Since the onset of the pandemic COVID-19, we have experienced an unprecedented crisis, with the worst-ever economic downturn but we also exhibited incredible resilience with most sectors including the Indian chemicals industry recovering from the economic blow.

The pandemic has posed many great challenges for mankind but on the other hand it has also opened up new dynamics in all walks of life.

One of the key developments that has emerged recently is that many global corporations seek to diversify their supply chain to decrease dependence on China and therefore a significant opportunity exists for India. Now, China+1 strategy is not a new thing anymore as many experts say that there are some serious discussions currently going on in board level meetings of various global corporations.

Competitive advantages due to recent reduction in corporate taxes, 100% FDI in the chemicals sector, the Petroleum, Chemicals and Petrochemicals Investment Region (PCPIR) scheme, PLI for various downstream industries and other schemes promoting ‘Make in India’, and significant improvement in ease of doing business are all positive factors that favor local manufacturers. However, we need to understand that the default option for the China+1 strategy will not always be India, it could be other developing nations like Vietnam, Thailand, Bangladesh, and Malaysia from where India may witness steep competition going forward. So, to make India among the top choices for future investments, the government needs to take some structural level policy interventions.

In my view, the three broad areas where the government should focus on in the upcoming Budget 2022-23. First, extending the PLI Scheme for value-added chemicals; Second, provisioning budgetary allocation in the Remission of Duties and Taxes on Exported Products (RoDTEP) Scheme so that the chemical sector (Chapter 28 and 29) can also be put under the purview of the scheme; and third, rationalization of duty structure.

The Indian speciality chemicals market is poised to grow at a CAGR (2020-25) of 10-12% as against the global estimate of 3-4%. India occupies 4% of the global share of speciality chemicals and the per capita consumption levels of speciality chemicals is far below the global average, which provides significant headroom for future growth in this space. With the increasing pace of urbanization, a growing young population with a disposable income will translate into a growing demand for end-user industries such as food processing, personal care, and home care. Keeping all these drivers in mind, the chemical sector also needs a big push mainly to discourage the imports of intermediate chemicals that are being widely used in local manufacturing.

Extending the PLI Scheme to the chemical industry will not only make various projects attractive in terms of investments but also highlight the positive intent of the government to make India a global manufacturing hub for chemicals and petrochemicals.

Export of CPC products grew at a CAGR of approximately 7% between 2018–20. Speciality chemicals account for a major share of more than 50% of chemical exports, dominated by agrochemicals, dyes, pigments, etc. Considering the true potential of the Indian chemical industry, the present export growth is by and large quite ordinary. To harness the full potential, the domestic industry should look for more aggressive exports and eye a double-digit growth rate at least for the next 5-7 years.

The RoDTEP scheme for refunding duties & taxes paid on inputs used for export production is an effort to boost exports. There are a host of cascading taxes that the chemical manufacturer has to bear and as a result, the end product cost tends to increase. In the global arena, India is facing cut throat competition from other Asian giants like China, Japan, Thailand, Malaysia, and South Korea. These countries not only provide various incentives to their manufacturers but also the overall cost of production is very low due to technological advancement and robust infrastructural development. Now, on the other hand, with high factor cost along with the additional tax burden (due to exclusion from RoDTEP) on the exported products, the Indian chemical producers become uncompetitive in the global market. Therefore, to improve the overall export competitiveness of domestic industry, the government should make necessary provisions for budgetary allocation in the RoDTEP Scheme and extend the benefits to the chemical sector (Chapter 28 and 29) as well.

Lastly, a country like India has a few advantages and many disadvantages like high factor cost, high cost of capital, lack of robust infrastructure, dependency on various raw materials etc. and needs to adopt a balanced tariff regime. The tariff regime should encourage essential imports of raw materials and on the other hand also help restrict imports of non-essential finished goods so that India can achieve self-reliance (Aatmanirbhar) and become a global manufacturing and export hub.

In the upcoming budget, the government may focus and consider tariffs as a policy tool to boost the competitiveness of the domestic industries and to provide an opportunity for value addition ensuring adequate support. In this relation, a ladder up duty structure approach is recommended for the chemical industry. A ladder-up duty structure is a concept of implementing minimum or no duties on raw materials and subsequently a stepwise increase in duty rates from raw material to intermediates to finished goods as we go along the value chain.

For instance, Feedstock (Naphtha and Natural Gas) and important building blocks should be preferably at zero duty. This should be followed by a slightly higher duty of 2.5% for other building blocks and 7.5% - 10% for basic chemicals/precursor to intermediates, 10.5% - 12.5% for intermediates, further higher around 12.5% - 20% for downstream chemicals and other finished products.

The Government of India had also advocated the ladder-up approach with a long-term phased import duty hike. Also, to encourage domestic production and create a level playing field, Government of India in Union Budget 2021-22 had announced the changes in basic customs duty for a few chemicals and plastic products such as duty hike of carbon black (from 5% - 7.5%), Bis-phenol A (from 0% -  7.5%), Epichlorohydrin (from 2.5% - 7.5%). Therefore, the upcoming budget may also be focused on duty hikes for downstream oriented value-added products.    

Additionally, similar to the previous reduction in customs duty for Naphtha (from 4% - 2.5%), the upcoming budget may also attempt to make all the necessary raw materials and building blocks into a zero duty bracket. o-Xylene and p-Xylene are the classic examples wherein the government had previously supported the industry with a zero import duty regime. Similarly, Chapter heading 2901 and 2902 contains other important building blocks like Ethylene, Propylene, Benzene, Toluene, Ethylbenzene etc. which form the very basis of the entire chemical industry. Thus, to stay competitive in the global market and support the vision of Aatmanirbhar Bharat it is also recommended that the entire Chapter heading 2901 and 2902 be put under zero customs duty regime.  

Author: Rajendra V. Gogri, Chairman & Managing Director, Aarti Industries Limited

Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of ICN and ICN does not assume any responsibility or liability for the same.