Government should revive its focus on PCPIRs

As per estimates by FICCI, the Indian chemical industry has been witnessing growth (CAGR) of 10-11 percent over FY 2006-FY 2012 and is estimated to be $110 billion (FY12). The growth has been driven by:

However, the industry is facing several challenges: availability of feedstock (especially natural gas), lack of scale and competitiveness in the base chemicals segment, poor infrastructure (ports, roads, power and water issues) etc. For industry to maintain its growth momentum, it would need support from government in areas such as PCPIRs, finalisation of National Chemical Policy, Studying the impact of FTAs, and rationalisation of duty structures.

 

Development of PCPIRs

The Government of India had notified the Petroleum, Chemicals and Petrochemical Investment Regions (PCPIR) policy in 2007, with the objective of developing dedicated integrated chemical clusters, at coastal locations in the country, thereby reaping the benefits of networking and greater efficiency through the use of common infrastructure and support services. The state governments are responsible for providing utilities such as power, water, and sewage, while the central government is responsible for external physical infrastructure such as railroads, highways, ports, airports, and telecommunication facilities. These clusters were modeled based on the development of similar chemical hubs across the globe such as Rotterdam (Netherlands), Port of Antwerp (Belgium), Bayport Estate in Houston (USA), Jurong Island (Singapore) and the Nanjing and Shanghai (China).

 

As of today, there are four PCPIRs which have been approved and notified viz Dahej (Gujarat), Vizag (Andhra Pradesh), Paradip (Orissa) and Cuddalore (Tamil Nadu). However, despite investment of Rs 54,000 crore and finalising the anchor tenants for three zones, the progress has been slower, expect in Dahej PCPIR. The government should revive its focus on this and promote development of these zones, through faster environmental clearances, better co-ordination between central and state governments and encouraging involvement of private sector.

 

Draft National Chemical Policy

The ‘Draft National Chemical Policy’ was released by the Ministry of Chemicals and Fertilizers, Department of Chemicals and Petrochemicals in 2012. It aimed at facilitating the growth and development of chemical industry (increasing India’s share of the global chemical industry from 3% to 6% in a decade) in an environmental friendly and sustainable manner. It lays lot of emphasis on aspects such as R&D, technology up-gradation, safety & sustainability, pollution & environmental aspects, effluent/waste disposal & treatment, and green chemicals. 

 

A lot of work has already gone behind formulating the ‘National Chemical Policy’. However, this policy is still in draft form and the final version has not been published yet. Having done the ground work, speedy implementation of this policy would help the Indian industry.

 

Impact of free trade agreements 

As per Assocham, India has signed as many as fifteen FTAs including preferential trade pacts, while nineteen are under negotiations and eight are in the pipeline but India is still grappling with slow growth of exports and sluggish foreign direct investment (FDI) flows from its FTA partners. As per a study conducted by Assocham in Nov 2013, out of the seven major trading partners viz., Asean (Association of South-East Asian Nations), Indonesia, Japan, Malaysia, Singapore, South Korea and Sri Lanka with whom India has operationalised FTAs, it has trade surplus with only Sri Lanka and Singapore.

 

The Government may want to review the impact of various FTAs on various sectors, including chemicals and take course correction, if needed.

 

Rationalisation of duty structures

In order to boost the local manufacturing, it is important to remove anomalies such as inverted duty structure, under which finished goods are taxed at lower rates than the raw material. In such cases, manufacturers have to pay a higher price for raw material in terms of duty, while the finished product lands at lower duty and hence lower cost.

 

As per a recent survey by FICCI, in chemical sector, while the additional custom duties are equal on raw material and final product, inversion exists because of difference in basic custom duty. This study identified sixteen such chemical products, for which it is necessary to remove duty inversion.
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Biswanath Bhattacharya is the Partner - Management Consulting, KPMG in India

Ashish Ladha is the Associate Director - Management Consulting, KPMG in India