Industry Outlook And Trends
The global chemical industry currently stands at US$ 4 trillion in annual sales. Over the past two decades, this industry has witnessed a structural shift of manufacturing dominance from the West (USA and Europe) to the East (China followed by rest of South East Asia). China alone represents a dominant 35% share of the global chemical industry, whilst India has only modestly benefitted from the easternization of chemical manufacturing. It is however, expected to be one of the fastest growing chemical markets in the world in the coming years. India is set to be a key beneficiary of structural shift in the global supply chain.
The COVID-19 pandemic has caused a shock to the global economy. The impact to business and industry will undoubtedly be reflected in sharply reduced global demand for goods and services. This impact on all end user industries will, in turn, be reflected in the demand for products from the chemical industry.
Indian Chemical Industry
The chemical industry in India covers a wide array of more than 70,000 commercial products. India is the sixth largest producer of chemicals globally and third largest producer in Asia in terms of output. The country ranks third globally in the production of agro-chemicals and contributes around 16% to the global dyestuff and dye intermediates production. On the exports front, India’s share stands at 12.5% and it ranks fourteenth in exports and eighth in imports of chemicals (excluding Pharmaceuticals products) globally.
The Indian chemical industry is expected to double to US$ 300 billion by 2025, recording an annual growth rate of 15%-20%. To achieve this, the Government is working on a draft chemical policy that will focus on meeting the rising demand for chemicals and reduce imports. The Government allows 100% FDI under the automatic route in the chemicals sector, and this has and will keep improving FDI into the industry. The total FDI in Chemicals (excluding fertilizers) from April 2000 to December 2019 stood at US$ 17.4 billion.
While the impact of the COVID-19 pandemic is yet to fully unravel, India’s chemical industry is expected to keep growing at a fairly strong pace after absorbing the shock in FY 2020-21. Even as the rapid spread of the pandemic has sharply derailed industries all over the globe, the strong fundamentals of India’s chemical industry are likely to ensure that this industry will be back on its feet soon.
Focus on decreasing Chemical Imports
India ranks eighth globally in chemical imports and is a net importer. Despite the improving condition of the Indian chemical industry to grow and make a significant impact at a global level, many intermediates and value-added chemicals are still falling short of the required volumes. The Indian Chemical Council's aim to achieve a turnover of US$ 300 billion by 2025 backed by Government's support in proposed infrastructure and policy changes. The investment requirement for this is estimated to be around US$ 75-100 billion and the primary objective is to reduce India's dependence on imports.
Structural Growth Drivers for India
India's large population with rising disposable income, urbanization, growing investments in infrastructure and demand from rural markets are some of the fundamental factors driving growth of the consumption of end use products leading to growth in demand for the chemical industry in India. In addition, huge dependence on agriculture and strong demand for exports throws vast opportunities for chemical players based in India. India has a low per capita consumption of chemicals as compared to the rest of the global economies. The per capita consumption of chemicals in the country is one-tenth of the world average with India being one of the low consumption countries even among the developing nations. The consumption pattern is expected to rise with the rising incomes of the population and consumers demanding better quality products with shift in their preferences towards a healthier lifestyle and environment-friendly products. The large size of the Indian market provides a lucrative opportunity for the end-user industries to set up their manufacturing bases in the country.
The shift in production and consumption pattern towards Asian and South East Asian countries in all sectors is leading to increasing demand for Chemicals and Petrochemicals. The combination of domestic consumption and export growth has made it viable to locate manufacturing operations in India thereby enhancing India's contribution to the Global chemical industry.
India's chemical and petrochemical industry accounted for 3% of the global chemical industry in FY 2018-19, and this is expected to further increase at accelerated rate in the ensuring years. Additionally, the Government has continued its work on ease of doing business in India by streamlining regulations and processes. It is issuing clear directives on the future regulatory regime. This along with introduction of sector-specific skilldevelopment programs will drive India's contribution to the Global chemical industry.
Recently, the Government of India's announcement of 'Atmanirbhar Bharat Abhiyan' economic package of ₹ 20 lakh Crores or US$ 266 billion support package for the economy to help mitigate the damage caused by COVID-19 pandemic, and the subsequent lockdown would stimulate demand and aid the economy. Further, the call for selfreliance along with initiatives to open all sectors for private players is expected to infuse the necessary impetus towards manufacturing in India which will further augment the base of end use products and exponentially increase the demand for use of chemicals.
Phase I of the trade agreement between USA and China may slightly compress the benefit to India’s growth trajectory, but other factors such as the clamp down by the Chinese Government on local manufacturing units and their tighter control has created a favourable tailwind. More importantly, with frequent disruptions caused by China, initially on pollution crackdown and subsequently due to the COVID-19 pandemic, large global manufacturers have been very decisive and have already accelerated their pace of setting up an alterative supply base in countries such as India to de-risk their business. In the long run, this is expected to create a large and sustainable opportunity for the Indian chemical players.
The Road Ahead
India has seen its GDP growth slowing in the last year due to contraction in consumption, weak investment, a slowing external sector and an under-performing services sector. As India is working towards becoming a US$ 5 trilliondollar economy, the long-term growth prospects remain positive for the economy as well as the chemical industry. The Government of India is focusing on strengthening the clusters, chemical regulations, partnering with academia and industry for skilling and preparing a dashboard for monitoring and supporting activities of the entire chemical industry. This along with reforms such as timely GST revisions can help improve consumer sentiment and enhance the demand to support India's overall US$ 5 trillion-dollar vision.
The uncertainty in global trade caused by the US-China trade conflict and the changing structure of China's chemical industry are expected to open doors for the Indian chemical industry. Despite industry-specific challenges, rising domestic demand in chemical end-use sectors such as agriculture, consumer and retail, infrastructure, auto and electronics and healthcare is increasing the attractiveness of India as a manufacturing destination and India's steadily improving 'Ease of Doing Business' ranking could further elevate its position as the epicenter of chemical manufacturing in Asia, in the long run.