As one of the emerging “tiger economies” of Asia, India has long enjoyed rapid growth. However, the global downturn left its mark on India’s economic progress, and the past several years have seen increased dissatisfaction within the country due to complex bureaucracy, inconsistent tax laws, infrastructure problems and other factors that impede job creation and economic growth.
Over the last few years, India has slipped down the list of priority investment areas for a number of global chemical companies.
New government leadership under Narendra Modi has promised a pro-business approach to address these issues. At the same time, a number of Indian petrochemical companies are making a move to increase their production levels and market share. Together, these two developments promise significant changes for a chemical industry serving markets in the world’s largest democracy.
“India is back in business.” 1
That was the sentiment expressed by many Indians dissatisfied with a stagnant economy when a new government administration headed by Prime Minister Narendra Modi was elected in May 2014. Mr. Modi offered voters a conservative, pro-business platform, stressing smaller government, promotion of private enterprise, reduction of government subsidies, reduced bureaucracy and support for increased foreign direct investment (FDI).
During the campaign, he talked about rolling out a "red carpet" for business rather than "red tape,"2 often refering to his success in promoting businesses during his tenure as chief minister for the West Indian state of Gujarat.
While many Indian companies have adopted a wait-and-see attitude toward the effect of the new government leadership on the economy, several ambitious petrochemical manufacturers have already taken dramatic steps to change the competitive landscape in their sector.
Despite a modest but steady growth rate expected for Indian chemicals, the industry will likely have to deal with significant fluctuations in markets for the ethylene, propylene and aromatics chains. Lower prices will also increase the possibility that producers will dump their feedstocks for offtake and develop more flexible product slates in the future. In addition, demand growth for aromatics (BTX) is outpacing capacity additions. Feedstock developments are constricting supply from steam crackers, while environmental regulations are limiting BTX output.
KPMG's analysis and client experience across geographies suggest that sustainable progress depends on Indian companies building on existing capabilities and introducing new ones. These capabilities include greater financial strength, more efficient production of bulk chemicals, increased partnering, better marketing and distribution, and improved management of margins across the refining and petrochemical sector. They also need to enhance project management, support more innovation, and increase their understanding of customer business models.
The new government offers new hope for the Indian chemical industry, and the early signs are positive. If the government can follow through on its commitments to foster a more business-friendly environment, the chemical industry can help serve as the foundation for further development of the country’s industrial manufacturing value chain. Indeed, we may start to see the Indian chemical industry re-establishing its position as an engine of growth for the global chemical industry.
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1Andrew Holland, chief executive officer at Ambit Investment Advisors Pvt., Mumbai. Quote from Modi-Led Bloc Wins Biggest India Mandate in Three Decades, Bloomberg, May 16, 2014
2Narendra Modi's Election Win Heralds New Era in India, Wall Street Journal, May 17, 2014