Abstract
This article very succintly analyses what is amiss with the chemical industry in India, on why capacity building is not taking place despite the rising demand for many chemicals – now served through imports.
The article clearly enlists the problems one by one and suggests possible solutions. The author who is a leading chemical industry consultant with indepth knowledge of the industry recommends Indian chemical industry expediting the bio-route to manufacture platform chemicals like methanol and ethanol.
There have been discussions in several forums that Indian chemical industry, which include petrochemicals, agro chemicals, polymers, dyestuffs, pigments, caustic chlorine, soda ash, pharmaceuticals (API) and several others are not registering production growth in tune with the growth in the demand in the country.
As a result, India is becoming net importer of several chemicals, which include bulk chemicals and speciality chemicals.
Further, there have been number of cases, where India was producing products earlier whose production have been totally suspended in the country and Indian requirement are now met by import.
It is necessary for the Indian chemical industry to admit the fact and ground reality about the slow and inadequate growth of chemical industry in India in recent times, which is viewed as near stagnation conditions by several quarters. Based on study and diagnosis, prescriptions have to be evolved to put back the Indian chemical industry on firm path of growth and progress.
What shortfalls and what remedies?
1. Shortfall
Excessive dependence on import of crude oil and natural gas for use as fuel and feedstock.
The frequent fluctuation in the price of imported crude oil and natural gas and lower price of natural gas and crude oil in oil and natural gas producing countries have resulted in increase in import of several chemicals due to inability of the Indian units to compete with imported products in price terms.
Remedial steps
India is large importer of crude oil and natural gas with little prospects for boosting the domestic production significantly.
India has to find appropriate alternate sources for fuel/petrochemical feedstocks.
Given the fact that India has large availability of biomass to produce bio-ethanol and municipal solid waste to produce bio-methanol and also large area of appropriate land for algae cultivation, it appears to be most appropriate to produce bio-ethanol, bio-methanol, algae in the immediate future, which can substitute for crude oil and natural gas for use as feedstock and fuel to a large extent.
Production of bio methanol for use as feedstock, production of bio ethanol for use as fuel (by blending with petrol) and feedstock and algae based bio-fuels and use of them as fuels and to produce derivative products would boost domestic production of chemicals and derivative products and would reduce import levels of crude oil and natural gas, that would result in savings in foreign exchange outflow.
Consumption norm for methanol produced by synthetic route and for production of bio-methanol from municipal solid waste (MSW) in application sectors are the same.
Ethanol from cane molasses and cellulosic bio-ethanol are chemically identical regardless of feedstock used (whether it is produced from starch and sugar based feedstock or cellulosic biomass feedstock).
Methanol is an important building block finding extensive applications in different fields and in the production of number of derivative products, which again are extensively used in diversified sectors. Most of India’s requirement of methanol and its derivative products are imported, resulting in the outflow of huge foreign exchange. India’s methanol plants, using natural gas (imported as LNG) have found it hard to compete with import of methanol coming from Iran and Saudi Arabia, in particular and therefore, several methanol plants in India remain closed.
Ethanol is a basic building block and India is unable to meet the ethanol requirements for various application sectors and therefore, import of ethanol is increasing every year. A number of chemicals which are presently produced from petrochemical feedstocks can be produced from bio-ethanol, which would use biomass as feedstock.
Algae bio-fuel can be produced in large quantities, since appropriate land area are available and suitable tropical conditions are prevalent in India and considering several advantages for India in producing algae bio-fuels and other derivate products.
2. Shortfall
Technology constraint
Remedial steps
As domestic technology efforts are not giving adequate confidence to investors, massive import of technology from abroad is necessary.
3. Shortfall
Investment constraint
Remedial steps
There are not many project promoters in India who have the capacity to make massive investment that are required to set up large scale and globally competitive sized projects.
Therefore, investors from abroad have to be encouraged to invest in setting up large capacity projects in India. Necessary conducive climate have to be promoted in India and appropriate and proactive policy initiatives of the government are needed.
4. Shortfall
Lack of export penetration and lack of global sized trading houses
Remedial steps
Present level of export initiatives is far from adequate and this is mainly due to lack of adequate number of trading houses in India, operating internationally. Large scale export penetration is possible only with the support of large trading houses. Collaborative efforts with global size trading houses are required.
5. Shortfall
Politically inclined environmental activism
Remedial steps
Strong campaign is necessary to ensure responsible environmental activism, so that the approach of the environmentalists do not slide into negativism and become counterproductive.
Some important suggestions
– Infrastructure hindrances
Manufacturing units in India are still not easy to be setup and run profitably due to variety of factors.
India is a vast and growing economy and its domestic market size itself is large enough to attract manufacturing in scale. However, given a choice between manufacturing in India and importing from abroad, many companies in India find it easier to take the latter option.
Lack of adequate infrastructure facility is one of the biggest hindrances to set up manufacturing units, where supply chains are dispersed globally and it is important to bring raw materials easily and ship finished goods within the country and around the world competitively.
It is hard to dramatically improve infrastructure very rapidly across a vast nation like India, given the investment levels needed and execution difficulty. Government has to play a more active and proactive role.
– Need for appropriate financial packages
Manufacturing in India has to be made sufficiently financially attractive and profitable to lure overseas investors from across the world to India, from destinations such as South East Asia and Middle East that offer very attractive financial packages.
Governments in countries like Singapore have knowledge of what it takes to compete globally and offer financial packages that make it attractive for companies to relocate and compete. The financial package could be a combination of corporate taxes and financial incentives that are sector specific. This needs imagination and an ability to tailor packages to specific sectors and companies, rather than broad policies that may not be good enough.
Along with taxes, Indian corporates have historically been burdened by high interest rates. Since the global financial crisis in 2008, developed economies in Europe, US and Japan have continuously reduced interest rates along with extremely easy monetary policy in the form of quantitative easing to stoke growth. Borrowing costs have plunged in developed countries, making the difference between real interest rates in India and developed countries very high.
While India has successfully battled inflation in the past five years and stabilized domestic prices within 3 to 4% inflation rate, interest rates have not followed downward sufficiently, making real interest rates in India one of the highest in the world. Private capital investment in such high real interest rate scenario has naturally stalled.
– Ease of doing business
While India’s ease of doing business has improved significantly in the past few years, as can be seen in global rankings, there is no uniformity in bureaucratic regulations imposed by states.
States vary vastly in their investor friendliness and are further dependent on party in power. There is no guarantee that contracts that are signed when one party is in power will be honoured or allowed to continue unhindered if the party loses power and is replaced by opposition party. High profile cases like Amaravathi project in Andhra Pradesh have damaged India’s reputation for adhering to sanctity of contracts.
Promoters of high profile, high investment projects are very difficult to attract, unless India can reverse this phenomenon and establish the rule of law in adhering to contracts and make doing business predictable.
Making business predictable with regulatory stability is crucial in sectors that depend not only on competition for success but also have heavy regulatory burden.
The experience of telecom industry in which almost every overseas investor has burnt the fingers and exited the country, inspite of India being one of the largest and fastest telecom markets globally, has soured the mood on regulatory stability in the country.
Constantly changing regulatory policy and government changing the dynamics of competition has put off new investors and even made existing players wanting to quit the industry.
– Need for Investment from abroad
There are constraints in investment for large capacity projects, as many project promoters lack adequate resources.
The hesitant mindset of some project promoters and investors towards setting up of chemical projects are evident.
In such condition, there appear to be no alternative other than resorting to massive investment from abroad for setting up the projects.
– Need to focus on export market
No country in the last two decades that has grown to a middle income country, such as the Asian tigers has achieved growth in export market significantly without export oriented economy.
Being an export economy makes industry adopt world class practices in manufacturing skills and improves the skills of labour and management in the country to compete in the world.
The additional benefits of export oriented economy by transfer of skills and bench marking knowledge through universities and industrial bodies is immense and will lift the manufacturing capability of the entire country.
A similar thing has happened in the IT sector with Indian companies bringing world class software engineering practices to the country that has made the entire industry lift up its skill levels.
– Need for thrust to global trading
Several trading houses in India are small in size and do not have competitiveness and understanding to operate in the export market.
Strengthening the trading houses is a matter of urgency, as trading houses have vital role to play in the export market penetration.
Government should examine this issue carefully and see how it can promote trading houses to grow faster, by initiating appropriate policy measures.
Sense of direction must be given for the country by government
Considering the complexities of the problems faced by India, particularly due to high import dependence on crude oil and natural gas and other factors leading to near stagnation conditions in the chemical and allied industries, Government of India has to work out its strategies and chalk out the firm, time bound programme based on ground realities.
While there is no doubt that massive production of bio-methanol, bio-ethanol and algae bio fuel and derivative products are elegant solution to tackle the multi various inter connected problems in the country and elimination of near stagnation conditions, Government of India and state governments have to fix stage wise time bound targets for achieving the end results.
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