Emerging investment scenario in Indian chemical industry

Emerging investment scenario in Indian chemical industry

Indian chemical sector is expected to contribute 25% of India’s manufacturing GDP by 2025

  • By Nainika Singh Rathore and Prapti Aravind Lohi , Investment Specialist, Invest India | July 12, 2023

India is showing remarkable resilience and robust growth even though the world is looking ahead to a slowdown. According to the World Bank, India’s estimated overall growth this year stands at 6.9% and is expected to deliver a real GDP (Gross Domestic Product) growth of 7.7% year on year, whereas worldwide economic output at just 1.7% in 2023, making India a beacon of hope. Amidst the global trend of economic downturn, India becomes a market that offers a favourable investment ground. A look at the trends and policies shaping India’s future, such as the Make in India Initiative, reveals that we are aiming to become a powerhouse for manufacturing and exports.

Digitisation, demographic growth, infrastructure development, and government focus on manufacturing capacity growth are some of the factors that will prove favourable in the growth of India’s manufacturing sector. India is now adopting a system of leveraging exports to boost saving and using that for infrastructure development which further increases the manufacturing and export capacity.

It is estimated that the share of manufacturing sector GDP will rise from 15.6% currently to 21% by 2031, which implies manufacturing value rises from US $447 billion to US $1,490 billion. This increase in manufacturing capacity can be expected to spill over to export capacity with an estimated rise to 4.5% by 2031 from the current 2.2%, bringing the size of the export pie to US $1,880 billion. As mentioned earlier, the growth in manufacturing will push infrastructure growth, the expected increase in infrastructure spending will be 7-7.5% of GDP in 2031 increasing from 4.5% of GDP in 2020.

Indian Chemicals Sector

India’s chemical industry is highly diversified and caters a substantial chunk of global markets in many product segments. India is the sixth largest producer of chemicals in the world and third in Asia and the chemicals exports are directed to more than 175 countries. By 2025, the Indian chemical sector is expected to contribute 25% of India’s manufacturing GDP. India’s per capita chemical consumption is far behind the average value in developed nations. In the coming years, GDP growth will lead to a growing middle class and increased urbanisation, and thus raise the domestic consumption of chemicals, according to the Mckinsey Report on “India: The next chemicals manufacturing hub”. This will triple India’s share in the global chemicals sector to 10-12% by 2040 and create an additional US $700 billion market value.

In the past, India started out with a pharmaceutical and bulk chemicals capacity and over time petrochemical production capacity and foreign investment in the chemicals sector have steadily grown. As chemicals extensively support almost all manufacturing processes, growth in end-user industries such as food processing, plastics, personal care, and home care drives the market for the chemicals industry. Based on the availability of a robust growth runway, India is expected to become a US $850-$1,000 billion chemicals market by 2040. Considering cost competitiveness and market attractiveness, the upcoming sub-segments that will be valuable in the next few years will be flavours & fragrances, nutraceuticals, plastic additives, textile chemicals, speciality polymers, and adhesives & sealants. 

Specialty Chemicals: Offering an Attractive Investment Opportunity

The specialty chemicals segment is one of the most promising segments that could aid India’s manufacturing capacity. The segment has the capacity to contribute US $20 billion to India’s exports by 2040. The primary reason that appears to be contributing to the growth of the specialty chemicals segment is cost competitiveness and market-ready products. Cost competitiveness is aided by domestic feedstock availability, capacity utilisation, the scope of tech innovation, and the presence of efficient and skilled labour.

There are various attractive investment sub-segments within this sector. One such sub-segment is the agrochemicals market, which is witnessing high demand due to the growing need for crop protection and yield improvement. Currently, agrochemicals in India is a US $5.5 billion market, showing sturdy growth at 8.3%. It is expected that by 2040, agrochemicals will drive 40% of India’s overall chemicals exports.

Another promising area is the construction chemicals market, which is expected to grow due to the increasing demand for infrastructure development and urbanization. Additionally, personal care and pharmaceuticals sub-segments are also expected to grow, fuelled by the rising middle class's growing awareness of health and personal hygiene and increasing per capita income which is expected to rise from US $1,360 in 2010 to US $5,242 in 2031.

Overall, the specialty chemicals industry in India presents numerous opportunities for investment, and investors can benefit from the sector's growth potential by strategically identifying and investing in the right sub-segments.

Government Reforms: Boosting Chemical Industry

With the government’s focus now being on Atma Nirbhar Bharat, there have been proactive and well thought out policy changes to ensure that manufacturing capacity in India does not only satisfy domestic needs, but also builds capacity to become a global export hub.

The reduced corporate taxes and labour reforms have created the space for companies to tap into the abundant opportunity that India provides. The Production Linked Incentives (PLI) scheme with a mammoth financial outlay of Rs. 1.97 lakh crore assisting 14 sectors creates the scope for fresh investment in the chemicals sector to address related sector expansions.

The PCPIR (Petroleum, Chemicals, and Petrochemicals Investment Region) Policy creates specific administrative zones where the chemical and petrochemical industry can flourish utilising a network of businesses all integrated into the same value chain. The PCPIR zones are set up around one anchor tenant, usually a refinery that provides the raw materials and feedstock to other companies in the zone that further process and specialise the product to add value.

A progressive focus on the integrated value chain and cluster based chemical industry set-up increases profit margins while reducing logistical costs, making the industry globally competitive. To boost trade, the government has introduced the Remission of Duties or Taxes on Export Products (RoDTEP). The scheme has been introduced with the objective to neutralize the taxes and duties suffered on exported goods and intends to compensate the duties/taxes/levies at the central, state, and local level borne on the exported product including prior stage cumulative indirect taxes on goods and services used in the production and distribution of the exported product.

Additionally, the Union Budget 2023-24 has indicated that a reduction in basic customs duty for certain inputs for the chemicals industry will enhance India’s competitiveness and would lead to export promotion. Duty reduction for glycerine and acid-grade fluorspar which was announced in the Budget will help in the production of specialty chemicals and fluoropolymers.

From an infrastructure standpoint, the National Logistics Policy that focuses on digitisation and multi-modal transport for infrastructure development will reduce the logistics cost from the current 14-18% to 8% of GDP by 2030 which will have a positive downstream impact on the manufacturing sector in general, thereby helping the chemicals sector.

Chemical Sector and Net Zero Goals

The chemicals sector is a hard to abate sector with energy intensive and polluting processes leading to negative environmental impact. In order to reach the defined “Net Zero by 2070” goals India has set; the chemical sector needs to prioritise a long-term goal of emission reduction. This needs the industry to tap into solutions encompassing use of renewable energy, improving energy efficiency, increased spending on Research & Development, using bio-based feedstocks, and improving efficient recycling capacity. Capex heavy technologies such as Carbon Capture Utilisation and Sequestration (CCUS) and Green Hydrogen should find greater industrial adoption, more so in the chemicals sector.

Technological development and a robust financial framework can help India become a global leader in environmental protection and sustainability. Given that a lot of India’s industrial assets are relatively new when compared to developed nations, and that India is still on a path to development, it is important for us to not take a route that penalizes growth, but one that incentivises innovation for lower and cleaner emissions.

The global markets and demands will soon move to products that are made through sustainable means, so the next few years are crucial for India to develop the capabilities and technologies to meet said demands. The time to invest in and focus on new technologies is ripe right now and leveraging these opportunities will differentiate long-term players from those that will suffer the consequences of the rapid change expected of the industry.

The opinions expressed are those of the authors and do not reflect the views of the organisation.

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