Budget 2022 | Six measures the chemical sector expects

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The chemical industry in India is a major sector manufacturing around 80,000 products, and employing ~2 million people. The sector size is estimated to be around $178 billion in FY19, of which specialty chemical is estimated to be around $32 billion.

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The industry is poised to witness healthy growth over the next few years driven by growth in domestic consumption, and demand from export market, partly supported by growing diversification of supply chain being adopted by global players under the ‘China+1’ strategy. The growth in sector will aid in achieving government policies such as ‘Atmanirbhar Bharat’, and ‘Make in India’.

However, in order to leverage the opportunity to its full potential, some of the bottlenecks and issues need to be addressed, which includes anomalies in duty structure, high dependence on imported feedstock for specialty chemicals, low R&D spend, and expected tightening of environmental norms and regulations. While in recent years the government has taken several steps to address some of these issues, further support is required.

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Some of these measures, which can be addressed in Budget 2022 are:

Rationalisation Of Duty Structure: The industry has faced duty structure anomalies arising from free trade agreements (FTAs) with several countries, leading to an inverted duty structure for several downstream and intermediate products. This had also resulted in insufficient capacity creation for these products which are used as feedstock for specialty/value-added products.

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Further, high duties on key raw materials and building blocks, which are not available domestically, impacted the competitiveness of domestic manufacturers. While, in recent years some of the duty structure related issues have been addressed, such as reduction in basic customs duty on Naphtha from 4 percent to 2.5 percent in Budget 2021, and some of the anomalies under the FTAs have been rationalised.

However, further rationalisation in duty structure is needed, with reduction in duties for key raw materials and building blocks, and addressing the instances of an inverted duty structure by increasing duties on intermediates/downstream product to encourage domestic production of value-added products.

Incentives For Exports: Incentives for boosting exports in the chemical sector can be announced. Schemes such as Remission of Duties and Taxes on Exported Products (RODTEP) can be extended to the chemical sector as well.

Production Linked Incentives (PLI) Schemes: Extension of the PLI schemes for more chemical segments would support the domestic manufacturing sector, and encourage capacity additions. Currently the PLI scheme has been extended to the Active Pharmaceutical Ingredients (APIs) and key starting materials (KSMs).

Cluster-Based Development: Any fiscal incentives/budgetary allocation for cluster-based development under existing programmes such as PCPIR/plastic parks (Petroleum, Chemicals and Petrochemicals Investment Region) or other such programmes will also help in domestic capacity creation. Such cluster-based development will also be beneficial for environmental and social risk management, due to shared facilities enabling better compliance with tightening environmental norms.

Research and Development: In order to produce more value added products, it will be necessary for the domestic industry to increase its R&D spend. Any incentives/rebates for R&D-related capital expenditure by the industry will be favourable.

Schemes For MSME Sector: MSMEs account for significant share of domestic chemical manufacturing, and specific schemes targeting this segment to enable technology upgrade, and ESG compliance (domestic and exports) can help the MSME sector move up the chemical value chain, increase its product offerings, and improve competitiveness.

Sabyasachi Majumdar is Senior Vice President & Group Head – Corporate Ratings, ICRA Limited.

Views are personal, and do not represent the stand of this publication.

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