COVID-19 Shifts the Balance: India Could Become Global Specialty Chemical Export Hub

The key growth accelerator would be our readiness in responding to the strong demand of key global markets to de-risk their supply chain by diversifying their base beyond China.

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As we step into a new financial year, the turbulence caused by the spread of the novel coronavirus (COVID-19) in the domestic and global economy refuses to dissipate. Even before the outbreak, the global economy was witnessing trade flow disruptions and impaired growth scenario.

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The COVID-19 blow to the demand-supply ecosystem and liquidity has not only worsened the situation further but also dented the prospect of any revival. Measures such as prolonged lockdowns to contain the spread of the virus are leading to contractions in economic activity and is getting reflected in the slashed FY21 growth forecast by the International Monetary Fund (IMF) for India to 1.9 per cent from 5.8 per cent projected in January.

However, the economic revival can be sustainable and far-reaching if the industries and the policymakers set their priorities right. Steps such as building import substitution to develop self-reliance and generate employment, technology enhancement, increased capacity utilization and expansion will help India mitigate the impact of supply chain disruptions and leverage the global market opportunities.

In fact, the COVID-19 crisis presents an excellent opportunity to the specialty chemical industry of the country to assert its dominance at the global level. This will be driven by various factors such as growing domestic demand, falling crude prices compounded with falling rupee. However, the key growth accelerator would be our readiness in responding to the strong demand of key global markets to de-risk their supply chain by diversifying their base beyond China.

China’s loss, India’s gain

Stringent environmental regulations and increased cost of labor have already stifled growth in China, which contributes 35-40 per cent to the global chemical industry. The pandemic has compounded the situation further as companies across the world are looking for alternate supply solutions. Japan’s announcement to offer economic stimulus package to encourage companies to shift manufacturing back to Japan further proves the desperation engulfing countries to reduce dependence on China and develop local supply chains.

The spillover impact of China’s declining competitiveness has set the stage for India to intensify its effort to capture larger market share. The inherent strength of specialty chemical manufacturing sector such as low operating overheads, better manufacturing and compliance standards, stringent environment policy, availability of feedstock, skilled manpower and stronger IP protection, among others, are good drivers to build India as a viable sourcing alternative for global players.

To keep up with the growing demand, the companies need to strengthen their manufacturing base by increased capacity utilization and expansions. There is also an urgent need to focus on the development of the four Petroleum, Chemicals and Petrochemicals Investment Regions (PCPIR). Allocation of feedstock for downstream industry is also a prerequisite. Bringing in technological advancement will also boost manufacturing. In addition, the industry initiatives must be supported with better infrastructure and development of industrial zones for shared electricity/water supply and effluent treatment capability.

Technology, environment and welfare

The Indian specialty chemical industry has so far mostly relied on imported technology licenses with very few companies able to claim in-house innovation. At the same time, over the last 30 years, the Indian pharmaceutical industry has been able to emerge as a global powerhouse by focusing on investing more in research and development, and encouraging the development of homegrown technologies. The time has come for the specialty chemical companies to emulate the pharma growth model to foray into new products and chemistries. The Indian specialty chemical industry is on a strong foundation with availability of good academic talent. The need of the hour is to harness this talent by deploying more funds in this direction.

Meanwhile, sustainability has become the global mantra for all large multinationals. The fact that the health of the rivers in India has improved by 30-40 per cent due to the shutdown of manufacturing units shows that the industries need to self-regulate and better manage waste streams. Going forward, clean and green manufacturers stand to gain and become the preferred suppliers across the world. Increased safety measures and improved health conditions will help manufacturers score over at the global level. Our industries have traditionally focused on being low-cost producers and that has been the competitive edge. But to become world-scale corporations and to develop a sustainable leverage, the priorities need to shift towards innovation, environment and welfare.

India exported specialty chemicals worth $23.8 billion in FY2019 whereas China’s specialty chemicals export figure was $173 billion in the same time frame. Before it’s too late, the industry must get its act together with the required government support to overtake China and make India a global specialty chemical export hub.