The chemical industry accounts for about 2.1% of India’s GDP and is the third largest in Asia (by value). Yet the industry faces many-a-hurdle. The Dollar Business caught up with Dr. B. R. Gaikwad, Chairman, CHEMEXCIL, to understand problems that continue to plague the industry and restrict its growth.

Interview by Aadhira Anandh M. | December 2015 Issue | The Dollar Business

TDB: What are the primary challenges that hinder the growth of the chemical industry as a whole?

BRG: Environmental clearances are a major issue. Major industrial estates in Gujarat have been declared critically polluted and are facing issues on account of stringent pollution controls imposed by Central Pollution Control Board (CPCB) or State Pollution Control Board (SPCB). Exports growth is hampered as exporters are unable to take advantage of cyclic market demands of specific products due to lack of flexibility of production of different product mix due to tougher stand(s) by CPCB/SPCB.

Duty inversion faced by EOUs on DTA sales is also a cause for concern. Foreign Trade Policy allows EOUs to sell 50% of their FOB export value into domestic tariff Area (DTA). Such sales are governed by Excise Notification No.23/2003 dated 31-3-2003. This notification provides charging of duties, as if goods are imported into India. The specific provision  allows charging of 50% of Basic Customs Duty (BCD), plus Countervailing Duty (CVD) and Special Additional Duty (SAD) or VAT, in lieu of SAD. However, when these goods (manufactured by the EOUs) are imported under FTAs or any Exemption Notification by domestic users, they are entitled for the reduced Basic Customs Duty (BCD), including Zero Basic Customs Duty. This duty anomaly makes the DTA sale of any EOU product uncompetitive in the domestic market, resulting in capacity underutilisation of such EOUs, thereby increasing overheads on the export product. These duty anomalies are forcing many EOUs to exit from the scheme and get themselves converted into DTA units.

Cost of export finance in India is much higher as compared to competing countries which impacts competitiveness of exporters. Interest subvention scheme, which used to reduce interest cost by 3%, is not available since March 31, 2014, and needs to be reintroduced.

India’s key markets like EU, LAC, China, Japan, etc., are facing recessionary conditions which have resulted in decline in demand and flow of orders. Indian exporters are also facing intense competition from Chinese exporters in chemicals. Moreover, entry barriers are imposed in China in the form of high VAT upto 17% which makes exports from India uncompetitive.

Owing to GSP (Generalised Scheme of Preferences) benefit withdrawal by EU on Indian exports, Indian exports to EU are now subject to full Customs tariff which has adversely impacted the country’s exports to the region.   

After merging Chapter 3 schemes into MEIS, export incentives under MEIS have been reduced from 2-5% for industrial products (including chemicals) to  2-3%. Besides, 2% benefit under Incremental Exports Incentivisation Scheme is also now unavailable. For almost all chemicals under Chemexcil’s purview, the export incentives under the new scheme (MEIS) is more or less 2%, which has further killed competitiveness of the exporters.

TDB: What export promotion measures have been taken by Chemexcil to ensure the growth of the industry?

BRG: As export promotional measures, Chemexcil has implemented trade promotion activities, which include participation in exhibitions and buyer-seller meets in India and abroad, holding of awareness seminars on statutory compliances like Registration of Substances of firms in European Countries (REACH), meeting on Indian chemical inventory, capacity building initiative on skills development, etc. Chemexcil also took up the matter of disbursement of 50% of ECHA registration fee incurred by the firms concerned under REACH, and released 50% of the ECHA registration fee to all concerned.

TDB: India has always been a big importer of chemicals (both organic and inorganic). Can you tell us why we have not been able to produce enough to meet domestic demand?

BRG: Domestic demand for basic feed-stock leads to heavy imports as these chemicals are not available in the country. These feed-stocks are used by a diverse spectrum of industries for manufacturing various types of specialty finished products which may be exported. In addition to this, due to reduced or zero duty on finished products under various FTAs, imports of these products have become more attractive than manufacturing the same in India. Though FTAs are essential for increasing bilateral trade, somehow these have adversely affected domestic value addition for making specialty chemicals. FTAs should be reviewed and these anomalies need to be addressed soon.

TDB: Are you happy with export incentives provided by the government? If not, what needs to be changed?

BRG: I reiterate that the existing reward rates under Chapter 3 are inadequate and impact the competitiveness of Indian exporters as against exporters from countries like China. In order to stem the downturn, there is an urgent need to increase MEIS reward rates on chemicals under the purview of CHEMEXCIL to 5%. The MEIS scheme should be expanded to include new items of high export potential which are excluded or not covered in FTP 2015-20.

TDB: Are there drawbacks in government policies that are affecting the productivity of the industry? If so, how do you plan to overcome those hurdles?

BRG: The industry is facing environmental ban on manufacturing units which is hampering growth. Moreover, units are also facing issues like steep increase (400%) in electricity charges on captive power producing units in Maharashtra, procedural delays by various pollution control boards, delays in implementation of GST, non-uniformity in state taxes and non-competitive gas prices due to long-term formula prices for manufacturing units.

TDB: Do you think the existing duty structure and tax deductions available to the chemicals industry is enough to boost its future?

BRG: There are several instances of duty inversion on account of FTAs that India has signed with its trading partners. There is an urgent need to revisit these FTAs so that the interest of domestic industry is protected. Besides, the same also needs to be kept in mind for future FTAs or mega blocks like RCEP which also includes China. All industry duty drawback rates also need to be revisited and should be realistic.

TDB: How will the ‘Make in India’ initiative help the chemical industry?

BRG: The objective of “Make in India” programme is to spur local manufacturing activity, which will lead to employment creation, overall growth and poverty alleviation. In case these issues are addressed, Indian industry has the potential to deliver. Speedy implementation of government initiatives to improve infrastructure, single window clearances for various approvals and GST implementation would certainly help boost local manufacturing.

TDB: How do you see the chemical industry performing in the near future?

BRG: In FY2014-15, exports under Chemexcil’s purview touched $12.67 billion. Since April 2015, exports have been declining continuously and the decline is almost 10% over the corresponding period of the previous year. Considering this, I think the coming months will continue to be tough on the chemical sector’s export growth.