IRACST International Journal of Commerce, Business and Management (IJCBM), ISSN: 23192828

Vol. 5, No.1, Jan-Feb 2016

Productivity Analysis of Steel Industry of India:

A case study of Steel Authority of India Ltd.
Dr. Asiya Chaudhary Neshat Anjum & Mohammed Pervej
Associate Professor Research Scholar
Department of Commerce Department of Commerce
Aligarh Muslim University, Aligarh Aligarh Muslim University, Aligarh

Abstract backdrop this paper attempts to propose a

India has emerged as a leading player in relatively simple productivity measurement
global steel industry contributing to about model suited to steel industry. A case study
4.7% of global crude steel production in is conducted in a steel industry by taking a
2011. Infrastructural expansion plans and Maharatna steel company i.e. Steel
raising per capita steel consumption in India Authority of India ltd, largest CPSE steel
promises unprecedented growth potential of producer of the country to analyze the
Indian steel Industry during next 10 performance based on the Productivity
years.The growth and all round development Accounting Model introduced by H. S.
of this industry has, made it a potential Davis. The results depict that the
competitor in the world. As this industry has productivity performance of industry has not
always been contributing extensively to been very satisfactory due to several reasons
GDP, employment generation, total discussed in the paper. Finally the paper also
industrial production, etc., it becomes discusses various measures that can be
necessary to measure its productivity in the adopted by the government to enhance the
recent past. The existing literature survey productivity and in turn increasing the
reveals that very few studies have been manufacturing and employment level in the
undertaken so far on the productivity industry.
measurement of a steel industry. Also, the Keywords: Steel industry, productivity
productivity measurement methods measurement model, total factor
presented in the literature are usually too productivity.
intricate and difficult to apply. With this

INTRODUCTION
The metal industry consists of establishments primarily engaged in manufacturing all types of
metals such as iron and steel, aluminum, base metals, and precious metals
(Vilamov,et.al.2015).The industry sells a variety of products, which includes sheet and tin
plate bars, wire rods, bars etcof different metals but revenue is predominantly generated from
the sale of iron and steel products.. Together, these products are expected to generate at least
51.2% of revenue in 2015 and are expected to remain the main revenue-generating segment in
future too. On the other hand the increasing growth rate of construction, automobiles, heavy

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Vol. 5, No.1, Jan-Feb 2016

machinery and equipment is expected to drive consumption of metals used in these industries
(Saniuk, Witkowski & Saniuk.S., 2013).Estimating productivity level and growth rate as well
as analyzing productivity determinants gained a renewed interest both among growth economists
and trade economists. As one of the major objectives of trade liberalization in India was to
enhance industrial productivity and input-use efficiency. Growth of a firm depends on the
efficient and rational use of the scarce resources available to the firm. In other words, it is the
level of productivity of the factors of production that determines the sustainability of the firm. It
is evident that output growth cannot be enhanced by continuous input growth in the long-run due
to the nature of diminishing returns for input use. For sustained output growth, Total Factor
Productivity (TFP) growth is essential and therefore, TFP growth became synonymous with
long-term growth as it reflects the potential for growth (Mahadevan, 2004).

Indian Steel Industry

India is the worlds third-largest producer of crude steel (up from eighth in 2003) and is expected
to become the second-largest producer by 2016. The growth in the Indian steel sector has been
driven by domestic availability of raw materials such as iron ore and cost-effective labour.
Consequently, the steel sector has been a major contributor to Indias manufacturing output.
(Ministry of External Affairs, n.d). Infrastructural expansion at large scale is planned for twelfth
five year plan starting from 2012 to 2017 and increasing rise in per capita steel consumption in
India shows a positive sign for potential growth of Indian steel Industry in coming 10 years.Steel
consumption in India is growing but the pace of growth is much slower in comparison to world
consumption.

Steel Authority of India Limited - A Maharatna Company

Steel Authority of India Limited (SAIL) is the leading steel-making PSU company in India. It is
a fully integrated iron and steel maker, producing both basic and special steels for domestic
construction, engineering, power, railway, automotive and defense industries and for sale in
export markets. SAIL is also among the seven Maharatnas of the country's Central Public Sector
Enterprises. Indias second largest producer of iron ore and of having the countrys second
largest mines network SAIL has a competitive edge in terms of captive availability of iron ore,
limestone, and dolomite which are inputs for steel making (SAIL,n.d).The Government of India
has granted the status of `Maharatna' to SAIL on 19th May 2010 with an aim that SAIL, can

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Vol. 5, No.1, Jan-Feb 2016

become prominent player both in national and international market. The researcher has taken
SAIL for the study because being largest public sector steel producing Maharatna Company, it
adequately represents Indian steel industry.( www.sail.in.)

Research Gap:
Through intensive literature review it was concluded that a lots of studies have been conducted
on productivity analysis of different industries like tea industry, paper industry and textile
industry but limited analysis was done on steel industry in general and SAIL in particular. The
researcher has selected SAIL for the study of productivity analysis considering the period of
2008-09 to 2011-12 with an aim to ascertain the total factor productivity of Indian steel industry
in general and SAIL in particular.

Measuring companys productivity :

Productivity measures Productivity and represents the efficiency with which physical inputs
are converted to useful outputs. Various productivity measures can be computed, depending on
the treatment of inputs and outputs. Single-factor productivity ratios, such as labor productivity
or capital productivity, give output per unit of a single input type. Multi-factor or total-factor
productivity ratios take into account the fact that multiple inputs are jointly used. (Lieberman &
Kang.,n.d).Productivity is a marginal contribution of a factor to the output growth of a product.
If productivity is increasing in an economy; it means that its factor of production and commodity
inputs are manifesting an increase in their output efficiency. The productivity improvements
along with the increase in quantities of factors will also be contributing an additional source of
output increase (Brahmananda, 1982).

Objective Of the study:

1. To identify the parameters to measure the changes in the productivity of SAIL: A
Maharatana Company.
2. To Analyze the change in trend in productivity from 2008 to 2012 of SAIL
Database and Methodology

The present study is based on secondary data and covers the period from FY 2008-09 to 2011-
12. To achieve the objectives of the study, data has been extracted from financial statement of
the selected company for the period of 4years.
Productivity Accounting Model is as follows:

1. Total Productivity = Monetary value of Production

Monetary value of Total input required
2. Partial Productivity = Monetary value of Production
Monetary value of particular input required
PRODUCTIVITY MODEL FOR STEEL INDUSTRY:

The present study is an attempt to analyze productivity of steel industry in India using
Accounting productivity model introduced by H. S. Davis on SAIL: A Maharatna company

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Vol. 5, No.1, Jan-Feb 2016

In Steel industry, the following factors of production constitute the input parameters for
measuring productivity of the steel industry. They are, 1) Labour input (L). 2) Capital input (C).
3) Material input (R), Miscellaneous input (Q) and the output (Qt) comprises of the quantity of
steel made. Entering these inputs and outputs in the Productivity accounting model we obtain the
productivity measurement model suited for an industry. The model is shown below

Total productivity = Qt (L+C+R=Q).

In this modified model all values relating to output and inputs are in monetary equivalent
deflated to a base year using a suitable price index or an average inflation rate so as to take care
of quality. The terms used in the proposed model specific to the steel industry are discussed
below.

Total Output (Qt): The output (Qt) represents the total sale of made steel in monetary terms.

Inputs to the Modified Model: The input to the modified model consists of labor, capital and
material All the inputs to the model are expressed in monetary terms. Detailed description
regarding various inputs to the model is presented below:

i) Labor input (L): Labor input comprises the following costs incurred by the steel industry.
a) Wages for development work
b) Wages for factory workers directly attached to the manufacturing.
c) Wages for indirect factory workers like drivers, etc. d) Salary of staff. e) others.

ii) Capital input (C): The capital input includes the following expenses of the steel Plants.
a) Interest on working capital, b) Interest on long-term expenditure,
c) Depreciation on plant machineries and other capital assets, d) Other capital input.

iii) Material input (R): This input includes the following costs of the steel industry.
a)Cost of raw material. b) Cost of sheets. c) Cost of materials issued and other material cost.

iv) Miscellaneous input (Q): The expenses relating to the following heads:
a) Various contract work. b) Purchased repairing. c) Security cost. d) office expenses. e) Social
overheads, f) other overhead. g) Taxes and levies input. (Gupta & Dey, 2010)
Data analysis:

Table-1. Annual output and consumption of resources in Steel Authority of India Ltd .

Year Labor Capital Raw material Misc.Exp. Total input Total Output

2008-09 10437.02 1486.42 17,257.67 737.79 29918.9 42,096.54

2009-10 12164.5 1538.36 23,915.45 878.94 38497.25 47,674.22

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Vol. 5, No.1, Jan-Feb 2016

2010-11 9651.65 1739.25 18,611.12 206.62 30208.64 41,995.45

2011-12 11181.45 1960.57 21,912.27 4,126.44 39180.73 46,271.34

http://www.moneycontrol.com/financials/steelauthorityindia/balance-sheet/SAI

Table-2. Percentage share of different Inputs in Total Input from 2008-09 to 2011-12.

Year Labor Input. Capital Input. Material Input. Misc.Input.

2008-09 34.88 4.97 57.68 2.47

2009-10 31.60 3.99 62.12 2.28

2010-11 31.95 5.76 61.61 0.68

2011-12 28.54 5.00 55.92 10.53

Source: prepared by the author based on the data from table no.1

Table-3. Total and partial productivity ratios on yearly basis from 2008-09 to 2011-12.

Year Labor Capital productivity Material Misc.productivity Total

productivity productivity Factor
Prod.

2008-09 4.03 28.32 2.44 57.06 1.40

2009-10 3.92 30.99 1.99 54.24 1.24

2010-11 4.35 24.15 2.26 203.25 1.39

2011-12 4.14 23.60 2.11 11.21 1.18

Source: prepared by the author based on the data from table no.1

Table : 4 Relative productive Index

Particular 2008 2009 2010 2011

Labor productivity index 100 97.17 107.86 99.50

Capital productivity index 100 109.43 85.24 83.33

Material productivity index 100 81.89 92.59 86.33

Misc.productivity index 100 95.06 356.203 19.65

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Vol. 5, No.1, Jan-Feb 2016

Total productivity index 100 99.28 99.28 84.28

Source: prepared by the author based on the data from table no.1

Source: prepared by the author based on the data from table no.4

137.5
110.
82.5
55.
27.5
0.
2007 2008 2009 2010 2011 2012

Source: prepared by the author based on the data from table no.4

Source: prepared by the author based on the data from table no.4

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Vol. 5, No.1, Jan-Feb 2016

Source: prepared by the author based on the data from table no.4

Source: prepared by the author based on the data from table no.4

Data analysis and Interpretation:

Productivity increases when the growth in output is greater than the growth in input, or when
the rate of growth of output minus the rate of growth of the composite input is positive.
Economic growth can be obtained either by increasing inputs or by improving productivity
factor. Productivity growth occurs when a higher output can be attained with a given amount of
input, or a certain level of output can be attained with smaller amounts of factor input. This
productivity growth is obviously preferable to growth due to increase in factor inputs, since the
later might be subject to diminishing marginal return. Productivity growth is necessary not only
to increase output but also to enhance competitiveness of a country. The estimation of factor
productivity will be very useful to evaluate the variations in the performance of an industry over
a period of time. The prosperity of a new developed nation has been attributed mainly to the
sustained growth of their total factor productivity (Prescott 1997).
To measure the productivity of SAIL, following measures are adopted and results derived:
The monetary equivalent of output is calculated by multiplying the quantity of made steel
(output) expressed in ton with the price of made steel in the concerned year. Once the
output is measured, all the four inputs are measured in the same fashion.

Table-1 summarizes annual consumption of four resources (input) and output for the four
years under study.
Table-2 shows the percentage share of different inputs in total input. It clearly depicts
that there has been an increase in capital input in year 2010-11 and subsequently there

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Vol. 5, No.1, Jan-Feb 2016

was a decrease in labor input. This decrease was mainly because expenditure was diverted
into capital budgeting and investment.
From the table it is evident that there is a decline in percentage share of material input by
5.68% whereas miscellaneous input increases to 10.53% and thus helps us to analyze how
much of contribution each factor has in total production during the period under study.
From these computed data, partial productivities with respect to each of the four inputs
were computed for each year along with the corresponding annual total factor
productivity and are presented in Table-3.
Labor productivity was measured by the ratio of output over labor input.
Material productivity was measured by the ratio of output over material input.
Capital productivity was measured by the ratio output over capital input.
Table no.4 shows the relative productivity index of Sail for the period of 2008-2011for
all inputs namely labour, capital, material and miscellaneous inputs.
Observations:
From table no.3, we observe that the relative level of TFP of SAIL shows a decline from 2008 to
2009, after that it shows an increase in year 2010 but as we see a decline, such fluctuations may
be due to two reasons:
1. Shift in production function: There is random change in variable factors in short
run time period.
2. Change in efficiency: change in efficiency of inputs also leads to decline in Total
productivity
It was found that the labour productivity is relatively declining and was very low
particularly in 2009.Though it has shown some improvement in subsequent years but the
rate of improvement is very low and not satisfactory.
It was also observed that capital productivity is showing a downward trend since 2010
and it is due to outdated technology and old machineries.
Material productivity input is the only one which showed improvement though it is also
subjected to fluctuations due to prise rise at international level and poor waste
management.
Table no.4 clearly depicts that the only factor which shows a sharp increase in 2010was
Misc.inputs in terms of productivity but anyhow it dropped to nearly 11% in 2011-12.
Overall Total factor productivity of SAIL in the given period of the study does not show
any kind of improvement. Even entrusting Maharatna Category to it could not help it
much to improve the productivity level.
Conclusion
After witnessing a worldwide downturn in all spheres of business including in the steel industry
in second half of 2008-09, SAIL remained focused on its fundamentals including expansion
plans. It was the result of concerted and collective action that during the calendar year 2009,
SAIL emerged as the second highest net profit earning company amongst all steel companies of
the world. In January, 2010, SAIL's overall ranking was second in the list of 'World-Class
Steelmaker Rankings' by World Steel Dynamics, a leading steel information services provider.

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The profitability of SAIL improved by 8% during 2008-09 over previous year, mainly due to
higher saleable steel production & sales volume; improved production of value added products;
reduction in coke rate, improvement in BF productivity & specific energy consumption,
favorable impact of input prices particularly of imported coal, nickel, aluminum etc; higher
interest earnings and impact of estimated provision for salaries & wages. However, the
profitability has been affected due to reduction in average net sales realization of saleable steel,
increase in royalty on minerals, higher interest cost and depreciation. Several strategic actions
are needed to be taken by the management to improve profitability viz. increase in production
and sales of value added products. Slow down in the global steel industry during 2009-10 also
witnessed general declines in raw materials prices. In the recent years, the plants of the company
continued with their journey of relentless improvement in production, product- mix and
efficiency parameters but the result are not impactful and Improvement in techno-economic
parameters,optimization in procurement, continuous emphasis on cost reduction and prudent
fund management etc. are some of the strategic areas where if focused would make SAIL the
most efficiently productive and growing manufacturing Maharatna Steel company.(1.Directors
report,SAIL.,2008) (2.SAIL.,2010)

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