India considering PLI scheme to take on China in chemical-petrochemical sector

Top 5India considering PLI scheme to take on China in chemical-petrochemical sector

New Delhi

Even as India gears up to emerge as a global manufacturing hub for chemicals and petrochemicals, the China factor in terms of aggressive output design on the back of its economic recovery production is a daunting prospect for India and its industry. This is being exacerbated by the ripples of geopolitical conflicts, destabilising of the supply chain for critical feedstock and flash price spikes hampering smooth operations. India is staring at the next few years being challenging in terms of sustaining margins. Aware of the need to push India’s place in the world as a manufacturing hub and help battle the constraints, the government is considering a PLI scheme also for the chemicals and petrochemicals sector, as Finance Minister Nirmala Sitharaman said at a FICCI summit on global chemicals and petrochemicals manufacturing hubs in India.

What makes the current situation so critical for India is the huge stakes that the sector has in morphing India into a manufacturing powerhouse reliant on its own strength. The sector has been marching on despite disruptions with a market size around US$190 billion, which is likely to reach US$300 billion by 2025, growing expectedly by 10-11% between 2021-26 and by 7-10% by 2027-40 by tripling its global market share by 2040. The market of specialty chemicals itself is growing exponentially and industry in India is expected to grow at 12% CAGR. India has already made an impact in the sector with combined exports of major chemicals and petrochemicals in 2022-23 at US$9 billion, driven by the country’s strong process engineering capabilities and low-cost manufacturing capabilities. Take Indian Oil’s proposed Paradip Petrochemical Complex project at Paradip, Odisha, at an estimated cost of Rs 61,077 crore. This mega project will be largest-ever investment of Indian Oil at a single location for producing several petrochemical products and is a cutting-edge, state-of-the-art complex, which, says Shrikant Madhav Vaidya, Chairman, Indian Oil, will undoubtedly be transformative in its impact, “significantly advancing the Aatmanirbhar Bharat initiative”.

The catch though is in the whopping increase in imports to US$13.33 billion, and hence, even as the growth surges ahead, India is facing an increasing gap between exports and imports, many of which are items which can be produced in India itself. India is growing domestically at 8% in the chemicals sector, but to sustain this growth over the next 10 years, there is need for 40% growth in the capacity. “Amidst currently experienced global headwinds, including from China, Indian chemical and petrochemical industry needs to continue its growth momentum and leapfrog to its target of US$1 trillion by 2040,” says Deepak Mehta, CMD of Deepak Nitrite. Here, the humongous capacity additions in China is a challenge, highlights a knowledge paper by Pricewaterhouse Coopers, which recently completed its 150 years of presence in India. This trend is seen in the polyolefin demand. Globally, the polyolefin capacity addition led by China and the United States has outpaced demand growth in the last three years.

Even as the demand for chemicals is steadily increasing in India, the major challenge lies in the supply and demand clusters of chemicals and petrochemicals in the country, and insufficient supply capacity to meet this demand, which in turn leads to heavy import dependence. China has emerged as the key source of imports of chemicals with best practices adopted by global chemical clusters. The paper gives insight into how along with Singapore and Germany, China has successfully established world-class chemical clusters offering valuable insights into infrastructure planning, technology adoption, environmental sustainability, and cluster management.

The high cost of manufacturing in Europe provides India a big opportunity, according to Mehta. With many countries looking at India as an alternate location to China for procuring chemicals, but India needs to incorporate such practices to create a conducive environment for chemical companies to thrive, fostering innovation, collaboration, and competitiveness. A shift of trade route from the Pacific Ocean to the Indian Ocean Region is expected by 2030, driving India and China to become the largest manufacturing hubs globally which makes ease of access to neighbouring market a key factor.

To leverage this, India requires establishment of plastic parks within chemical clusters which provide specialised infrastructure and common facilities for plastic manufacturers, enabling them to enhance productivity, reduce costs, and optimise resource utilisation. Mehta also calls for chalking out a clear action plan to create these much-needed chemical hubs in India. There has been much work on the idea of chemical parks since the early 2000s and India already has a PCPIR (Petroleum, Chemicals and Petrochemicals Investment Region) policy, which has met with limited success so far and has failed to create “interdependent and integrated” manufacturing hub for chemicals and petrochemicals.

The government is also now undertaking detailed work on establishing chemical parks and has suggested to industry to form an association or SPV and partner with the Central and State governments. The private player can have a 51% stake in the entity and develop the park on a turnkey basis. The process of setting up plastic parks is already in place.

Going ahead, government and business are optimistic on the changing industry landscape driving the Indian chemical and petrochemicals industry towards the next wave of growth with newer opportunities as geopolitical tensions and the aftermath of the pandemic turn attention to critically evaluate its supply chain resilience and thus look beyond China. Subhrakant Panda, President, FICCI is upbeat on the potential of the highly diversified chemicals sector with products which have an interplay with multiple sectors being key building blocks and raw materials. The industry manufactures 80,000 products which include sectors like agriculture, infrastructure, textiles and packaging. “It has grown at more than 1.2x of GDP and holds immense potential for employment as well as exports, driven by domestic consumption and enabling policies of Government,” says Panda.

India has made progress in establishing chemical clusters, particularly through the PCPIR program. Currently, the government has approved four such regions—Dahej in Gujarat; Vishakhapatnam in Andhra Pradesh; Paradip in Odisha; and Cuddalore and Nagapattinam in Tamil Nadu. These PCPIRs have emerged as a thriving hub attracting major national and international chemical companies and witnessing rapid growth, thereby offering favourable investment opportunities. Once fully established, these PCPIRs are expected to attract investment of INR 34 lakh crores (US$420 billion) approximately.

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