The proposal will now go to the ministry of finance for its approval. The proposal comes at a time when most players in the industry are feeling the pinch due to low realisations and high input and conversion costs.

In an exclusive interview to The Financial Express, ministry of steel and mines joint secretary KS Rajendra Kumar said that the ministry has agreed that the steel sector should be classified as an infrastructure industry and written to the finance ministry to clear the proposal.

Among the players in the industry, SAIL and Tisco both require cheap sources of finance to extend their product profile and carry out renovation and modernisation programmes. Companies like Essar require funds to put up a blast furnace for further reduction in the cost of production.The whole idea is to make the industry competitive and resilient to face external competition through better cost structures, Kumar said.

Classifying an industry under infrastructure would mean that steel companies can avail of tax deduction under Section 80 IA and the benefits of section 10 23(g) to lenders where the cost of financing to borrowers comes down and ECB benefits.

As per section 80 IA, an industrial undertaking would get 100 per cent deduction in profit for the first five years and 30 per cent for the next five years. The benefits of deduction would be available for 10 consecutive years falling within a period of twelve assessment years beginning with the assessment year in which an assessee begins operating and maintaining infrastructure facilities.

Nevertheless, the benefits of the scheme can be availed only after the unabsorbed depreciation and carried forward losses are fully written off. For tax purposes, interest during projects can be capitalised though the same cannot be done forrenovation. This means that the effective period for availing the infrastructure benefits would be reduced further.

The benefits of section 10 23(g) accrue in an indirect manner. According to this section, investments in infrastructure results in income tax exemption derived by way of dividends, interest or long-term capital gains for an infrastructure capital company or fund. This benefit is generally passed on to borrowers in the form of lower interest rates for the project.

Finally, as per the ministry of finance, the ECB borrowings in the infrastructure industry can be utilised for rupee expenditure. Herein, all projects are permitted to avail ECB to the extent of 35 per cent of the total project cost. Further, the holding company/promoter is permitted to raise ECBs to finance equity investments in a subsidiary/joint venture company for infrastructure projects. Importantly, the ECB can be raised for "non-recourse financing" as well.

The development commissioner for iron and steel, government ofIndia, RK Prasannan, added that the ECB borrowings would be really beneficial to the steel sector though the proposals are not that easy to implement. A major problem in treating the steel sector as an infrastructure project is related to the very definition of the word "infrastructure".

According to project financers, the term infrastructure relates to an industry or entity through which the normal production in the economy is facilitated. So far, no country has classified the steel industry as infrastructure in the world.

Secondly, in most infrastructure projects the government acts as buyer-customer for the services provided by the infrastructure entity. This results in a close analysis of the agreement of the infrastructure player with the government as well as the relation with other buyers. Although the government is still the major buyer of steel products, the proportion of sales to total sales by the industry has come down.

Further, unlike a power purchase agreement with the power producer,there is no fixed price at which the government would buy the steel products from the industry.

Lastly, according infrastructure status to the steel industry may well see other industries such as cement demanding a similar status.