Jean-François Tremblay
C&EN Hong Kong

With the right government policies, India could boast of a formidable chemical industry. The country has a huge population-the source of potential employees and consumers of a whole range of chemical products. It has low labor and construction costs. It has brains.

India's chemical industry has a long history. In fact, the Indian Chemical Manufacturers Association (ICMA), whose members produce 70% of the chemicals made in India, has been around for 60 years, which is longer than India has been independent. But because of the conflicting demands of the electorate, the chemical industry is not reaching its potential. The current government in New Delhi has even turned back the clock on some of this decade's reforms, which had gone only partway toward solving problems in the first place. The chemical industry can deal with some uncertainty, but the flippancy of Indian authorities often has been extreme and has created a continuing string of difficulties.

According to Mitsubishi Chemical subsidiary Martech, India's annual per capita consumption of plastic is a mere 2 kg per person, one-third that of China. It could be much higher, considering India's vast labor force. For instance, the labor-intensive toy and textile industries consume synthetic fibers, dyes, plastics, and performance-enhancing chemicals as raw materials.

India's main industry is still agriculture, but use of agricultural film-essentially as mulch-is far from extensive. In the countryside, women carry water in relatively heavy clay pots, even though plastic buckets would be lighter and not expensive.

The chemical industry is knowledge-intensive and cost-conscious. Indian brainpower is cheap. "I can get a very good engineer, trained in one of the best technology institutes in the world, at about $15,000 per year," says P. M. Thampi, chairman and managing director of BASF India." And he is as good as anywhere else in the world. Let anybody compare." Other Indian chemical companies tell C&EN that they pay their engineers and R&D chemists much less than BASF pays its comparable workers.

India has a large number of chemists and chemical engineers trained to the most advanced levels. And despite India's physical distance from Western countries and Japan, the cultural gap is not that wide, given England's earlier influence on the education system. Freedom of the press also helps close the cultural gap because Indians have access to the same news as the rest of the world. Indians can thus easily adapt to the culture of multinational corporations. Unlike in China, multinational corporations have little difficulty absorbing Indian employees.

Another of India's cost advantages resides in its capital goods. Although much of the equipment needed to build petrochemical plants cannot be found in India at satisfactory quality levels, the situation differs for nonpetrochemical companies. The cost of building facilities can be much lower in India than in Western countries for similar quality.

Mumbai-based Zerxes F. Lashkari, who is president of YezPer Consultants, comes up with a few "back-of-the-envelope" estimates of the cost of building chemical plants in India. He reckons that the cost of buying reactors and specialty equipment in India is 1.2 times more expensive than that of acquiring similar equipment on the U.S. Gulf Coast. The ratio for mill steel is 0.8, special steel is between 1 and 1.5, electrical equipment is 0.9, and installation is 1.15 to 1.3. Lashkari further estimates that in India, depending on the structure and complexity of the project, erection of facilities can be 30% cheaper and civil engineering can be 40% cheaper.

BASF says it has been able to take advantage of these factors. It is building a chemical base, one plant at a time, in the southwestern city of Mangalore. Two dye plants are operating so far, built at a cost of about $34 million. The facilities cost less than half what they would have cost to build in a Western country, Thampi says. He points out that all the plant components were obtained from local sources. And the plant is built to standards at least as high as they would be in Germany, he insists.

It's a different story for petrochemicals. S. J. Desai, general manager for construction at the Gandhar facilities of Indian Petrochemicals Corp. Ltd. (IPCL), is particularly critical of Indian-made capital goods. Equipment ordered from Indian manufacturers is typically delivered late, he says. He notes that he does not encounter such difficulty with imported equipment.

Diversity distinguishes India's chemical industry. "We produce everything that is produced in the world. Not necessarily with the best technology, but we produce everything," says Lashkari.

In some areas, India's achievements are notable. It is Asia's second largest producer of pesticides after Japan. India is also known as a low-cost producer of generic drugs, which it exports on world markets amid complaints by multinational drug companies that their discoveries are being unfairly taken advantage of.

Chemical production facilities also come in a spectrum of guises. Many are old and small-something for which ICMA blames earlier government policies. "Most of the plants were built when government rationed capacity. They are well below optimal size," says Lashkari, who occasionally speaks on behalf of ICMA. Many of these plants pollute a lot, a problem the government tackles inconsistently.

But India can also boast of a number of world-class, state-of-the-art production facilities. Some are owned by Indian firms, and some were built in the past few years by multinational corporations. At the BASF dye plants in Mangalore, some of the salty water effluents are diverted into a fish pond. That fish can be seen to thrive there is meant to prove to skeptical nearby fishermen that the effluents are clean and will not disrupt their livelihood.

Most of India's chemical industry is located in the states of Gujarat and Maharashtra. At the nearby Bombay High Offshore field are found most of India's proven oil reserves, which represent 1% of the world total. Reliance Industries' largest complex at Hazira and IPCL's Vadodara and Gandhar complexes are in Gujarat. But outside Gujarat, chemical facilities can be found all over India, even in comparatively poor Calcutta.

The business center of India's chemical industry is Mumbai, formerly known as Bombay, where most foreign companies also maintain their Indian headquarters. Reliance, Hindustan Organic Chemicals, and the largest office of the New Delhi-headquartered ICMA are also in Mumbai. Notable exceptions are DuPont and ICI, which have their main offices in New Delhi. The Pesticides Association of India is also headquartered in New Delhi.

By world standards, India's chemical industry is tiny. Despite being home to about one-fifth of the world's population, India produces only 2% of the world's chemicals. In terms of name recognition, no Indian chemical company can match DuPont, ICI, Bayer, or even smaller companies such as Rohm and Haas, Solvay, or Mitsui Chemicals. India's largest company, Reliance Industries, barely makes it onto C&EN's listing of the world's 50 largest chemical companies.

But the industry is growing fast. Soutrik Ganguli, an executive officer in charge of the chemical industry at the New Delhi headquarters of the Confederation of Indian Industry, says that the chemical sector will grow 9 to 12% in sales in fiscal 1998 (ending March 31, 1999), and he predicts a growth of 10% in the following year. He says that on the whole, 11 to 13% has been the average of the past eight years.

A study of India's petrochemical industry published by Martech last year showed that India's petrochemical industry had entered a period of fast growth, but starting from a small base. The country's annual ethylene capacity, which was 525,000 metric tons until last year, has grown to 1.7 million metric tons and will reach 2.5 million metric tons by the end of 1998. But this figure will be only slightly higher than the ethylene capacity of Taiwan-a country of only 22 million. By 2000, Martech forecasts that India will still be an importer of plastic resins, but that it will have a surplus of synthetic fibers.

India is still a long way behind China in terms of market development and in adopting the types of measures that make foreign investors feel welcome. But Chinese reforms began in 1978, whereas India was slower in deciding that its central economic planning and its quest for "swadeshi"-economic self-sufficiency- were flawed. Only in 1991 did India begin to implement economic reforms. At times, it seems that India is not convinced that economic reform is the right way to go.

The reform process continues, but 45 years of tight government control of the economy cannot be erased overnight. Moreover, India is a democracy, and therefore the government is mandated to strike a balance between a host of contradictory demands.

So the reform process is erratic. The current government even occasionally discusses the merits of self-sufficiency, something that once again would close India to the outside world.

Yet, there still appears to be a deep-seated commitment to reform. In West Bengal, where Calcutta is located and standards of living are particularly low, the communists have been in power for the past 21 years. However, even there, a realization has surfaced that business-friendly policies attract industry and that industry brings wealth. So the government's attitude toward business has evolved: It used to demonize profit-seeking companies, but now it devises policies to attract their investment.

These days, those involved in India's chemical industry complain most loudly about India's inadequate infrastructure. Says Lashkari: "We have very serious problems with infrastructure. The port facilities are inadequate, especially for handling bulk. Also, the storage facilities are inadequate. India has a poor road network, and there is hardly any pipeline. Furthermore, the quality of electricity is very poor, and the frequent power failures have deleterious effects on continuous process. . . . These are the greatest drawbacks." He notes that one way to overcome these drawbacks while maintaining international competitiveness is to come up with projects of a massive nature that include their own infrastructure.

"The chemical industry demands a lot of infrastructure," says Ganguli. "Once the infrastructure is there, the industry will definitely develop. Infrastructure is the most important factor." For example, compared with India, Singapore is a high-cost location that has no land, but it has experienced a boom in its chemical industry because of the government's policy to provide the needed infrastructure. In India, "the skills are there, as well as the manpower and the technology. Only the infrastructure is missing," adds Ganguli.

In the petrochemical industry, it takes longer to build plants in India than it does in other countries, says Desai. After signing a letter of intent, it usually takes IPCL between four and five years to set up a grassroots petrochemical plant including a cracker, he says. "Water, power, and roads are more easily available abroad. In our case, we need to make our own arrangements, more or less. In the state of Maharashtra [where IPCL has a complex], government departments can help us. But we have to spend money and follow up; it takes lots of effort." He further notes that land acquisition can be extremely time consuming.

The limitations of the infrastructure are in evidence everywhere. Ganguli provides the example of the limited bulk-handling facilities. In Hazira, where Reliance Industries operates its largest petrochemical complex, company officials point to an excellent public access road leading to its plant, a road that the company mostly paid for itself rather than waiting for the government. At Haldia, near Calcutta, Haldia Petrochemicals officials bemoan the sluggish pace at which government officials have been enlarging the roads leading to their complex currently under construction. "We had told them well in advance what we needed," one company official says. And during most evenings, it is nearly impossible to make phone calls between India's petrochemical hub of Vadodara and Mumbai. As for electricity, most companies operating large chemical production facilities would not dream of relying on the supply from the public grid, notorious for frequent interruptions and power of uneven strength. They build their own power plants or have their own generators.

Aside from infrastructure issues, there is a long tradition of government impediment to the growth of India's chemical industry. In the decades from independence in 1947 up to 1991, India's chemical industry was segregated from foreign competition by tariffs that exceeded 100% on many products. During that period, India's chemical industry was not exposed to international advances, nor was it integrated into the world chemical industry.

Furthermore, until a few years ago, the unwieldy New Delhi-based bureaucracy of the "License Raj" decided which private industrial project would be allowed to proceed. Rather than relying on simple market forces, investment decisions in capital-scarce India were made by bureaucrats who were the target of bribes. As a result, although in many industries, including chemicals, demand was growing faster than supply, capacity expansion was held in check by this licensing system.

Unlike most countries where companies compete on price, quality, or development of new features, Indian companies concentrated their energies on obtaining licenses to expand capacity. In comparison with the benefits of being successful in obtaining a license, investments in R&D or in improving a company's image yielded few advantages. After a few decades of this regime, Indian industry made itself uncompetitive compared with the rest of the world.

Since 1991, national government leaders have attempted to reverse the damage. But the changes have not gone smoothly. For instance, Reena Ramachandran, chairman and managing director of state-owned Hindustan Organic Chemicals in Mumbai, thinks tariffs have been coming down too fast. "The industry thinks that tariff rates are falling faster than what had been contemplated," she says. Peak tariffs on chemicals dropped from 120% to 30%, but they have since increased slightly.

Yet the problem is not that the tariffs are now too low, the industry says. Indian executives of chemical companies tell C&EN that they welcome foreign competition. But they say they cannot accept that, from their perspective, foreign companies have certain advantages. For example, depending on the location, chemicals produced in India may be slapped with municipal, sales, excise, and other taxes, Lashkari says. These extra levies typically add up to a 15% tax burden. Some of the chemicals imported into India require tariffs in the range of only 15 to 20% he says, which means that Indian chemicals have no protection.

Indian firms also hope that the government will do something about the tight financial liquidities that cause high interest rates of about 20%. According to Ramachandran, government policy is behind these high rates: "There were reforms in the financial sector. But there are also social commitments in education, health, and food security. The government needs to issue guidelines that limit the [lending] activities of banks to finance social activities. In order to finance food imports, banks need to set money apart."

Lowering interest rates could also destabilize the rupee, which has become noticeably wobbly following the testing of nuclear devices in May. The tests have also caused a reduction in the amount of foreign money injected into India by multilateral agencies such as the Asian Development Bank. Because of the international sanctions resulting from the tests, international private investors have grown more reluctant to put funds in India. These reduced foreign liquidities represent further pressure on interest rates.

A government policy that particularly hurts India's petrochemicals industry is the tax imposed on imported equipment. The world petrochemical industry is both capital intensive and extremely cost competitive. Despite proficiency in certain areas, Indian equipment manufacturers do not produce high-quality, globally competitive continuous-process equipment required by the petrochemical business. Import tariffs on much of the equipment used by the petrochemical industry remain high, even though the 20 to 30% range currently in effect is a sharp improvement from the 120% tariff duties of a few years ago.

Part of the reason behind the stubbornly high tariffs lies in conflicts between Indian chemical manufacturers and machinery suppliers. "Our association always advocates the lowering of tariffs [on equipment]," says Lashkari, speaking on behalf of the India Chemical Industry Association. "But we have a vested interest. The engineering industry is against tariff reductions. The Engineering Industry Association calls for a stiffer tariff" on imported equipment.

However, the biggest failure of India's government probably is the lack of policies to encourage private firms to invest in R&D and harness the intellectual capital the country has to offer. Some countries have oil, others have banks, but India has lots of well-educated people, many of them scientists.

As the world economy is entering an era in which knowledge is one of the most valuable assets, India should be one of the world's wealthiest countries. India has developed a vast and well-respected nationwide network of government laboratories under the umbrella of the Council for Scientific & Industrial Research. Some universities also produce excellent research. But these labs have failed to make an impact on the economy the way that private labs would.

A lack of vision of what it takes to compete globally is also noticeable in the environmental protection field. Against the backdrop of a country that experienced the Bhopal disaster, the Maharashtra Development Council published a paper in April in which it states that one of India's competitive advantages, as far as the chemical industry is concerned, is that companies are comparatively free to pollute there. According to the report," the strengthening of the green movement and the growing protests against environmental pollution in many Western countries provide an opportunity to India to emerge as a prominent player in the global dye market. . . . In the U.S.A., companies like Allied Corp. [AlliedSignal], American Cyanamid [now part of American Home Products], and DuPont have stopped making dyes. . . . Given the global tendency of taking full advantage of lower labor costs and less stringent effluent legislation, India has a competitive advantage which has been sharpened by the relative abundant availability of technical manpower."

To be fair, not all of the underachievement that prevails in the Indian chemical industry can be laid at the feet of the government. With sufficient determination and foresight, Indian chemical firms could turn themselves into world-class organizations. Nothing illustrates better the scope of what is achievable in India's chemical industry than the phenomenal rise of Reliance Industries, which over the past few years has emerged as one of the world's 50 largest chemical companies and India's largest firm in any category.

Furthermore, given the extremes of wealth, education, and religious beliefs in the Indian population, it would take a singular amount of determination on the part of any government to thoroughly implement the drastic actions necessary to make India's chemical industry world class. Just within the chemical industry, one of the government's difficulties is the many established players that have been around for decades and are known for subpar and subscale production facilities. These companies are not used to the ways of global competition, and they resist change even if they claim otherwise.

When India's democracy and the diversity of the electorate are taken into account, it's easier to understand why John Feldmann, BASF's president of Southeast Asian (including India) and Australian operations, describes the country as progressing by "taking four steps forward and three steps back." Moreover, one source explains to C&EN, the extent of poverty in India means that there will always be a strong socialistic flavor in the Indian government. It's difficult to consider in a cool and dispassionate manner that fostering globally competitive industries is in India's long-term best interest when millions of citizens are in need of food, clean water, adequate housing, and rudimentary health care. Socialism and private industry seldom see eye to eye.

The diversity of the people also makes it difficult for India to elect a government that will stay around for a full mandate. There have been so many shaky coalitions since independence that only four prime ministers have completed a full mandate. According to government officials, the frequent changes of government are a handicap to decisive action and also make it more difficult to follow through on policies.

And even without changing government, policy flip-flops occur. A stunning example was provided by the government's latest budget announcement on June 1. At that time, Minister of Finance Yashwant Sinha proclaimed additional across-the-board tariff duties of 8%. Less than two weeks later, the same minister announced that the government had changed its mind and that the duty increase would be only 4%.

Although some Indian companies welcomed the extra tariff protection, others that depend on foreign supplies were forceful in their opposition. Officials at DuPont, which operates a nylon tire cord plant in Chennai (formerly Madras) that relies on imported nylon, could not believe it. In reaction, a pan-Asia DuPont management committee went as far as reviewing the firm's investment strategy for India.

Despite the many problems, foreign chemical companies have a long history in India. ICI began manufacturing in India in 1939 with a chlorine and caustic soda plant at Rishra. The British firm built more plants, and in the process of building, its presence has had a deep influence on the country's chemical industry. One can bump into former ICI executives when visiting other Indian chemical companies.

Until 1991, foreign companies mostly kept a low profile in India. This was especially true as their interest in the country sank lower with the Bhopal disaster of 1984, in which leaking methyl isocyanate gas from Union Carbide India's pesticide plant killed thousands of local residents.

But since the reforms began in 1991, interest has heightened with investments by major chemical producers like DuPont and Germany's BASF. The Indian chemical market is still relatively small, at about $30 billion, according to Martech. Moreover, the development of the market has been slower than some expected, especially in the past few years. Both BASF and DuPont have been moving more slowly on their investment plans than they had originally intended.

Extending a welcome to foreign investors?

DuPont originally planned to put on-line a complex somewhere in India capable of producing annually 20,000 metric tons of nylon 6,6 fiber and 13,000 metric tons of fabric for the tire industry. But the $200 million project is being phased in gradually rather than all at once, says spokesman G. Irvin Lipp. So far, $100 million has been invested, and a production line capable of producing 6,000 metric tons of nylon 6,6 fabric has come on-line. It's not clear if and when the second phase will be implemented.

At present, the largest foreign investor in India's chemical industry is Mitsubishi Chemical. The Japanese company is building a $385 million purified terephthalic acid plant at Haldia. The firm, which worldwide ranks a distant second after Amoco in the PTA market, reasoned that China was getting too crowded with a major PTA investment by Amoco in Zhuhai. So Mitsubishi opted for India as the place to seek new opportunities. And since Reliance dominates the western part of India, Mitsubishi concluded that the east might be a good location.

Despite liberalization, the government retains a high degree of direct involvement in India's chemical industry. A number of chemical firms remain under government ownership, including IPCL, Hindustan Organic Chemicals, and Gujarat Fertilizer. The fertilizer industry, which is closely tied to feeding the Indian population, is likely to remain under government control. Managers at IPCL say they would welcome privatization, even if they claim that being owned by the government has not made management more cumbersome.

In coming years, the health of the chemical industry will be, to a large extent, out of its hands. The decisions to explode nuclear devices have raised interest costs for Indian companies and moderated economic growth prospects. Exports from Asian countries in the thralls of a serious economic crisis could entice the government to put the brakes on liberalization. Clamoring for a "level playing field," many Indian firms want the government to adopt "countervailing duties" to protect them against dumping. They also want more infrastructure, lower taxes, and lower interest rates. Some executives from multinational chemical companies are not entirely bullish on future prospects for the industry and especially dislike the frequent policy changes.

The government's desire to protect some of the less competitive companies ends up strengthening the companies that are truly competitive. With its low-cost integrated facilities and extensive marketing network, a company like Reliance could compete with the best in Asia or the rest of the world. The extra tariff protection instead just helps to boost the firm's profit. In the long run, should the government decide to reverse course on its policies of opening up, it's hard to imagine that India's chemical industry would find the will to continue the modernization now under way. And that would be unfortunate, because cleanly produced cheap chemicals would be a boost to this developing country.