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Question No.4 Describe various sectors of chemical industry.

What are India’s competitive advantages & disadvantages in the
export of chemical goods?

Solution: India has, over the years, developed strengths in sectors like dyestuffs,
pesticides, organic and inorganic chemicals, drugs and pharmaceuticals, plastics, rubber
processing, synthetic fibres etc. India is also strategically located in Asia. These are our
strengths and these must be fully exploited with more efficient and quality oriented
facilities to increase our share in the world market. There is tremendous scope of growth
in India in the chemical sector. The per capita consumption of chemicals is well below the
prevailing world level.

The Indian chemical industry can well remain competitive via-a-via its counterparts in
developed nations, even after fully complying with the Indian environmental regulations
both in letter and in spirit. Following are the major sectors of the chemical industry:

1. Organic Chemical Industry: The Indian organic chemical industry (covering

petrochemicals, bulk organic chemicals and speciality chemicals) in the country is
characterised by uneconomic capacities, fragmented production base and poor marketing
focus. However, the industry can be viewed in terms of players with distinct
characteristics. There are the large petrochemical cracker operating companies such as
Reliance and ICPL producing all key commodity plastics plus a slew of other bulk
chemicals. There are single polymer manufacturing companies who procure either the
basic chemical or the intermediate to make the commodity polymer. In bulk organic
chemicals, there is a range- from benzene based producers such as Hindustan Organic
Chemicals and Herdillia Chemicals to fertiliser companies which have diversified into
products such as caprolactum and methanol. Another separate group is the molasses
(industrial alcohol) based chemical producers some of whom even compete with petro-
based manufacturers in products such as MFG, acetic acid and VAM. In addition, there are
the speciality chemical companies which at the upper end are dominated by multinational
companies such as Ciba Specialities.
2. Petrochemicals: The petrochemical market in India is essentially supply driven. Growth
rates for various commodity polymers and polyester have been in double digits helping
Indian companies to keep operating at high rates even in the face of a reduction in price.
As Reliance has shown, Indian companies can build that extra cost advantage by world
class delivery systems to a fragmented market, thereby keeping the working capital costs
of the customers low. Integrated large producers, IPCL and Reliance, are well placed to

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ride out of the through of the price cycle and in fact are investing further to maintain the
market share. Single polymer companies do not have the pricing flexibility of a cracker
complex through some such as Finolex Industries have world class capacities. Most of the
remaining companies are likely to continue as marginal players.
3. Bulk Organics: This is one segment of the industry which could soon witness a phase of
consolidation. Even companies with reasonably large capacities such as Hindustan
Organic Chemicals Limited are finding the going tough. Unlike in petrochemicals,
investments have I been tardy. Although some companies have been successful in
reducing conversion costs, competitive advantage could come through only world class
capacities and integration. Many of these companies are hampered by lack of resources to
invest and stay competitive. Multi-business companies in fertilisers and chemicals are also
intent only on maintaining the status quo.
4. Alcohol-based chemicals: The alcohol based chemical industry became subject to the
vagaries of molasses prices after these prices were decontrolled in 1993. Raw material
supply and prices for these companies are inextricably linked to the sugar economy and
State level policies. Large sugar producers now operate an integrated complex producing
apart from sugar, paper and organic chemicals. This segment of the chemical industry is
likely to remain marginal without attracting large investments.
5. Speciality Chemicals: As far as the speciality chemical industry is concerned, high
margin product segments should continue to be dominated by the technologically strong
multinational companies, Indian companies have a reasonable presence in this sector and
should continue to maintain their share although margins will be linked to end user
industry performance and therefore on an economic revival.
6. Pharmaceuticals: Over the past five decades, the Indian pharmaceutical industry has
moved through several phases, largely in accordance with government policy.
Commencing with repacking and preparation of formulations from imported bulk drugs,
the Indian industry had moved on to become a net foreign exchange earner, with capability
of producing almost all drugs.
7. Oil and Gas: India is currently the fourth largest oil consumer in the Asia-Pacific region
after Japan, China and South Korea. Estimated to increase at the rate of 7 per cent a year,
the demand for petroleum products, in absolute terms, is expected to nearly double from
the present level of 80 million tonnes to 155 million tonnes per annum by 2006-07.

India’s Competitive Advantages and Disadvantages

Growth in value of world merchandise exports by product groups reveals that chemicals
product group registered the third highest growth rate of 22%, after office and telecom
equipment (26%) and iron and steel (25%) in 1995 over the previous year.
Polymerization products and medicinal, pharmaceutical products are the major items of
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this industry, accounting for more than 45 per cent of its total exports. Nitrogen
compounds and products of condensation are the other important items in the group.
During 1991-95, world imports of chemicals registered an annual growth of 11.9 per cent.

Exports of medicinal products, carboxylic acids and perfumery cosmetics continued to

grow rapidly. Below average growth was recorded for dyes, cellulose derivatives, plastic
materials and pesticides.

As developed world consumes about 70 per cent of the global production of chemicals,
world trade too is virtually among developed countries. USA and Germany are the
leading exporting countries and are followed by UK, France, Switzerland, Japan and
Belgium. Among the developing countries, Korea Republic has a significant share in
hydrocarbons (6,0%), products of condensation (4.5%) and polymerisation products
(4.2%) and Hong Kong, India and China have considerable share in synthetic dyes
exports. China is a major exporter of plastic materials also. Imports too are dominated by
developed countries. Korea Republic and Hong Kong are the only developing countries
having significant imports,

Though India has substantial exports in some of the sectors such as medicinal,
pharmaceutical products, synthetic dyes, nitrogen compounds and products of
condensation, overall share in the chemical group is below one per cent. The recent
growth rate in India’s exports, 27.4 per cent in 1997-98, is indicative of the growing
acceptability of Indian products overseas. Owing to the high cost of labour, the
overheated economies of many countries are endeavouring to re-locate their
manufacturing and sourcing bases. Industry should take advantage of the emerging
opportunities.

India’s competitive advantages and disadvantages of chemical sector may be evaluated

through the SWOT analysis. Following is the evaluation of strength, weakness,
opportunity and threat of chemical sector.

SWOT ANALYSIS (Strength, Weakness, Opportunity, Threat)

Strengths

 Easy availability of a highly skilled pool of technical and scientific manpower gives a
technological edge and helps creation of value addition from basic stage to finished
products.

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 Industry is six decades old with well-diversified sectoral composition.

 Important linkages with the other sectors of the economy and provides vital inputs.
 Easy availability of raw materials/feed stocks such as naptha, gas, ethyl alcohol etc.
 Presence of MNCs in the industry is an added advantage.
 From position of net importer, the industry graduated to a growing exporter with 14
percent contribution to total exports.
 Excellence in R&D aided by national and private sector institutions, provides an edge
 Low cost of technical manpower gives a competitive edge.
 Indian patent act being amended to be in tune with GATT regulations.
 Petrochemicals has been declared as a “Thrust Area” by Government of India for
prioritised development.
 India has, over the years, developed strength in sectors like dyestuffs, pesticides, organic
and inorganic chemicals, drugs and pharmaceuticals, plastics, rubber processing, synthetic
fibres etc. India is also strategically located in Asia.

Weaknesses

 Contract manufacturing in India has not yet developed.

 The chemical industry worldwide spends a high proportion of production costs on R&D,
whereas in India it is not so.

Opportunities

 Petrochemicals are a fast growing area in Asia-Pacific region. Most countries in the region
are seeking to enhance their- domestic petrochemical capabilities through foreign
investment.
 In East Asia, plastics and textiles expansions are expected to fuel demand for additives and
dyestuff chemicals.
 Owing to the high cost of labour, the overheated economies of many countries are
endeavouring to re-locate their manufacturing and sourcing bases. Industry should take
advantage of the emerging opportunities.
 Future prospects of sustained growth in the chemical industry are outside the developed
world. Areas of growth are Eastern Europe, the Pacific Rim, China etc.
 Two biggest customers of the chemical industry namely, construction and automobiles are
undergoing radical changes due to trend towards wider use of new materials such as optic
fibres, super polymers, composites, fine ceramics, fibre reinforced plastics etc.

Threats

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 The chemical industry has become increasingly conscious of environmental concerns. All
EU countries have stringent environmental laws, particularly for chemicals, given their
risk-prove characteristics.
 Rapid technological obsolescence is one of the prominent features of the chemical
industry.

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