The sector anticipates the much-awaited extension of the PLI scheme to chemicals to encourage domestic production
In 2024, the global economy experienced mixed performance, with some regions showing signs of recovery and growth while others grappled with economic headwinds and uncertainties.
India has emerged as a pillar of economic stability internationally, maintaining its growth trajectory and achieving a notable 8.2 percent rise in real GDP for FY24 making it the fastest-growing major economy globally.
India's economy proved resilient, overcoming global challenges like geopolitical conflicts, Russian sanctions, the Red Sea crisis, and the impact of spiralling of energy costs and higher interest rates that decelerated global trade.
Considering the above geopolitical conditions and depreciation of the Rupee, the Government will need to find an equilibrium through Budget 2025 to both draw in foreign investment and foster a sustainable revenue framework.
India's manufacturing and agriculture sectors are foundational to its economic growth and stability. The chemical industry is a cornerstone of the Indian economy. It plays a critical role in achieving India's goal of becoming a USD 5 trillion economy and is projected to grow to USD 383 billion by 2030, doubling its global industry share to 6%.
In line with the global trends, the chemical companies in India have faced significant challenges thereby reporting a decline in the Y-o-Y sales and profit margins in the last fiscal year on account of sluggish global demand, fluctuations in commodity prices, increase in geopolitical strains leading to disruptions in the global supply chain and increased costs, influx of low-priced goods from China and widespread inventory corrections.
These challenges require strategic responses from both the industry and the Government. Companies need to focus on enhancing operations, invest in R&D for higher-value products, and diversify supply chains, while the Government can aid by promoting fair trade, preventing dumping, and fostering innovation and sustainability in the chemical sector.
In light of the above, stakeholders within the chemical sector are indeed looking forward to the upcoming Budget 2025, to be announced on 1 February 2025, for potential measures that could spur economic growth and offer support to these sectors.
Key expectations from Budget 2025 for the chemical sector:
Production Linked Incentives (PLI): The sector anticipates the much-awaited extension of the PLI scheme to chemicals to encourage domestic production. This could help achieve the following:
Promoting investment: The PLI scheme's incentives/ benefits may attract more investment to the chemical sector, facilitating expansion, job creation, and technological adoption.
Driving innovation: Resources from the PLI scheme may encourage R&D investments, leading to innovations and improved efficiency, boosting India's competitiveness in the global manufacturing arena.
Reducing import dependency: By strengthening the domestic manufacturing of chemicals, the PLI scheme can help reduce India's reliance on imports thereby making India more Atmanirbhar.
Employment generation: The PLI scheme's boost to manufacturing could create jobs in the chemical and end-use sectors which is key for economic growth and social stability.
Export promotion: With increased production and improved competitiveness, companies can expand their presence in international markets, leading to growth in exports.
Sustainable practices: The PLI scheme can also be structured to promote environmentally sustainable manufacturing practices, aligning with global trends and regulatory requirements.
Infrastructure Development: The industry anticipates government emphasis on enhancing infrastructure in PCPIRs and port-linked chemical ‘plug-in’ hubs by simplifying registration, licensing, and environmental clearances via single-window systems. This would expedite greenfield projects and bolster manufacturing's GDP contribution.
Green Chemical Hubs: There is a hope for creating green energy-driven chemical hubs, with incentives expected for eco-friendly manufacturing and green products, addressing environmental priorities and industry demand.
Investment into R&D: To meet global demand and sustainability goals, Indian chemical firms must focus more on R&D. A regulatory framework supporting new agricultural technologies and allowing MSMEs to direct CSR funds to R&D is expected. Enhanced tax deductions and a revised 'Patent Box' regime are anticipated to further incentivize R&D in the sector.
Rationalization of Customs Duty exemptions and review of Free Trade Agreements (FTAs): Government may consider revising customs duty exemptions on imported components and critical raw materials and FTAs to bolster domestic manufacturing, while making it more competitive with low priced imported goods.
Inverted duty structure: Companies facing an inverted tax structure, where GST on outputs is lower (5% or 12% rate) than on inputs (18% rate), accumulate input tax credits without any availability of refund mechanism for input services. There is a need to amend inverted GST refund mechanism to enable companies to claim GST refund in such cases.
Extension of Tax Incentives: Reintroduction of preferential 15 percent tax rate for new manufacturing companies is expected to support more investment into the sector during these challenging times.
Budget 2025 is anticipated to be a strategic blueprint for India's economic trajectory, with an emphasis on attracting foreign investment and establishing a sustainable revenue system in the face of global economic challenges.
Moreover, it is expected to nurture an environment conducive to innovation, aligning with the broader objectives of Viksit Bharat and Atmanirbhar Bharat. The commitment to maintain fiscal prudence will be key to achieving these goals without compromising on the nation's financial health.
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