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Friday, 10 February 2017

Dynamics of Indian chemical industry

Chemical industry in India is a diversified industry, covering more than 80,000 commercial products. It is the mainstay of industrial and agricultural development of the country and provides building blocks for several downstream industries such as textiles, papers, paints, soaps, detergents, pharmaceuticals, varnish etc. More than 2 million people are employed in this industry. 
With initiatives like "Make In India" programme gaining steam, investments, innovation and infrastructure are going to be the major thrust areas for chemical industry. Apart from this, a large talent pool is available which will foster growth of the chemical industry. The current low per capita consumption (10 kgs for polymers in India as compared to world average of 25 kgs) suggests that the demand potential is also yet to be realised. Moreover India has a very strong outlook for the key end-user industries (eg. Packaging is expected to grow at 18 percent p.a. over the next five years, Electronic is expected to grow at 12 percent p.a. over the next five years, Construction and Automotive both sectors are expected to grow at 12 percent p.a. over the next five years).
In the biggest tax reform since Independence, "Goods and Services Tax" bill was passed in 2016 by Rajya Sabha which will give boost to the chemical industry by lowering transaction cost and avoiding any cascading effect on the taxes.
Going ahead the demand of chemical products is expected to surge at 9-11 percent p.a. over the next five years.
Size and Characteristics
Global chemical market size was estimated at $4.3 trillion in 2015 and is expected to grow at 5-6 percent per annum over the next 5 years to reach $5.7 trillion by 2020. Indian chemical market size stands at $147 billion in 2015. Despite its large size and significant GDP contribution, Indian chemical industry currently accounts for only 3 percent of the world chemical market. India ranks 14th in the world exports of chemicals (excluding pharmaceutical products) and ranks 8th in the world imports of chemicals (excluding pharmaceutical products) with a valuation of $29.76 billion in 2014.
Chemical sector accounted for 2.5 percent of the overall GVA (at 2011-12 prices) in 2013-14, compared to 2.45 percent in 2012-13. The share of this sector in the GVA for manufacturing sector at 2011-12 prices was 13.84 percent during 2013-14 as compared to 13.38 percent in 2012-13. Net imports have grown at 17 percent between 2011 and 2015.
Consumption of major chemicals has also witnessed 6 percent CAGR between FY11 and FY15. Top six States, namely, Gujarat (33.5 percent), Maharashtra (19.7 percent), Uttar Pradesh (6.0 percent), West Bengal (5.0 percent), Himachal Pradesh (4.7 percent) and Tamil Nadu (4.1 percent) contributed 73 percent in the Gross Value Added (GVA) for the chemical sector.
Major Initiatives
Make in India: The initiative was launched by GOI on 25th September, 2014 to encourage multi-national as well as national companies, to manufacture their products in India. It will help in the growth of chemical industry in the following ways:
Goods and Services Act: Goods and Services act which is expected to be operational from April 1, 2017 will help the chemical sector in the following ways:
GST implementation is expected to reduce the logistics cost for chemical industry by 10-15 percent which will directly add to their bottom-line
Petrochemicals, if exempted from the purview of GST would lose input credits. It would also increase revenue neutral rate for other chemical products resulting in increase in tax burden
Current urea manufacturing duty is 1 percent without CENVAT (on MRP) or 5 percent with CENVAT. Government subsidy is not taxed. Fertilizer should be zero rated
Phosphoric acid/ other chemical imports currently exempt - will have immediate cash flow impact unless IGST exemption granted
Salt & Seeds business if not zero rated, will result in increase in cost
Industry Challenges
The industry is facing numerous challenges around raw materials, infrastructure & environment, duty structures, manpower etc. Some of the key issues have been detailed out below:
Continuous availability of feedstock at a competitive cost is a key concern for the companies operating in this sector. Feedstock (naphtha and natural gas) are critical inputs for both organic and inorganic chemicals industry. Costs of these raw materials are high as compared to countries like China, Middle East and other South East Asian countries such as Thailand and Malaysia, which makes the products uncompetitive in the International markets.
Infrastructure & Logistics
The Indian bulk chemical industry is mainly concentrated in the West coast, especially Gujarat, due to close proximity of raw materials and ports. However, majority of the demand comes from the end-use industries located in the Southern and Eastern regions leading to distribution issues and high transportation cost.
Competition Intensity
The chemical industry faces a major challenge in the availability of cheaper imported chemicals from low-cost manufacturing hubs like China. Under various multilateral and bilateral agreements (FTAs), India has committed to gradually eliminate the tariffs on various chemical products in addition to non-tariff import barriers such as quotas based on amount and source. Also, many of the chemicals are placed in Open General Licence (OGL) of imports. This has increased the import of various chemicals, intermediates and end products. If the government decides to reduce the import tariffs further to meet the increasing demand of the country, then the level of competition in the Indian chemical industry will further intensify.
Large capacity additions in countries such as ethane-rich Middle East and shale gas rich USA is another cause of concern for the domestic players as it may affect their market. It is estimated, that out of the 30 million tonnes of ethylene capacity additions expected during period FY15-FY19, 12 million tonnes is expected to be in US alone. Since, ethane and petrochemical products are cheaper than petrochemical products in India, it will affect the margins of domestic players due to underutilisation of their capacities.
Regulatory Issues
The prevailing duty structure taxes raw materials (inputs) at a higher rate than the finished product, and thereby discourages domestic value addition through local manufacturing. Also, Free Trade Agreements (FTAs) with certain countries ensure that the finished products draw negligible duty. 
Implementation of Petroleum, Chemicals and Petrochemical Investment Policies (PCPIRs)
Though the PCPIR policy was notified in 2007, it has not witnessed significant off take by the states till now. Only few states including Gujarat, Andhra Pradesh, Orissa and Tamil Nadu have so far shown interest in developing PCPIR regions. Hence, the Government is planning to revise the PCPIR policy.
Lack of skilled manpower is a major issue faced by the industry. To address the issue, the Ministry of Chemicals and Fertilizers recently signed 3 MOUs with the Ministry of Skill development and Entrepreneurship.
Future Outlook
To address the macro level uncertainties associated with an industry level growth estimate, Tata Strategic has developed three scenarios to look at the possible growth outlook of Indian chemical industry based on the growth rates of its sub-segments.
In the base case, the market size is estimated at $206 billion by FY20.The most likely case growth rate is pegged at 9 percent with a market size of $226 billion. And the optimistic case is likely to achieve a growth of 11 percent p.a. over the next five years resulting in an industry size of $248 billion.
Source: Tata Strategic Management Group
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