenting the global scenario of
steel industry and also its production, consumption and growth of steel industry in India.
Steel is an important element for the development of modern economy and the level of per
capita consumption of steel is considered to play a major role in estimation of socioeconomic
development and the living standard of the people. The steel industry of India has been
showing rapid growth over the past few years. The government is supporting the steel
industry with favourable reforms while on the other side private sector is supporting by
investing billions of dollars. The industry sustained the growth even through economic
slowdown. The production rate of steel has been showing a steady growth over the past years.
Orissa and Jharkhand are the most potential steel destinations of India. It was identified in
1976 that rural markets have greater potential in the consumption of steel. India has a long
way to go with respect to its consumption of steel when compared global consumption steel.
Innovations in technology are required by the steel manufacture to obtain higher grade of
steel as it would increase the steel consumption by decreasing fabrication need which
ultimately reduces the cost of steel. Some of the challenges faced by the steel industry of
India are the low productivity of labour though abundant supply of labour is available, high
cost of basic inputs and services, delay in the adoption of advanced technology, high level of
taxation, lack of expenditure in research and production, low quality of steel and steel
products. India is expected to be the one of the largest producers of steel in the near future.

In the paper by Dr. Bhaskar Chatterjee, the level of consumption of steel is considered to
be one most important factor for measuring the quality of life. The year 2017 shows a
favourable outlook for steel industry in India. The consequent growth in GDP of India shows
that major segments like construction, real estate, capital goods, consumer goods,
automobiles and energy are benefiting. With the introduction of Make in India there will be
growth in the steel industry and also India will be able to supply higher grades of steel to
meet the requirements of the population. China has been depending upon the exports of steel
because the growth in steel consumption is slowing down. The consistent availability of coal
and iron ore still remains as a challenge of Indian steel industry. Indian steel enterprises
invested huge amount in the modernisation and the expansion of existing units in order to
build a world class and cost competitive and environment friendly industry despite the threat
of its imports. According to the list of World Class Steel Makers in the world 36 steel makers
were classified as World Class Steel Makers out of which 6 where from India.

Dr Shailendra Kumar Chaturvedi and Ms Suruchi Tripathi in their paper aim at

comparing the growth prospects for Indian steel industry in pre- post liberalized settings and
also to know the impact of government policies and FDI on the growth prospects of Indian
steel industry. The government is continuously making efforts to help the domestic steel
industries to overcome its problems and also to boost the demand and consumption of steel.
The new industrial policy paves the ay for private investment by removing number of
industries which was earlier reserved for the public sector and it also abolished compulsory
licensing. Currently imports of foreign technology and FDI are freely permitted to certain
limits. With liberalisation, there has been no shortage of iron and steel materials in India. By
2020, India is expected to produce 150 million tonnes of steel. As compared to the developed
nation, the potential demand of India has to be increased in the coming years. The
consumption of iron and steel is based upon the manufacturing construction and
infrastructure sectors which have been showing an impressive growth in the last few years in
India. Most of the global investors have identified India as steelmaking location.

The study by Shipra Bhatia was on the crisis in the Indian Steel Industry. According to the
study, production and consumption of steel has grown and stood at 100.8 million and 83.9
million during 2016-17 and is still rising. India now has become a net exporter of steel which
previously had been importing steel. India has been exporting steel to countries like Italy,
Iran, UAE, Vietnam and Belgium. The study concluded that re-opening of mines in
Karnataka and Goa will boost production in the country. The study also suggests that unless
prompt measures are not taken for debt relief and improving the profitability of the Industry it
may become difficult to meet excess demand.

DR. M. Kalimuthu and MR. A. David in their study analysed the growth of steel industry
in the world and India. They tried to find out the growth of steel industry in the world and
India. They examined the short term and long term financial solvency and profitability of
steel industries. They measured the impact of capital structure and utilisation of assets on
profitability of steel industries. They have taken a sample of 10 major steel plants and found
that JSW (Jindal South West Holding Limited steel company) had the highest CGR value in
terms of current assets while Sunflag iron and steel company had the lowest CGR value. The
study has bought out the importance of financial performance of steel industry. For sustaining
and combating global economic scenario and competition steel industry needs to monitor its
financial performance and take rational financial decisions.
DATA AND METHODOLOGY

This paper is based completely on secondary data which has been obtained from Prowess IQ
database and the steel report produced by IBEF organisation. This data is presented in
descriptive econometrical manner in the form of regression equation and use of some
microeconomic applications. Our data set consists of 234 companies which lie under the steel
industry for a period of 10 years from 2009-2019. We have collected data for every company
individually. We have taken the Total Production which comprises of the sum total of the
sales and the change in stock as the variables, for Labour we have taken compensation of
employees as the variable and for Capital we have considered the summation of rent, lease
rent, power, fuel and water charges as the variables. We have used the R studio software
along with Microsoft excel to prepare the charts, regressions and calculations. By the
literature survey we have derived that many scholars have given the impact of export and
import on the steel industry but none of them have done the production analysis using
regression and other micro-econometrics tools. This paper doesn’t assure complete correct
information as it is based on secondary data because collecting primary data for the analysis
consumes a lot of time.

ANALYSIS
We will use the Cobb-Douglas Production function which is a form of production function
used to define the relationship of the output which can be produced using two or more inputs.
Here we have taken Labour and Capital as the two inputs.

The Cobb-Douglas Production Function is given as follows:

𝑌 = 𝐴𝐿𝛼 𝐾𝛽

Where,

Y= Total Production

A= Technological Constraint

L= Labour

K= Capital

And labour and capital are the inputs (independent variables)

Now, we take log on both sides,

𝑙𝑜𝑔𝑌 = 𝑙𝑜𝑔𝐴 + 𝛼𝑙𝑜𝑔𝐿 + 𝛽𝑙𝑜𝑔𝐾

We run the regression of the above equation giving commands in RStudio software firstly
starting by exporting the data from excel and then regressing the independent variables with
the dependent variable and we get the following results:

Log A which is the intercept term has the values 7.92052

0.46499 is the value of , which is the elasticity of output in respect to the labour. The value
of coefficient of labour shows that Labour is positively correlated to the output.

0.15679 is the value of , which is the elasticity of output in respect to the capital. The value
of coefficient of Capital shows that Capital is positively correlated to the output.

We have obtained the adjusted R squared value as 0.5171 that means 51.71% which shows
that is a moderate fit model. As for a model to be fit the value must lie between 50-100%. We
consider the adjusted R squared value because it removes the biasedness.

The t-value of Labour and Capital is 9.144 and 2.819 respectively which is greater than 2
shows that the independent variables are individually significant with the dependent
variables.

The P value is <2.2e-16 which means that the variables are statistically significant i.e. there is
a relationship between the independent variable and the dependant variables all together. And
since there is a relation between the dependent and independent variables so we reject the
Null Hypothesis.

The F-statistic value is 125.2 on 2 and 230 degrees of freedom so we accept the alternative
hypothesis.

The following is the graph plotted after the regression of the above function:
 The Residuals vs. Fitted plot shows the fitted values plotted against the model
residuals and since the model follows a slightly diagonal line, there may be other
predictors in the model as well.
 The Normal Q-Q plot shows the quantiles of standardised residuals plotted against
the quantiles. Here it shows that the error term is following normal distribution and is
positively correlated.
 The Scale-Location plot shows the squared root of the absolute standardised residuals
plotted against the fitted or predicted values and here since the lowless line is not
completely flat so it does not have a complete constant variance which indeed refers
to the fact that it violates the assumption of heteroscadasticity.
 Finally, the Residuals vs. Leverage plot show a measure of the influence of each
point on the overall equation against the standardized residuals. Though few points
stand out far from the pack, overall it shows that there are no large numbers of
‘outliers’ having undue influence on the fit of the model.
Now we get a plot for the histogram of the squared residuals which is given as follows:

Conclusion

The steel industry of India is the 2nd largest producer of raw steel in the world with an annual
production of over 82.68 million units of total finished steel as most of the steel is produced
in India. India comes after China which is produces the largest amount of steel in the world
which accounts for around 42.9% of the total steel production the world for the year 2017.
The steel industry of India got its freedom from the government in 1991; it was del-licensed
and de-controlled after the industrial policy of 1991 which enabled Liberalisation,
Privatisation and Globalisation. After these policies, the production of steel has shown a rapid
growth from 2009-2019 according to our survey conducted. Thus in this paper we have
emphasised on the production of steel using a Cobb-Douglas production function and tried to
find the impact of inputs like Labour and Capital which have shown a positive significance
with the Total Production as a whole as well as they are individually significant. Further with
the graph it was found that there was absence of heteroscedasticity but the problem of multi-
collinearity is there mainly because of correlation between labour and capital. And since it
was found out that our model is not a good fit but a moderately fit model we can also
conclude that inputs other than labour and capital should be taken into consideration so that
we get a more accurate R squared value for our model which indeed makes it a less unbiased
model. But the overall steel production has been increasing during the years and this can be
seen clearly by our assumptions.

Policy recommendation- More input independent variables must be incorporated to avoid the
biasedness and get a better goodness of fit for our production function. This might also
remove the problem of heteroscedasticity as well.

Bibliography
Bhatia, S. (August 2017). Crisis in Indian Steel Industry:Issues and Challenges. International Journal of
Scientific and Research Publications.

David, D. M. (2018). Reasearch Review Journals .

Pal, S. (August 2013). Study on performance and prospects of Indian Steel. Kolkata: International
Journal of Economics, Commerce and Research , J.D Birla Institute.

Srinivas, D. S. (Jan 2012). THE INDIAN STEEL SECTOR : DEVELOPMENT AND POTENTIAL. International
Journal of Multidisciplinary Research .

steel industry. (n.d.). Retrieved SEPTEMBER 2019, from IBEF: http://www.ibef.org/industry/steel-

presentation

Tripathi, D. S. (April 2018). government policy and FDI triggering growth opportunities of Iron Steel
in India. Indian Journal Of research .