Chemical industry pins growth hope on next government

The country is gearing up for next general election, with the last working day of the 15^th Lok Sabha coming to an end on February 21, 2014. The economic growth has been going down in last two years, with experts holding the Central government’s policies (or lack of it) responsible for the poor show along with external factors. Though Finance Minister, P Chidambaram announced some measures to revive investment and boost consumption in his interim Budget 2014, industry feels this may be too late, too little.
 
“With growth decelerating and no major investment on the horizon, earlier estimates of the chemical industry growth of 11% and an estimated $224 billion size by 2017, appear difficult. While we understand that the Finance Minister was presenting a Vote on Account, we had hoped that the government would tweak a few tax rates, bring about rationalisation in corporate tax, or simplify cess or duty structure,” said Vipul Shah, President, CEO & Chairman, Dow Chemical International Pvt Ltd and APAC Regional Director, Functional Materials.
 
The Vote-on-Account provided some interim relief to the manufacturing sector, especially given the slump that the sector has been witnessing over the last several quarters. Shamsher Gorawara, a Spokesperson of Lupin, said, “With duty cuts on auto and capital goods, and a general move to curb expenditure, there will be some relief for the middle class.”
 
ALSO READ: Interim Budget 2014: A vote for growth?

With regard to the pharmaceuticals and healthcare sector, spends have been kept at a constant, with a marginal change from last year. Though Gorawara welcomes the government’s FDI policy in the pharma industry, he believes that there is a need for the government to build an ecosystem that encourages innovation and R&D. “We have not heard from the government on increase in weighted reduction or incentives for research & development or for that steps that would promote local manufacturing and exports from the Indian pharmaceutical industry,” he added.
 
Banking on the new government
The slow economic growth in 2013 has impacted the demand for chemicals. The worse affected were commodity and bulk chemicals manufacturers who experienced slowest growth in 2013. Experts feel that their margins will continue to be under pressure in 2014. Chaitra Narayan, Associate Director, Chemicals, Materials & Foods Practice, Frost & Sullivan, said, “Yes, commodity chemicals will experience a slow growth at least for the first few months of the year. With the upcoming general elections, decisions and projects are being put on hold. Hence, growth is expected only by Q4, if any.”
 
The industry now pins its hope on the next government to put the economic back on growth path. "The industrial coatings business has been impacted by slowdown and rise in raw material costs. We do not expect any significant change in the situation in 2014 till a new government is in place and policies become clearer and predictable,” said Sameer Nagpal, Managing Director and CEO, Shalimar Paints.
 
GST, the missing link
The new government will have to act fast on two of India’s biggest tax reform initiatives - the Direct Taxes Code (DTC) and the Goods and Services Tax (GST). Shah said, "Like the Finance Minister, we too would like to see GST take effect, at the earliest. We hope that the new government will be able to resolve all the pending issues in relation to GST. While this economic reform will go a long way to streamline growth, it is pertinent to highlight the need for a GST framework that encompasses and absorbs multiple taxes, currently levied at the state and local levels."
 
At a macro level, the manufacturing industry, including chemicals, is seeking a clear road map from the Government to make investments in setting up new plants and R&D in India. Aashish Kasad, Partner - Tax & Regulatory Services, Ernst & Young LLP, opined, “The Indian chemical sector will look forward to the new Government for introducing the much-awaited laws such as GST and DTC to simplify the regulatory framework and spur growth, while creating an enabling environment for new investments by making taxes such as DDT and buyback tax creditable.”
 
Bet on speciality
According to a recent report of Frost & Sullivan, a business consulting firm, though commodity and bulk chemicals are likely to experience slow growth owing to reduced industrial output, the specialty chemicals segment is expected to show considerable growth. The report predicts the growth of Indian chemicals industry, which earned revenues in the range of $ 155-160 billion in 2013, at 11-12% in the next two to three years.
 
ALSO READ: FMCG companies banking on specialty chemicals to achieve sustainability

“Speciality and knowledge chemicals forms about 35-40% of the total chemicals industry, and it has been witnessing a double digit growth over the years due to increasing penetration and growth from a lower base. As such, 11-12% growth for the overall industry seems reasonable. Also, considering the exports have been steady and growing at 8% irrespective of the global economic condition, the double digit growth rate is feasible,” said Narayan of Frost & Sullivan.
 
This being the case, is there a visible change in strategy of home-grown big chemical companies to shift focus from traditional commodity chemicals to specialty, niche segments in last couple of years? Narayan replied, “Though there are changes in strategy of home-grown companies, the shift is not very drastic. Speciality chemicals, which are established as a market across the globe, have been the main focus for many Indian companies rather than getting into very niche products. This is also due to the fact that economies of scale generally would be low in India since major raw materials are imported.”
 
Indian companies are however moving out of their comfort zones and have tried to expand beyond major exporting geographies. “Acquisitions abroad has seen an increase, with cash rich local companies taking over niche speciality players across globe to gain markets, technologies and knowledge leadership for the future,” she added.