21 May, 2024 16:05:48 IST 
Despite the consistent growth seen in the Indian chemical industry in the last decade it is obvious that the industry still weighs in far below its potential on a global stage. Estimates of its size differ – depending largely on what is included or excluded – but a value of about $250-bn or thereabouts is widely accepted. While this puts India in third place in Asia, behind China and Japan, this is not much to brag about considering this represents only about 5% of the global chemical industry.
While several mid-sized projects have been commissioned in the last few years, especially in petrochemical value chains, there are still gaping holes in the portfolio of products made in the country. With demand growing, this has come to mean increased imports,which are reaching unsustainable levels.
All of this begs the question as to what can be done to further the growth of the industry and encourage investments in new projects. While manufacturing as a whole is benefitting from the creation of a common market through the introduction of GST, and there has been improvement in general infrastructure (road, rail, ports), as well as in the ease-of-doing business (at least at the level of the Centre), chemical industry specific measures are needed to spur investments. These include creation of dedicated zones for the industry; enabling the availability of key feedstock on a broader level; measures to encourage technology development and its adoption; and tackle the threat posed by cheap imports.
Dedicated zones as home for the industry of tomorrow
The dominance of western India – in particular Gujarat and Maharashtra – as chemical manufacturing hubs has reached its saturation point and further concentration in this geography is neither sustainable nor desirable. Every effort must be made to develop alternate hubs – particularly in the coastal States of southern and eastern India. Some efforts have already started in this direction, with production centres emerging in Mangalore (Karnataka), Ennore (Tamilnadu), Paradeep (Odisha) and Haldia (West Bengal). But these need to be scaled up significantly – in size and in the kinds of products made. For the moment, production in these regions is largely in bulk chemicals, but wider availability of raw materials could spur investments in downstreamfine and speciality chemicals as well.
While the anchor investors in the hubs are refinery and petrochemical companies, due their ability to marshal large capital and manage complex projects, these clusters need to be expanded to include SMEs. This will create the integrated value chains that matter very much for competitiveness, as exemplified in China.
Cluster-based chemical manufacturing in a planned manner will also make for saferoperations and logistics. The industry cannot afford to grow to the size it aspires for (there is talk of a $1 trillion industry by 2040), in the way it has done in the past. Sustainable and safe manufacturing is a duty of the industry and new projects, in particular, offer a straightforward way to incorporate these aspects adequately and efficiently at the design stage itself.
The good news now is that there is cognisance in government both of the need for such ‘Chemical Parks’ and of the mistakes made in earlier attempts to create ones. While there are fewer States clamouring to set one up today compared to the past, with the right policy interventions and the fiscal support a few can be operationalised in the next three years.
Several mega-trends are providing strong tailwinds for setting them up and include fundamental changes in energy markets; and in the supply chain strategies of companies, which is expected to afford Indian companies bigger opportunities globally.
Making key raw materials available on wider scale
One of the handicaps that the chemical industry here faces is the poor availability of several key raw materials outside of the companies that make them. This is exemplified by olefins, which are produced in mammoth, capital-intensive plants, and almost entirely captively used by the companies that produce them (naphtha/gas crackers and crude oil refineries). There is very little sold outside of battery limits, and this has limited the value addition possibilities considerably.
There was talk of reserving a portion of the feedstock for third party investors, but this has not been operationalised through a mandate. There is no reason for this reticence! The arrangements for offtake of feedstock with third-parties can be on an arms-length basis, purely on commercial terms using models that are well-known, transparent and widely practiced. Pricing of ethylene, for example, can be easily benchmarked to that of polyethylene, which are widely reported by independent agencies. ‘Take or pay’ contracts are well known in the chemical industry world-over, and even in India the concept has gained traction, for example, in natural gas contracts. The irony is that arrangements for sharing olefins even existed several decades ago in India and spawned a few units (many of which now do not operate, but for reasons that have nothing to do with the topic at hand).
Many feedstocks cannot be imported for reasons of safety or due the fact that the merchant markets for them are shallow. This makes it all the more important to ensure wider availability from domestic sources, preferably by pipelines. This is seen in the big chemical clusters of the world that dominate global chemical output.
It is also important to bear in mind that several downstream investment opportunities will not be worth the while of the anchor investor. The reasons for this are many, but largely have todo with the scale of operation or the kind of business structure it entails.
Indigenous technology development
In several value chains investments are being hindered because of lack of access to contemporary process technology. Technology licensing from overseas is an option, but it often come with strings attached. The best is not always available (especially if the licensor is also a player in the markets), and where available comes with caveats of markets that can be accessed or is limited in scale of operation. It can also be so expensive so as to adversely impact the commercial viability of the project. In some cases, technology is not available for licensing at all, outside of joint ventures with the company that offers it.
The answer to these travails is to negotiate from a position of strength achieved through indigenous technology development efforts. This can be singly done or in partnerships with publicly-funded laboratories. There are pros and cons of both models, but in eachgovernment support will help. This can take the form of weighted tax deductions; special incentives for sales achieved for goods produced for the first time; and through technology upgradation funds (that have been offered to several other industries).
In several technology development initiatives in which publicly funded labs are involved there is a ‘valley of death’ between the technology proven at laboratory scale to a commercial one. There is an acute need for a technology validation centre where it can be scaled up to pilot level to afford customers some comfort of its technical and commercial performance. Such centres exist in many developed countries, and one is apparently in the planning stage in India as well.
Tackling imports
This is a tricky area to manoeuvre! Structuring import tariff structures in the chemical industry is a complex exercise, given the long value chains. In practice this is done by following a simple principle: raw materials are taxed lower than finished goods. But discrepancies do arise and need to be rationalised quickly.
Selective tinkering with tariffs, for one,has unwelcome consequences. Raising tariffs for a chemicalcanimmediately raise the cost of raw materials for the industry that uses it as feedstock. The producer then has the option of passing this raised cost to his clients or absorb it, very likely denting margins. Often there is little choice in the matter, as market forces determine the response.Raising import tariffs on a chemical to curb its imports also runs the risk of shifting the imports upstream or downstream.
China’s mammoth chemical industry is flooding global markets with cheap goods, and putting pressure on margins in many countries, India included. Combating this threat is a severe challenge, and there are no easy solutions. At the very least, unfair trade – such as dumping at ‘below normal’ pricing – needs to be tackled effectively and swiftly, through the several mechanisms available under global trade rules. The speed at which this is done in India leaves a lot to be desired, andneeds to change.
Key to economic growth
There is much that can and must be done to build a larger, diversified and competitive chemical industry within the country. In several value chains, India’s needs are now substantial, and require investments in world-scale plants – not sub-scale, uneconomic ones.
This is a key industry for India’s economic growth. The government cannot ignore it!
