Published on June 11, 2014
The Indian chemical industry has a number of obstacles which should be overcome. Lack of skilled workforce, raw materials and much-needed technologies can prevent the industry from capitalising on growth opportunities offered by our country.
This industry is extremely important to the global economy. Chemical sales on a global scale have increased exponentially in the last ten years.
The global chemical industry is witnessing a gradual transition to developing countries. India offers a strong alternative manufacturing base in Asia for foreign players.
In FY2013, India was the tenth largest chemical manufacturer in the word, accounting for 3 per cent of the global chemical industry. Basic chemicals account for the biggest share of the Indian chemical industry, followed by knowledge chemicals and specialty chemicals. Growth of knowledge chemicals in the past few years has been driven by the pharmaceutical industry.
Indian chemical exports stood at Rs 1.5 lakh crore in FY2013, with a CAGR of 17.9 per cent during FY2009-13. However, this tremendous rise in exports has not stopped India from being a net importer of chemicals.
Demand for chemicals in India is extremely high, making it an attractive destination for foreign players to strengthen their foothold in the country. This rising demand is being driven by end user industries like automobile, construction, foods and agriculture.
FY2009-13 also witnessed a good financial performance by the industry with EBITDA margins of around 14-17 per cent. The same period also saw around 60-70 M&A deals every year. Despite these positive outcomes, capacity addition projects are getting delayed due to the sluggish economic.
India does have a competitive edge in terms of hard costs like power, logistics, cost of borrowing and fuel costs. The country also has one of the lowest import duties on chemicals in the world. The drug discovery cost in India is around $ 10 million compared to around $ 100-200 million in the US.
But the industry continues to be plagued by lack of infrastructural facilities and issues related to transaction costs. India is ranked at 87 among 144 countries for the quality of infrastructure in 2012-13.
In 2013, World Bank ranked India at 132, faring poorly terms of setting up a business venture (ranked at 173), handling construction permits (rank 182), and enforcing contracts (rank 184) amongst 185 nations.
The industry should also tackle issues related to access to raw materials. The industry is heavily dependent on imports of raw materials like monomers and has also failed to leverage the strong base of herbs and natural ingredients.
The regulatory system implemented to govern the global chemical industry will affect the performance of the Indian industry.
Lack of a strong R&D base and access to technology is another key challenge. An inexpensive talent pool with no cross-functional skills affects the employability of the workforce.
The government is currently working toward setting up PCPIRs, which are likely to bring about an investment of about Rs 4.8 lakh crore. These projects aim to make India mor attractive destination for investments and encourage downstream chemical development for the plastic and petrochemical industry and to bring in more investment into the chemical industry. But the projects are getting delayed.
Thus, the industry's growth ultimately depends on its ability to address the challenges of lack of skilled workforce, raw material availability and infrastructural facilities .
