The Indian chemical industry is among the established traditional sectors of the country that play an integral role in the country’s economic development. This sector forms a part of the basic goods industry and is a critical input for industrial and agricultural development.
The Indian chemical industry is one of the oldest industries in India and has made immense contribution to the industrial and agricultural development of India. It encompasses both large and small-scale units. The fiscal incentives granted to the small-scale units in the mid-1980s provided the thrust to the growth of MSMEs in the sector. The chemical industry serves the needs of sectors such as textiles, leather, plastics, paper, printing inks and food stuffs, among others.
The chemical industry is among the most diversified industrial sectors and includes basic chemicals and its products, petrochemicals, fertilizers, paints, gases, pharmaceuticals, dyes, etc. The sector covers over 70,000 commercial products, and provides the feedstock to many downstream industries such asfinished drugs, dyestuffs, paper, synthetic rubber, plastics, polyester, paints, pesticides, fertilizers and detergents. Over the years, the industry has been evolving with a shift towards product innovation, brand building and environmental friendliness. Besides, customer focus is gaining significance in the industry.
High potential for growth in chemical industry
The industry comprises both small-scale and large units (including MNCs) and produces thousands of products and byproducts ranging from plastics and petrochemicals to cosmetics and toiletries. The industry consumes a significant share (around one-third) of its own production. The industry has a 14% weightage in the overall Index of Industrial Production (IIP) which gives an indication of its importance in the country’s industrial growth. A robust chemical industry ushers in many economic and strategic benefits for the nation. Indian Chemical industry to touch USD 190 billion by end of 2016.
Ref:Indian chemical industry to touch $190 billion in next 2 years: Report
The Indian chemical sector accounts for 13-14% of total exports and 8-9% of total imports of India. In terms of volume of production, it is the twelfth-largest in the world and the third-largest in Asia. Currently, the per capita consumption of products of the Indian chemical industry is one-tenth of the world average, which reflects the huge potential for further growth. The Indian advantage lies in the manufacturing of basic chemicals that are also known as commodity chemicals that account for about 57% of the total domestic chemical sector.
Industry structure
The chemical industry can be broadly classified into two segments – organic and inorganic chemicals. Organic chemicals cover over half of all known chemical compounds, and include petrochemicals, drugs, cosmetics, agrochemicals, etc. Inorganic chemicals comprise alkalis, dyes and dyestuffs.
Based on a more functional classification, chemicals can be divided into basic, specialty and fine chemicals.
Alkali chemicals form the highest chunk in the total chemical production in India. During FY10, alkali chemicals production (till February 2009) was 5.5 MMT and accounted for around 71% of the total chemical production. The dyestuff sector is one of the important segments of the Indian chemical industry and has forward and backward linkages with a variety of sectors such as textiles, leather, paper, plastics, printing inks and foodstuffs. The textile industry accounts for 70% of the consumption of dyestuffs.
Trend in production of the chemical industry
In the Indian chemical industry, alkali chemicals enjoy the highest contribution in the total production. Since FY02-FY09, the representation of alkali chemicals in the total production has been around 70%, followed by organic chemicals at around 20%. The share of dyes and dyestuffs and pesticides, on the other hand, remain extremely low; however, the production of dyes and dyestuffs has been increasing steadily since FY04 due to its growing significance in sectors such as textiles, leather, plastics and foodstuffs. Nonetheless, the growth in production of organic chemicals has been extremely sluggish. During FY03-FY09, the production of inorganic chemicals rose steadily as compared with the steady production growth of alkali and organic chemicals, therefore this segment grew at comparatively healthier CAGR than the industry as a whole.
- In the case of alkali chemicals, soda ash has been enjoying the highest share in total production since FY03. However, from FY08, the production of caustic coda has been surpassing soda ash; the contribution of caustic soda increased to 38% in FY09 from 29% in FY04.
- In the organic chemicals segment, the share of carbon black has been over 70% of the total production since FY04 whereas in the inorganic chemicals segment, out of the 19 products, methanol, acetic acid and acetaldehyde constitute over 50% of the total production.
Imports dominate international trade of the Indian chemical industry
Imports of chemicals dominate the total trade of major chemicals; in fact, imports have been representing around 68% of the total international trade volume since FY03. During FY08, the chemical industry exported around 3.4 MMT of major chemicals while it imported 7.4 MMT of the same. The top importing and exporting destinations are China and Saudi Arabia, and China and Africa, respectively. Due to the attractive incentives available to chemical producers in China, their products are comparatively cheaper in the global markets, and give a tough competition to Indian chemical players. During FY03-FY08, organic chemicals had a dominating share in imports and contributed an average of around 57% in the total volume of imports.
In FY08 organic chemicals contributed over 60% to the total volume of imports at 1.2 MMT due to the strong domestic demand by end-user industries such as plastic and petrochemical industries, which have been witnessing healthy growth since the past few years. However, domestic players have been finding it difficult to meet the ever-increasing domestic demand due to inadequate technologies. Thus, the production level of organic chemicals has been stagnating, even though the capacity of organic chemicals is being added since FY04.
Ref:Export of Major Chemicals – Product wise / Group wise from 2008-09 to 2015-16 (upto September 2015)
Ref:Import of Major Chemicals – Product-wise / Group-wise from 2008-09 to 2015-16 (upto September 2015)
Gloomy export scenario seeks to curb anti-dumping activities
The exports of the chemical industry depict a sluggish performance and have been on a declining trend after FY05. In FY08, around 7% of the total production was exported. The key export destinations of the chemical industry are the US, China, UAE and the UK.
In case of composition of total exports, dyes and dyestuff, which form around 1% of the total production, have been leading contribution at around 27% since FY03. The segment provides good opportunities for international trade considering its end-user industries – textiles, plastics, leather and foodstuffs.
Besides dyes and dyestuffs, alkali chemicals and inorganic chemicals also form a significant part of the total exports. The growing demand of soda ash in the industries such as glass and detergents has boosted the exports of alkali chemicals. However, the exports of alkali and inorganic chemicals have been declining consistently and in FY08 they decreased by around 69% and 20%, respectively, over FY06.
The industry will continue to be affected by the anti-dumping activities undertaken by some countries like China. Due to the export incentives granted to producers of some countries an oversupply is created in the global market that affects the domestic players who then seek further fiscal incentives from the government. Further, the stringent global environmental norms continue to impede the export opportunities available to domestic players. Recently, the government imposed a 20% safeguard duty on soda ash. It is now deliberating on imposing duties on the affected chemical products as well. Though a short-term measure, but in the current scenario of economic slowdown, this would bring some relief to the export players.
Technology upgradation is required essentially for improving efficiency
The capacity utilisation of the industry remained at a moderate level of around 79% during FY04-FY08. It has been observed that the industry has been finding it difficult to source the advantage of additional installed capacities into production. This trend is seen in the case of organic chemicals industry that has been adding installed capacity but has not been able to produce commensurately. During FY07-FY08, the growth in production of the organic chemical industry was almost stagnant. The same trend reflected in the industry figures as well; during FY06-FY08, the total installed capacity rose at a much faster rate than production.
Over the years, the industry has been implementing technology upgradation to achieve efficient production; however, the lack of technology or the deficiency of funds to promote adequate technology continues to plague the industry. Higher access to technological initiatives, fund to implement these initiatives into production process and adequate availability of trained and skilled manpower may help the industry improve its utilisation rate and achieve efficient production levels.
The other problems faced by the industry include: high price of basic feedstock such as crude oil/natural gas, the price fluctuation mar the profit visibility and viability for the companies. High fragmentation of manufacturing units, mostly SSIs and limitation in capacity in the SSI sector put them in disadvantageous position while tapping export opportunities with large volume. Another area that poses challenge for the companies is the lack of coordinated marketing, branding and distribution development. The low levels of technology and R&D investments hamper the way for new product and technology development, leading to lower levels of profitability.
Investment
The government has made 100% FDI permissible and has de-licensed most chemical products except those that are hazardous in nature to drive investments in the sector. During FY01-FY09, the total FDI investments made in the chemical industry (excluding fertilizers) was about USD 9,567 mn.
The extent of investment attracted by the chemical sector was evident in the number of industrial investment proposals it received, inclusive of the Industrial Entrepreneur Memoranda (IEMs)/LOIs/DILs. During August 1991 to July 2009, the total number of proposals, filed or granted, stood at 9,898 and represented around 12% of the total proposals filed/granted during the same period. The total proposed industrial investments in chemicals (excluding fertilizers) formed around 9% of the total industrial investment that stood at around Rs 4,763.6 bn. The proposed investments were stated to generate employment in excess of 1.3 mn. According to the data available with the Secretariat for Industrial Assistance (SIA), the Department of Industrial Policy and Promotion implemented 1,149 IEMs during August 1991 to July 2009 for an investment of Rs 445.6 bn. During January 2009 to July 2009, Rs 4.4 bn was invested.
The investment in the sector has been consistent and points towards the rising interest of investors; however, it is imperative for the companies in the sector to devise new processes and technologies, develop new products and to follow prudent environment norms to garner more investments and investor interest.
Government initiatives
The government has taken various steps to improve the productivity and efficiency in the chemical sector. The government policies such as 100% FDI and SEZ and industrial parks model of development have also led to increase in the overall investment in the sector. Some major initiatives taken by the government for the sector are:
- The licensing requirements have been removed except in the case of hazardous chemicals. Entrepreneurs are now allowed to set up chemical industries through the Industrial Entrepreneurs’ Memorandum (IEM) route
- In the Union Budget 2009-10, the Department of Chemicals and Petrochemicals was granted an outlay of Rs 239.7 bn. Likewise, the textile sector, which is the most important consumer of the chemicals, was granted an outlay of Rs 450 bn to concomitantly sustain textile sector growth and boost demand for chemicals.
- In order to develop the country as a major chemical hub, the government set up petroleum, chemicals and petrochemical investment regions (PCPIR). These regions directed investments for establishing manufacturing facilities for domestic and export led production of petroleum, chemicals and petrochemicals. The PCPIR may include one or more SEZs, industrial parks, free trade and warehousing zones, EOUs, or growth centres, duly notified under the relevant central or state legislation or policy. All the benefits available under the relevant legislation or policy will continue to remain available to the said zones or parks, as the case may be, forming part of the PCPIR.
- To mitigate the impact of the anti-dumping activities, the government imposed a 20% safeguard on soda ash and imposed such safeguard duties for other affected chemical products as well.
Development of chemical industry in Maharashtra
The Indian chemical industry is well-established in Maharashtra. During FY07, the production of major chemicals in the state was 565,481 MT. In the same year, chemical production capacity of 17,928 MT was added that took and the total installed capacity increased to 1.02 MMTPA.
Under the National Industrial Classification, the chemical industry includes basic chemicals and its products –petrochemicals, fertilizers, paints, varnishes, gases, soaps, perfumes, toiletries and pharmaceuticals. For the purpose of the cluster and industry study, the chemical industry is classified into five major segments and these are as follows: alkali, inorganic chemicals, organic chemicals, pesticides, and dyes and dyestuff. Accordingly, any reference made to the Indian chemical industry hereon will include the information on these five major segments exclusively.
Way ahead: Focus on core competencies and technological innovation
The Indian chemical industry is endowed with availability of low cost labour. The allied industries such as leather, plastics, food processing, rubber, textiles offer huge growth opportunities in the long term for the chemical industry. Besides, the government is also undertaking several initiatives to sustain the growth of the industry. The promotion of Special Export and Investment Zones, SEZs, cluster development and monetary incentives through fiscal and policy initiatives will foster the growth of the industry. Infrastructure sector has gained significant importance and is a priority focus of the government. Thus, the increased spending on infrastructure will help in reducing the infrastructural bottlenecks in the long run. However, issues like inadequate technologies, skilled labour, environmental norms and need to innovate remain a threat to the industry.
The players must focus on specialising in their areas of expertise in line with the global trend. Innovation is gaining importance as it enables focus on core competence and enables players to lead in specialty products. The idea is to focus on one’s core competency and select business segments where competitive advantage exists. Likewise, the industry must focus on improving its product and production processes by investing in technology development and building R&D capabilities. Such a step will enable the industry to not only build its expertise in a chosen field but also will lead to cut down in production costs. Adherence to environmental and public safety norms and promotion of safe management of substances are also pivotal areas that need focus right from the design, end use, to its final disposal (hazardous waste) of products.
Logistical bottlenecks, high raw material and fuel prices and anti-dumping activities are posing a threat to the industry in the short run. Thus technology upgradation, access to skilled manpower and funds at a reasonable cost, adequate infrastructure support and economical input costs are essential for the sustained growth and development of the Indian chemical industry. Even though this industry is currently affected by economic recession, in the long term it will benefit immensely from the high growth foreseen in its consuming industries and the improvement in export markets.
Further Read (PDF File): Planning Commission FYP 2012-2017