Abstract
The steady growth of the Indian economy has led to an increase in demand for bulk, intermediate, and specialty chemicals. However, the problem lies in the insufficient supply capacity to meet this demand, leading to heavy reliance on imports for basic and intermediate chemicals, as well as finished chemical products.
Introduction
It is generally said that production capacity of any chemical or allied product should be built based on the present demand and projected demand in the coming years. In other words, the theory is that demand precedes supply and supply capacity should be built in tune with the demand trend. In recent years,with the steady growth of Indian economy in multiple directions, the demand for bulk, intermediate and speciality chemicals in India has been steadily increasing. In today’s condition, it appears that there is no particular concern about demand prospects. The problem is that supply is not being built as required by the growth in demand. Such situation has made several Indian chemical industrial units and chemical consumers to be excessively dependent on import of basic and intermediate chemicals as well as finished chemical and allied products.
Indian import export trade – Case study China
China has emerged as India’s top source of import for several products including chemicals and the share of China in India’s total merchandise import has steadily increased. During the last decade or so, while India has signed many Free Trade Agreements with different countries, there has been no noticeable decline in China’s market share in India’s total import.
At sectoral level, 10 product groups account for about 80 percent of India’s total import from China. Among these, the top three product groups make up for more than 60 per cent of India’s total import from China. These product categories include basic organic and inorganic chemicals, intermediate chemicals, pharmaceuticals, apart from electronic goods, mobile phones, semiconductors of different types, electrical appliances.
On the other hand, the latest data show that in 2022-23, India’s export to China has declined in absolute terms. Consequently, China’s share in India’s export basket came down to 3.4 per cent in 2022-23 from 5.04 per cent in 2021-22.
Selected top export items to China from India
(April to March)
In $ million
| Commodity | 2019-20 | 2020-21 | 2021-22 | 2022-23 | Average | |
| Petroleum products other than crude | 2,098.44 | 1,017.58 | 1,830.28 | 1,907.02 | 1,713.33 | |
| Cyclic hydrocarbons | 1,409.53 | 956.97 | 988.29 | 268.39 | 905.8 |
Refined petroleum products are India’s most important export item to China. Other than that, India’s exports to China have been mostly dominated by agricultural goods. iron ore, semi-finished products of iron, copper and copper products, fish and marine products, vegetables, vegetable oils and rice. Share of India’s export of chemical and allied products to China in the overall export is at negligible level. This is mainly due to lack of adequate manufacturing capacity in India for chemical and allied products.
PLI Scheme
Considering such supply constraint scenario, Government of India has done well to implement Production Linked Incentive (P L I) scheme to accelerate the pace of manufacturing capacity build up in the country. However, it is reported that the PLI Scheme has had a slow start with disbursals of just Rs. 2900 crore so far out of the corpus of Rs.1.97 lakh crore.
industry representatives in certain sectors including chemicals, textiles and food processing have been complaining about the high threshold levels of investments and turnover for eligibility to avail PLI scheme, that are viewed as a disincentive for smaller investors. While this view may be appropriate to some extent, the ground reality is that adequate number of viable proposals with strong technology inputs have not been submitted for availing PLI scheme in several cases including chemical and allied products.
In any case, PLI schemes can be provided by government only for a few products. Therefore, depending upon PLI Scheme for manufacturing capacity build up in all potential areas is not appropriate.
Import dependence on chemicals
Today, there are many chemicals where Indian import is steadily increasing with no plans for capacity build up being announced to the level of requirement, in spite of steady growth in domestic and global demand.
A few examples are given below
| Product | Present annual import
quantity in tonne
|
Present annual domestic production in tonne |
| Methanol | 2,815,925 | 167,000 |
| Poly vinyl chloride | 2,469,480 | 1471,000 |
| Poly acetal | 61,731 | Nil |
| Polycarbonate | 224,233 | Nil |
| Styrene monomer | 1,093,429 | Nil |
| Vinyl acetate monomer | 211,730 | Nil |
| Acrylo nitrile | 233,758 | Nil |
| Adipic acid | 57,466 | Nil |
| Bisphenol A | 85,662 | Nil |
| Citric acid | 131,440 | Nil |
| Lysine HCl | 75,630 | Nil |
| Methyl methacrylate | 88,437 | Nil |
| Methylene Diisocyanate (MDI) | 161,311 | Nil |
| Nylon 6,6 | ~33,000 | Nil |
| Polycrystalline silicon | ~10,000 | Nil |
| Silicon metal | ~72,000 | Nil |
| Propionic acid | 25,406 | Nil |
| Titanium dioxide rutile pigment | 220,000 | 30,000 |
| Poly vinilydene chloride | ~10,000 | Nil |
While a few examples are given above, there are host of several other bulk, intermediate and speciality chemicals, where import level is surging due to steady increase in demand and lack of efforts to build domestic capacity.
It is vaguely argued that certain manufacturing sectors in India may be gaining from Indo-China import trade, as availability of cheap intermediate inputs from China has possibly helped Indian companies to stay competitive in the domestic and international market.But it is also true that some sectors and sub sectors of Indian manufacturing have been adversely affected because of cheap import from China. This is particularly so, in the case of chemicals and allied products.
Why supply constraint? – Galore of explanations and excuses
A number of reasons such as the following have been stated by stake holders and observers in India for the domestic capacity build up efforts in chemical industry falling behind the need. However, the fact is that while there are constraints, there are also enough ways to overcome the constraints to achieve big leap forward. What is required is change for better in the mindset, approach, strategy and confidence level of investors and project promoters in India.
Feedstock scenario
Issue
As India has excessive dependence on import of crude oil and natural gas and the landed price of imported crude oil and natural gas being much higher than in several other countries, the petrochemical-based derivative products cannot be produced at globally competitive price in India. In view of this reason, India remains as large importer of several chemicals such as methanol and polyvinyl chloride, where the price of imported product is lower than the domestic cost of production.
Way out
To overcome this issue, Indian companies should set up such projects abroad where crude oil and natural gas are adequately available and at lower cost. Reliance Industries has already shown the way by deciding to set up ethylene dichloride plant in middle east region and bring it to India to produce PVC. Similarly, methanol plant can be set up in some countries like Trinidad and Tobago, where natural gas is available adequately at acceptable cost and bring such methanol to India for production of derivative products and for domestic use.
Investment constraint
Issue
Number of companies in India that can invest adequately large amount for setting up globally competitive capacity projects are limited. Without such large projects, India cannot penetrate in the global market in a big way.
Way out
Obviously, joint ventures must be set up in India with overseas investment and partnership. Indian project promoters have to take a lead. However, the problem is that even large companies in India in private sector are broadly controlled by families and professionalization at top management level are few and far between. Such family centred possessive attitude prevent the project promoters from accepting partnership with international companies by providing large equity base for such overseas organisations in the projects. Such conditions are prevalent in public sector also. Many international companies want major equity stake in such joint ventures, as they share their technology and market. Obviously, their expectations are justified.
Technology
Issue
For production of most of the chemical and allied products, globally competitive technology is not available in India. This is largely due to dismal research and development efforts in the country over the years. India is dependent for import of technology even in the case of not only large-scale projects but also several medium scale and sometimes even small-scale projects and even from small countries like Taiwan, Israel and Korea.
Many proposed projects are stranded in India due to want of technologies
Way out
For rapidly building up manufacturing capacity, India has no alternative other than procuring technology from abroad. Particularly in the case of small and medium-scale projects, the cost of acquisition of technology from abroad is prohibitive, which Indian units cannot afford. This is a very difficult situation. The more critical issue is that Indian companies are importing similar technology for similar product several times. There are so many urea fertiliser plants and so many petroleum refineries operating in India but still Indianunits have to seek technology and engineering support from abroad for setting up more of such projects of similar nature.
Cooperation and collaboration between Indian R& D institutions and design and detailed engineering organisations to develop and scale up technology is the need of the day. For such efforts, government can do little and initiatives have to come from technologists, industries and R & D bodies. This seems to be nearly conspicuous by absence.
Many project promoters have said in private discussions that they lack confidence in Indian R & D institutions for technology acquisition, particularly since technologies developed by Indian R&D bodies are mostly at lab scale or bench scale level and which have not been proved in commercial scale operations.
Obviously, confidence with cooperative attitude is needed between industries and R& D bodies. Perhaps, both industries and R&D bodies have to accept the blame to some extent for such situation. R & D bodies too should show greater pragmatism in fixing the fees for technology transfer, considering the fact that there could be a calculated risk for the project promoters in some cases.
Global market penetration
Issue
There are no trading houses in India with global presence and competitiveness to operate internationally for chemical and allied products. This is a big issue in penetrating the global market.
Way out
Global trading activity involves sophisticated management practice, with digitalisation, updated data base, market intelligence to forecast the demand and price trend, which are all vital factors. This calls for large investment too. Probably, trading houses in India can join together with specialisation in particular field to widen the operational base and give themselves enough strength and muscle power to operate in competitive conditions globally.
Cooperation between Indian industries
Issue
There is lack of cooperative attitude between Indian industrial units operating in similar field to join together and set up large capacity projects that would be globally competitive.
Way out
Given the investment and feedstock constraints and realising the need to put up large capacity projects, industries operating in similar field can put their heads together and promote ventures of globally competitive size.For example, there are number of starch units in India producing large quantity of starch and such starch units can join together to set up large scale starch-based projects. Companies with agriculture base for producing tapioca, corn etc. also can join these starch base derivative projects. Such elegant cooperation would enable India to setup large scale starch-based projects such as citric acid, Lysine etc. which are totally imported now.
Counterproductive activism
Issue
Many worthwhile projects have been blocked in India due to politically backed environmental activists, who seem to lack adequate understanding of technological issues and the national need. The immediate example is the closure of Sterlite Copper in Tamil Nadu. Other example is the agitation against the Neutrino project in Tamil Nadu, which is a very important R & D project. Former President Dr. A P J Abdul Kalam appealed to the activists not to object to this vital project but the appeal of the learned scientist fell on the deaf ears.
There are so many other cases of blocked projects
Way out
Often it happens that vote bank politics is the primary driver for taking vital decisions in India by the government. In the case of such counterproductive attempts to stop meaningful projects, the governments have to take firm stand and implement the schemes with courage of conviction. Not sure whether it can happen in India today, where it appears that politics often over rules economics and development interests.
Product dumping at low CIF price from abroad
Issue
While the domestic demand is increasing and supply gap in the country is increasing, there are problems in setting up new projects due to the import dumping at a price, which would be less than the production cost in India.
Way out
This is a genuine issue that should be considered by Government of India. Government of India often comes to the rescue of Indian companies by imposing safeguard duty/anti-dumping duty on the imported product. However, safeguard duty/anti-dumping duty is imposed only on an appeal from an operating project in India.In such circumstances, there is apprehension about setting up new projects where import dumping may happen at low price, when new project promoters would not be sure that safeguard duty/anti-dumping duty would be imposed. Government of India should consider assuring the proposed projects about price protection support at the time of commissioning of the project, in case there would be import dumping at low price which would be less than production cost of the new project.
Prognosis
Indian import dependence for chemicals and allied products are now increasing at an alarming level. This is not a healthy scenario and can-do harm to long term interests of India’s economic and industrial development. The industry associations have to be more forthright in highlighting the issues and suggesting solutions and perhaps, give up the temptation to discuss the issues in a cosmetic way in the presence of ministers and top bureaucrats in much publicised meetings and conferences.
Calling a spade, a spade is the need of the day.
