The Hindu Business Line : Chemical sector: Get equation right

HOW will the Indian chemical industry be 50 years from now? Going by the vision statement of Dr S. Ganguly, former Executive Chairman and Managing Director, ACC, certain sectors of the industry would change dramatically due to the development of new sciences such as crop protection, drug manufacture and delivery and customised and pest-resistant seeds.

How prepared is India to face the increased competition, growing consolidations, mergers and acquisitions in the global chemical industry? To expand its base and streamline operations, the industry needs to synergise with both the Government and various trade promotion organisations.

According to FICCI, the Government has an important role to play in the chemical industry. It needs to rationalise labour and pollution control laws and assist in the establishment of mega industrial estates to realise economies of scale; it must rationalise duty structures for both raw materials and inputs; it must make available fuels and energy at international prices; and streamline tax and legal regime . The Government would also have to support IT initiatives and set up central laboratories for quality control tests in major industrial zones. To facilitate the orderly growth of the industry, watchdogs are needed to monitor developments. .

Though the industry accounts for approximately $28 billion of revenues and constitutes 6.7 per cent of India's GDP and 10 per cent of the country's exports, globally, it is insignificant, accounting for just 2 per cent of the industry worldwide.

The high cost and shortage of power, the high cost of finance, the poor infrastructure, the stringent labour laws and the inflexible tax regime have acted as dampers on the industry's growth, as with many other industries . Despite alliances and partnerships and new investments in plants and equipment, , the Indian industry is a poor competitor to its Chinese counterpart . Being a signatory to the World Trade Organisation and having to abide by its norms, brings in its own compulsions. Peak Customs duties have to be brought down and import restrictions removed. Complying with WTO norms also means facing environmental issues .

It is not as if the industry has not grown over the years. In fact, growth rates have been as high as 8.6 per cent over the last few years and the industry has a wide product portfolio with basic chemicals accounting for 57 per cent of the production, followed by speciality chemicals (25 per cent) and knowledge chemicals (18 per cent).

But to achieve the global targets, the industry needs to focus more on IT, adopt world standards in manufacturing, and concentrate on research and development. Domestic players need to restructure and focus on core competencies.

The question is: Would domestic demand support firm sizes of global scale? The answer is yes for many products. For others, manufacturers would have to find markets abroad. Exports would thus continue to play an important role in the Indian industry.

According to a Chemexcil report, exports grew 13.8 per cent in 2002-03, touching Rs 21,700 crore. Besides drugs and pharmaceuticals, whose exports touched Rs 11,920 crore in 2002-2003, dyes and intermediates recorded good export growth and despatches of inorganic, organic and agro chemicals were substantial at Rs 4,730 crore.

The market in the developed countries is opening up and India should take advantage of this. In certain categories of chemicals such as dyes, pharmaceuticals and agrochemicals, India has an advantage especially as it has created strategic alliances with Russia and the CIS countries. But to improve access to other markets, Indian needs to reduce tariffs from the current 35 per cent to 12-15 per cent. This would mean the domestic industry would face more competition. India is also likely to face other barriers to trade in the form of sanitary and phytosanitary measures in the developed world. But the process of diversifying exports, with India moving more proactively towards the Asian free trade zone, should help it improve exports to other regions.

In the Asian perspective too, India does not fare too badly. It is the biggest manufacturer of basic pesticide chemicals among the South Asian and African countries, next only to Japan. It is also the second largest producer of agrochemicals in Asia. Currently, 145 pesticides are registered in India, of which 85 technical grade pesticides are manufactured in India.

Foreign direct investment into the industry in India has also been encouraging, with approvals touching Rs 12,852 crore and inflows reaching Rs 4,840 crore. World majors such as Unilever, ICI, Hoechst, DuPont, BASF, Bayer and Glaxo already have a presence in India.

A SWOT analysis of the industry by FICCI identifies certain strengths and weaknesses of the industry, which will either enable it to meet the challenges of the future, or act as deterrents to growth.

The diversified manufacturing base of the industry, vibrant downstream industries, strong exports, low costs of research, abundant raw materials and India's edge with a large English-speaking population, would push it on the trajectory of global growth. India also has the opportunity to manufacture products going off-patent on an economic scale. Being close to West Asia, it is also in a position to make major value-additions to the abundant petrochemical feedstock from this region.

The issues that need to be addressed by the Government and industry, however, continue to plague this sector. These include poor customer focus, high costs of power and finance, poor infrastructure, low scales of production and fragmentation.

The legacy of the past policies of industrialisation, have also left the industry with certain disadvantages. The efforts made to spread out the industry, despite high concentration largely in Gujarat and Maharashtra, have resulted in the dispersal of the industry. This has created certain locational disadvantages for the industry, resulting in extra transport costs for both raw materials and finished products. Though a highly regulated environment is a thing of the past, much needs to be done to make conditions for the industry more flexible and conducive to growth.

Global developments will determine the direction the Indian industry will take. But the Government, industry and trade bodies need to join hands to steer the industry and help it acquire a new face altogether.

(The author is a Mumbai-based freelance journalist.)