ICC - Indian Chemical Council

1. I am extremely happy to be here today to be speaking to you on the status of the Indian Chemical Industry and its future prospects. To be doing this at an annual lecture in memory of the father of the modern chemical industry in India is indeed a unique honour for me. In 1990, when Prafulla Chandra Ray founded the Bengal Chemical and Pharmaceutical Works, he was working against all the odds that a colonial administration could set before him. Today a partnership has been established to ensure the health and future growth of this vital manufacturing sector.

2. Chemicals and petrochemicals are the building blocks for several downstream industries and products. The industry has consistently recorded impressive growth figures since independence. Today this sector has matured into a US$ 28 billion industry and constitutes 6.7% of the Indian GDP. The product range extends from plastics to drugs and, in terms of exports chemicals, petrochemicals and pharmaceuticals together account for about 14% of the overall Indian export basket. No other developing country can claim to have as diverse and comprehensive a chemical industry as we have. Quite clearly the impulse that drove Prafulla Chandra Ray to establish the first chemical manufacturing facility more than 100 years ago continues to drive the entrepreneurs and technocrats in the 21st century as well.

3. Till 1991, the major thrust of the industry was on import substitution to cater to domestic demand. Indian industry was somewhat constrained in its growth. Licensing of capacity, trade regulations and high tariff protection served as major inhibitors to efficiency & growth. Most Chemicals carried high rates of custom duty while quantitative restrictions were imposed on certain other categories. The demand for various chemicals was regulated by supply and no organized attempt was considered necessary to develop domestic as well as export markets for donwstream products.

4. The New Economic Policy of the 1990s initiated the liberalisation process. The Industrial Policy announced in 1991 was designed to deregulate the economy by removing licensing controls for a majority of products. Amendments in the MRTP Act, lowering of entry barriers for foreign direct investment, free import of technology, de-reservation of sectors hitherto reserved for the public sector and wider access to the capital market were other concurrent measures that set the stage for a new set of challenges & opportunities. While industry rejoiced at the removal of controls the exposure to global competition with the consequent need to improve cost competitiveness become new challenges for the emerging chemical industry.

5. As the world turns into a global market place and barriers are swept aside, a new trade regime is getting defined. This regime dictates that the Indian chemical industry modernise, boost exports and attract direct foreign investment. Being competitive at the international level is essential for survival and growth.

6. What are the questions before the Indian Chemical Industry today? In my view, these are:
i. How can competitiveness be enhanced and growth stimulated in an increasingly global economy?
ii. How can the intrinsic potential of the industry be unlocked?
iii. How can the successes, found in isolated pockets of the industry, be replicated?

7. Before we analyze the Indian Chemical Industry, it may be useful, by way of perspective to take stock of the global chemical industry. Internationally, the chemical industry is valued at US$ 1.5 trillion which is about 6% of the global GDP. The total trade is valued at US$ 400 billion which is about 10% of the total global trade. The Asia-Pacific is today the fastest growth region in the chemical industry. It is estimated that by 2010, Asia will be one of the major markets for chemicals in the world. By then, 40% of the chemical manufacturing capacity will also be based in Asia. The larger than life importance of China is already being felt. This is expected to loom larger in the years to come and, by the end of this decade, both China and India would be major chemical markets.

8. The global chemical industry has of late witnessed the following 6 broad trends:
i) Globalisation.
ii) Consolidation.
iii) Cost reduction.
iv) Research and Development.
v) Increased use of IT &
vi) Environment consciousness.

9. Globalisation has resulted in the location of manufacturing bases close to raw materials, cheaper energy sources and lower tax regimes. Consolidation has necessarily emerged out of the need that companies have felt to seek economies of scale in manufacturing, logistics and R&D. The impact of consolidation has often been improvement in geographical reach and entry into new markets. The two main components in cost reduction have been aggressive identification of improved operating norms and financial restructuring, to cut interest costs. In R&D, there has been focus in knowledge areas designed to secure future revenues. There has been increased emphasis on application development in specialty chemicals alongwith greater customer interaction. The trend of companies investing in process R&D, especially in genetic knowledge, has also been witnessed on a large scale.

10. Environmental consciousness has been a matter of increasing concern for the industry as well as the global community. Environmental issues are forcing the industry to adapt and innovate. In the plastics industry the need for recycling has led to changes in the design and material specification for many products. Effluent disposal issues have driven research into areas such as co-generation and upgradation of technology. In many cases these have also had a healthy impact on costs and profitability.

11. Where does the Indian Chemical Industry stand? Clearly our strengths lie in our:
v Diversified manufacturing base.
v Vibrant downstream industries.
v Strong presence in segments such as dyes, pharmaceuticals, and agro-chemicals.
v Large domestic market.
v High quality human resource base.

Our weaknesses are:
> Cost of power.
> Cost of finance.
> Infrastructure.
> Scale of production.
> Multiplicity of taxes.
> Labour laws.

Where are the opportunities?
A decade of economic reforms have tested the resilience of the Indian Chemical Industry. Success stories in Sectors such as Dyes and Agrochemicals have boosted our confidence to take on global competition. There are many lessons in this. The question is: can we capitalise on the availability and abundance of raw material and establish a win-win partnership using Middle East petrochemicals feedstock as a base for major value addition and, can we exploit the potential of using India as a production base for the domestic market and for outsourcing requirements. These questions need to be asked and answered by the distinguished captains of the chemical industry gathered here today. The removal of Quantitative Restrictions and continued reduction in customs tariff will have to be factored into the calculation. Additionally, stiff competition from China, Korea and Taiwan and the decline in margins are a fact of life. Those who are slow to adapt will begin to feel the pinch. The trick is to anticipate and plan since only the fittest will survive in the market place.

12. While several global industrial trends can be witnessed in India, there are also some unique issues facing the Indian industry. These can be identified as:
i) High domestic demand potential.
ii) Low export focus.
iii) Cost disadvantage.
iv) Fragmented nature of the industry.
v) Low levels of R&D.

13. The high domestic demand potential can, for instance be seen in the low per capita polymer consumption in India which is about 3 Kgs as compared to the world average of about 20 Kg. Similarly, per capita polyester consumption in India is 1.4 Kg while the world average is 3 Kgs and the consumption in China and Indonesia is 4 and 5 Kgs respectively. If we look at the annual per capita drug expenditure it is a meagre US$ 3 in India compared to $ 97 in UK, $ 191 in USA and $ 221 in Germany. These statistics are illustrative of the potential that lies ahead.

14. The export focus of Indian chemical industry has been low. Indian trade accounts for 1.3% of global trade worth US$ 545 billion. The chemical industry is a net importer with an annual trade deficit of US$ 1.3 to US$ 1.8 billion. However, a silver lining is that exports have been showing a positive trend. They increased from Rs.5,000 crores in 1995 to Rs.12,000 crores in 2002.

15. The High Level Task Force on Chemicals headed by Dr. A.S. Ganguly submitted its report in February, 2002. The Task Force analysed the cost disadvantage and identified the major contributing factors. These are:
i) Cost of raw materials;
ii) Cost of utilities;
iii) Cost of capital; and
iv) Impact of multiple taxes and levies.

16. These factors have led to a decline in the profitability of the Indian chemical industry. In turn this has resulted in a decline in the creation of new fixed assets over the last 3 years or so. According to the Centre for Monitoring of the Indian Economy (CMIE), the profitability of the Chemical Industry (defined as the profit after tax as a percentage of gross sales) came down from about 6% in 1994-95 to 1% in 1998-99. It hardly needs to be underscored that the cost disadvantage needs to be addressed if the full potential of the chemical industry is to be exploited.

17. It is well known that the industry is highly fragmented. While this is more so for companies operating in the area of basic chemicals, it applies even to the specialty and knowledge segments of the chemical industry. For instance, agrochemicals classified as a knowledge industry and in which Indian players have had a distinct advantage, is deeply fragmented. Globally, major players are a mere handful. Between them they control 75% of the market. In India most of the larger companies have 3 to 7% of the market. The story is similar in other segments of the chemical industry. Needless to say, consolidation is one of the critical imperatives for the industry. The chemical industry has a dismal record of very low levels of R&D spending. As a percentage of sales, R&D expenditure is only about 2% in the pharmaceutical sector. The international norm is 18%. If we look at specialty R&D, the scenario is even more bleak. 0.4% of total sales is a shameful reflection of the priority attached to R&D. Clearly globalisation has not caught up with us in this area.

18. Having looked at the specific issues facing the Indian Chemical Industry, let me now state what the industry and the Government can do to address these issues. Essentially, the solutions will flow from the nature of the problems. To begin with, let me identify the main requirements to prepare for the challenges ahead. These are:
v) Speedy growth and consolidation.
vi) Cost reduction.
vii) Research and Development.

19. Growth has to be the prime basis for the industry to emerge from the difficulties it is facing. This can come from newer application development or by support drivers such as agro credit, better health management and other relevant welfare measures. Other components of more aggressive growth can be a focus on exports and setting up capacities globally.

20. I have no doubt that you are constantly looking for ways to achieve cost reduction to do well in the future. It is indeed a critical requirement. The various avenues for cost reduction whether on the process side or in raw material or in maintenance cost are well known and need no elaboration. Equally important is the need to restructure debt, particularly for the basic segment of the chemical industry. Suffice it to say that no amount of cost reduction is too small to be ignored in the context of today’s challenge.

21. Research and Development is a theme to which we must constantly return. In the basic segment the industry needs to focus on R&D and improve efficiency thereby reducing cost. In the specialty segment the requirement is quite different. Application of R&D to develop new products is the path that we cannot afford not to take. In either case, R&D is the corner-stone for the sustained health of the Chemical Industry.

22. While the industry has to take a lead in setting its house in order, we appreciate that there are certain measures that the industry expects from the Government. These can be classified under three main categories.
i) Industry competitiveness.
ii) Environment related.
iii) Export promotion.

23. In so far as competitiveness is concerned, Government is conscious of the necessity of reducing tariffs on basic inputs such as fuel and feedstock to make the industry more competitive. It is also important that the dumping and safeguard provisions are effectively invoked to prevent undesirable level of imports from countries having excess capacities. Technology Upgradation has been talked about for some time and perhaps the time is ripe for the Government to look at this initiative in partnership with industry. Equally important is the need for encouraging the emergence of clusters or rehabilitation of existing clusters to enable collaboration within the industry and reduction in overhead costs. It goes without saying in some of these areas the Central Government will have to work in tandem with the State Governments.

24. Environment protection and its regulatory framework is extremely dynamic. We, therefore, realize that the chemical industry needs some hand holding to enable it to comply with the newer and more stringent standards of environment protection. This can either be by way of assistance to individual units or grants to clusters of small and medium enterprises for setting up shared facilities for environment protection. As you are aware, some work is already going on in this regard. It needs to be taken to a higher level.

25. Sooner that later the entire manufacturing sector, including the chemical industry, will have to look beyond the domestic market and actively pursue the opportunities which the new trading order opens up. The inherent strength of the industry will be the main driving force. Nevertheless, the Government can look at specific sectors or sub-sectors with a view to encourage full realization of the potential. Import of critical raw materials at internationally competitive prices would be another instrument of encouraging exports.

26. Apart from responding to what the industry needs, there are two other aspects in which the Government can play in important role. One is in the realm of intellectual property where we need to reassure the world that their investments in India are not only safe but also rewarding. India must become a base for genuine technology development. An important fallout for the chemical industry will be enhanced competitiveness.

27. The other area is to attract substantial investments. The Task Force on Chemicals has stated that the chemical industry in India at present does not inspire confidence in the prospective investor. It is, therefore, necessary to pro-actively highlight areas with potential for good returns and seek additional investment. The Task Force has identified dyes, agrochemicals, fine chemicals, and specialty chemicals as important areas for this purpose. The Government shall pay heed to this recommendation.

28. In conclusion, let me say that the industry indeed faces a daunting task in the years ahead. The basic strength of the industry is your entrepreneurial spirit. We must transform our challenges into opportunities. This is what P.C. Ray did at 100 years ago. The ultimate tribute to his memory will be our ability to establish that we can do it today.