Urgent need to addressing growing imports of chemicals

At a recent conference in New Delhi, the Secretary, Department of Chemicals and Petrochemicals, Government of India, warned about an imminent crises stemming from rising imports of chemicals and petrochemicals to meet growing domestic demand. He has good cause to be worried. In the absence of investments in new projects and expansions, imports of chemicals and petrochemicals are expected to rise from about 10-mt, worth Rs. 65,000-crore currently, to a staggering 46-mt, valued at over Rs. 200,000-crore by 2030, according to some estimates. Such a surge will limit indirect job creation, compromise competitiveness of a whole lot of industries in which strong capabilities have been built, drain valuable foreign exchange, strain infrastructure at ports, complicate supply chains and open downstream industries to price volatility stemming from foreign currency volatilities.

Imports now account for an overwhelming part of several value chains. In some, such as styrene, polyvinyl chloride resin, acetic acid, vinyl acetate etc. – to name just a few – the import dependence is 100%, and no project is in sight to improve self-sufficiency.

Lip service and no more

There is clearly a need to promote domestic investments and build a robust and broad-based chemical industry in the country, but this has not been achieved despite years of paying lip service to the idea. About a decade ago the government announced an ambitious plan to build regions dedicated to the petroleum refining, chemical and petrochemical industries. The Petroleum, Chemicals and Petrochemicals Investment Regions (PCPIRs) were to be clusters built along the lines of those in Shanghai, Singapore, Antwerp-Rotterdam and the US Gulf Coast. To be located at coastal locations – with almost every State with a coastline said to be interested – these were to co-locate a world-scale refinery from an anchor investor, a steam cracker producing primary building blocks (olefins and aromatics), and downstream derivative plants that would manufacture a spectrum of petrochemicals.

The projects were to come up in partnerships, with active private sector participation – from within India and overseas. The seed funding for the infrastructure needed to lure investors to remote locations were to come from the central and state governments, but once set up the administration was to be in the hands of professional agencies, as is the case elsewhere.

Failure of PCPIRs

That was the intent. But the reality has been far removed. Barring a solitary PCPIR at Dahej (Gujarat), which too was a sleight of hand and created by bandying together several existing units, there has been little progress in the others planned for Cuddalore/Nagapattinam (Tamil Nadu), Vishakhapatnam (Andhra Pradesh) or Paradip (Odisha), even as the one for Haldia (West Bengal) was given a quick burial largely due the State’s government disinterest. More recently, even the Andhra Pradesh government threatened to jettison the plans, citing inability to lure an anchor investor, but some efforts are now going on to woo them back.

Several factors have contributed to the failure of the PCPIRs – a factor the government now tacitly accepts. Top-most has been the inability to find an anchor investor. In Dahej, the government could lure an ONGC subsidiary, ONGC Petro-additives Ltd. (OPaL) to set up an ethylene cracker, though no other investors have planned independent downstream projects, mainly because OPaL has chosen to keep nearly all the olefins produced for itself. In Tamil Nadu, hopes were pinned on the Nagarjuna refinery – an ill-fated project that involved import of a second-hand plant from Europe. The project has been jettisoned for good, as has been the PCPIR itself. In Paradip, hopes have been kept alive by Indian Oil Corporation, which has been threatening a naphtha cracker downstream of its existing 15-mtps refinery. No firm plans have been outlined so far, though some petrochemical projects based on propylene from the fluid catalytic cracker (FCC) have been announced.

Tweaks won’t do

The government at long last seems to have recognised that the PCPIR concept has failed and that mere policy tweaks will be inadequate to enable investments to happen. They will follow only when world-class infrastructure is backed by fiscal and policy support – including tax breaks – akin to that offered by other countries, and trade policies are fine-tuned so as not to handicap investors. If an investor in South Korea, Thailand, Singapore or China can access the Indian market at zero or near-zero duties, will any international major look to invest in a project in India, especially one burdened with high costs of capital, raw materials and utilities?

Turning India into an investment destination for chemicals will take more than mere statements of good intent.

Focus on infrastructure

Take infrastructure first. The list of woes on this front is long. It starts with availability of land at the right prices, at the right locations and in the right sizes. Too much of the industry is now clustered around Gujarat and alternate locations are very much needed. The coastal states identified by the PCPIRs are the right locations, as they are close to ports through which raw materials (including crude oil) can be imported, and finished products shipped out. The PCPIRs were always going to be a challenge given the large area they required – 250-sq.km. upwards. In a populous country as India, this was always going to be a challenge. There is now a realisation that the government had bitten off more than it could chew and the revised policy has downsized the area for these clusters to around 50-sq.km. The key is to balance this with the right zoning regulations to ensure residences and commercial spaces do not come up close to production sites, as has happened in erstwhile industrial pockets around Mumbai, for instance. This is essential for safety.

The squatting on land parcels without progress on project activity also needs to be curtailed. This is a problem in existing chemical clusters, and has raised costs for legitimate investors seeking real estate.

A controversial idea proposed by some industry representatives is a cess on chemical imports to fund infrastructure improvements. This could do more harm than good, by raising the cost of raw materials, and is likely to be opposed by a broad spectrum of the industry.

Clear the regulatory minefield

The regulatory pathway for new projects and even expansions continues to be a minefield and needs urgent simplification. A single window clearance system introduced in Gujarat, for instance, has yielded good results and needs to be replicated across the country. Environmental clearance is the biggest headache for new investors today and the process needs reform. For a start, projects located in approved chemical zones should have a fast track channel for individual projects. The approvals should also provide flexibility to investors to juggle product slate, as long as it does not increase the sanctioned environmental footprint. This is particularly important for producers of fine chemicals – a business in which molecules go out of style for various commercial reasons. The ability to adjust the portfolio to tackle exigencies and benefit from newer opportunities is key to commercial success.

There is a clear need to distinguish between compliant and non-compliant companies – an aspect current policies utterly fail to do. The initiative to recognise companies that comply with the tenets of Responsible Care, a voluntary code of practice spanning manufacture and the supply chain, is a welcome start, and needs to be widened.

Adjust FTAs

There is a need to reform import tariffs and rectify some of the anomalies that still linger. More importantly, the Free Trade Agreements (FTAs) that have been signed by several past governments need to be evaluated carefully as they come up for review. There is talk of entering into an agreement with China as part of the Regional Comprehensive Economic Partnership (RCEP), which has been strongly opposed by several industrial sectors, including chemicals.

The level of imports of chemicals and related products augurs poorly for a country that aims to be a $5 trillion economy. Given the enabling role of the chemical industry it is impossible for the target to be achieved without a commensurate growth in domestic chemical manufacturing capabilities. India’s chemical industry now punches far below its weight globally. This must change!