India: Under New Management

Sworn in nearly a year ago, Prime Minister Narendra Modi has raised expectations in India after years of economic and social stagnation under ineffective coalition leadership.

Modi’s ambitious new government hopes to raise living standards for the poor, modernize cities, improve public health and sanitation, improve education, and deliver steady and strong economic growth without harming the environment. Over the past year, Modi has toured the world in his quest for foreign friends and investors who can help him achieve his dream for India.

Of course all new administrations have lofty goals. But according to those who have met Modi or members of his team, the new government seems to have the discipline and work ethic to pull them off. Modi is said to hold regular meetings lasting several days at which he grills senior public servants on what they are doing to promote growth in India. Under pressure to deliver, officials are seeking input from industry executives on how to remove impediments to growth. Usually ignored, leaders of the Indian chemical industry are delighted to be included in the consultation process.

Modi has taken charge at an auspicious time for the chemical industry in India. Integrated industry zones that have long been discussed are finally coming together. Demand is strong for everything from plastics to crop protection chemicals. And new petrochemical complexes are opening across the country, improving local availability of needed raw materials.

The first of the two stories in the pages to follow offers the chemical industry’s take on where India is going and what it needs to do to succeed. The second is a look at how the Modi administration intends to balance environmentalism and economic growth in an Indian city where, in years past, industry ran amok.

It’s clear upon landing on a flight to Mumbai that things are changing in India. The city, India’s largest, recently completed the construction of an immense and modern international terminal. Long lines for passport inspections and security checks are, to the relief of many, a thing of the past.

Leaving the airport reveals what is still the same. Like most Indian cities, Mumbai lacks an efficient mass transit system, so only in the dead of night are streets uncongested. Distances and travel times need to be carefully considered in order to arrive on time at appointments in the vast city.

Indeed, many of the old stumbling blocks to doing business in India are still there. But for the country’s chemical sector, the outlook has shifted under the administration of Prime Minister Narendra Modi, who took office a year ago. Whereas in years past Indian chemical company executives tended to see an array of hurdles to economic success, the mood today in Mumbai, also the nation’s business capital, is definitely upbeat.

Even before Modi’s election, growth in the Indian chemical industry had accelerated to an uncharacteristically strong 9% per year, compared with the 2005–10 period when chemical production barely expanded. Now, with a government that appears to be serious about removing perennial obstacles to business, executives are beginning to shed their doubts.

“Now is the best of times for the Indian chemical industry,” said Sudhir Shenoy, head of Dow Chemical’s operations in India, speaking at a conference organized by India’s Chemical Weekly magazine last month. “The new government has improved the outlook, so the industry could grow at 10, 15, or even 20% in coming years.”

It will be growth from a small base. Although India is home to one-sixth of the world’s population and is Asia’s third-largest economy after China and Japan, the country has a tiny chemical industry that accounts for only about 3% of world chemical output, according to Tata Strategic Management Group, an Indian consulting firm.

Dow and other companies seeking to increase that figure will be buoyed by initiatives championed by the new government, Shenoy said. For instance, the chemical industry can only benefit from the Modi administration’s goal to build 100 “smart cities”—places where such things as traffic flow, trash collection, and transit system operation are centrally monitored and controlled through comprehensive information technology.

Although other executives at the conference shared some of Shenoy’s enthusiasm, many are skeptical that unbridled optimism is warranted at this early stage of the Modi administration. The critical problem of India’s poor infrastructure will take a long time to solve, they pointed out.

Stephan Pilz, vice president of business development in India for Germany’s Evonik Industries, noted that the World Bank presently ranks the country 134, out of 183, in ease of doing business. The chemical industry in India is challenged by impediments such as an inverted import duty structure that discourages manufacturing.

“Custom duties are currently 8% on spinal implants made with PEEK”—polyether ether ketone, an engineering plastic—“and 30% on PEEK resin,” Pilz noted. “So who will import PEEK to make implants in India?” He also observed that India compares unfavorably as an investment destination with Singapore, even though the city-state has a small market for chemicals and no indigenous source of natural gas or crude oil.

Industrial growth is hampered by myriad regulations, such as those that prevent foreign ships from ferrying cargo from one Indian port to another, added Matthew George, head of petrochemical exports at Indian Oil Corp., a large state-controlled refiner. Using the Indian companies that control coastal shipping is slow and expensive, he added, and partly explains India’s overreliance on trucks. It’s a dynamic that won’t be easy to change, George said. “India has many lobbies. The local shipping industry opposes opening the market.”

The simple act of sending chemicals from one plant to another is a challenge for foreign companies, concurred Steve Stilliard, managing director for India at the U.S. chemical maker Huntsman Corp. “Headquarters will never approve an investment plan that involves hazardous materials traveling 200 miles in small-capacity trucks on bad roads. We need pipelines,” he said.

But on the whole, Stilliard has a positive outlook for the chemical industry in India under the Modi administration. “The interest of the Indian government in the chemical industry is almost unprecedented anywhere in the world,” said Stilliard, a British-born chemical industry veteran who has been at Huntsman for 15 years.

The pharmaceutical chemicals sector could also shine if certain reforms are implemented, said Dinesh Dua, chief executive officer of Nectar Lifesciences, an antibiotics manufacturer. Indian companies have a better understanding than their Chinese counterparts of regulations in developed countries and how to make complex active pharmaceutical ingredients (APIs), according to Dua. But in recent years, generic drug makers in India have become increasingly reliant on China.

“I used to make my own intermediates, but Chinese costs are 50% lower,” Dua said. Producers in China have access to the well-developed infrastructure of industrial parks as well as cheap and reliable electricity, he noted.

If for one reason or another—a crackdown on pollution, for example—Chinese producers of pharmaceutical ingredients stopped shipping to India, the country’s generic drug industry would be wiped out, Dua warned. But he’s heartened that the new government seems to share the drug industry’s concerns about relying on China. The Modi administration has promised to improve infrastructure—including effluent treatment—at seven industrial clusters and to provide financial incentives to the industry, Dua said.

“If all this is done by this absolutely business-friendly government, we will not only be self-sustaining in APIs, we will also push China 10 to 15 years behind us,” he said.

Experts at prominent consulting firms agree that the Indian chemical industry is positioned for spectacular growth in the near future. Alok Verma, director of strategy at PricewaterhouseCoopers, said the overall Indian economy could grow sustainably at 9% per year if certain reforms are made. In its latest predictions, the International Monetary Fund said the Indian economy will expand by 7.5% in 2015, surpassing China’s growth.

And if the overall economy expands by 9% annually, the chemical industry should grow at close to 15%, Verma pointed out. The government will do what is required to facilitate growth, he predicted, partly because India’s high birthrate requires it. “If we don’t create 240 million new jobs in the coming 20 years, we will face a demographic nightmare,” he warned.

In the near term, Manish Panchal, practice head for chemicals and energy at Tata, cautioned that business confidence is likely to drop in the coming months because the Modi government has created sky-high expectations while so far delivering little except promises. Among its few concrete changes is a controversial move to allow companies to expand in highly polluted areas.

But the government will deliver, Panchal predicted. “I’ve never seen the Indian government working so hard,” he said. When it comes to the economy, the government’s immediate focus is to make it easier to do business in India. At this juncture, foreign chemical companies that don’t have a presence in India should consider an acquisition, he advised. And those that are already present should get ready to produce chemicals for export.

The Indian chemical industry is buoyant for reasons beyond the feel-good influence of the new Modi administration, said Gaurav Moda, a partner at consulting firm KPMG India. For instance, the general move of India’s rural population to cities is resulting in demand for transportation, clean water, and construction materials.

Another source of industry growth is a trend by Indian oil companies to build petrochemical complexes alongside their refineries to increase the value they get out of crude oil. Between 2013 and 2018, he expects, India’s petrochemical sector will expand by 13% annually.

Among the companies building new projects are Oil & Natural Gas Corp., Gail India, and Hindustan Petroleum Corp. Some of these companies are newcomers to the petrochemical industry, and their entry means more options for buyers of basic chemicals. With greater choice, bargaining power will shift to buyers, Moda expects, and lower prices will stimulate industrial growth.

Whether created by the new government or not, tremendous opportunities are emerging in India’s chemical industry, Moda contends, and the question becomes whether companies are ready to take advantage of them. For example, because the chemical industry in India is highly fragmented, companies hoping to gain market share will have to establish a sophisticated marketing and distribution infrastructure.

It’s by no means assured that chemical companies will rise to the occasion and take advantage of new opportunities in India. But the government, Moda said, is intent on “extending the red carpet to chemical companies, rather than the red tape.”

Compared with what it was 15 years ago, Vapi seems to have cleaned up its act. Streams no longer change color depending on the time of the day. The city’s chemical industry, which includes several dye and pigment makers, has improved effluent collection so that most wastewater is sent in for treatment instead of being discharged into the closest stream.

But the city, north of Mumbai in India’s Gujarat state, remains one of the most polluted in India. As a result, a decision last summer by the new administration of Prime Minister Narendra Modi to lift a moratorium on industrial expansion has drawn much attention. Even if it’s a clumsy and unfair way to control pollution, the blanket ban on industrial expansion had proven effective, environmentalists claim. Lifting it will only raise pollution in a city already saturated with it.

Vapi (pronounced Wappy) illustrates in vivid ways the challenge the new Modi government faces in using deregulation as a means to promote industrial growth. Growth in industrial clusters such as Vapi has been frustrated by the moratorium. But lifting it could backfire unless the government remains vigilant. In already-polluted Vapi, allowing expansion again could easily result in worsening environmental quality.

“In every part of India where a moratorium was put in place, pollution went down,” says Sanjeev K. Kanchan, a researcher at the Centre for Science & Environment (CSE), a nongovernmental organization in New Delhi. Kanchan conducted field research in Vapi in 2010 to measure pollution there. “Government officials had tried to implement other action plans before that,” he says, “but they weren’t effective.”

One of India’s oldest chemical industry clusters, Vapi is home to hundreds of plants. Besides dyes and pigments, it’s known for materials including agrochemicals and pharmaceutical ingredients. A few big producers such as United Phosphorous and Aarti Industries operate there, but the majority of companies are small to medium-sized firms.

Vapi has long ranked as one of India’s most polluted cities. During a visit in 2000, C&EN was easily able to find a stream that changed color from red to green at different times of day and another stream that was deeply red (C&EN, May 15, 2000, page 27). In 2013, India’s Central Pollution Control Board ranked Vapi and another Gujarat city, Vatva, as having the worst surface water quality in India.

Between 2010 and 2014, companies operating in Vapi and other Indian cities deemed “critically polluted areas” were slapped, on and off, with blanket bans on industrial expansion. Last June, less than a month after the Modi administration took office, the Ministry of Environment, Forest & Climate Change lifted the ban in Vapi and seven other badly polluted areas.

The ministry said it lifted the expansion bans because the Central Pollution Control Board in Delhi didn’t follow through on a promise to review the methods used for measuring pollution in the eight locations. Rohit Prajapati, an environmental activist based in Vadodara, Gujarat, claims that the decision to lift the bans in fact happened after intense lobbying by industry.

Although the ban has been lifted, companies hoping to expand in the polluted areas still have to apply for environmental clearance from the ministry.

Lifting the moratorium means that the environment in Vapi will not improve, CSE’s Kanchan laments. “You have to hurt producers in their pockets, and then they will do something,” he says. It’s not the first time that the moratorium on industrial expansion in Vapi was lifted, he recalls. When it happened a few years ago, pollution in the city quickly worsened.

Even during the moratorium, enforcement of regulations was lax, adds M. S. H. Sheikh, an environmental activist based in the Gujarat city of Surat. Officers of the local environmental protection bureau rarely inspect production facilities unless the public complains, he says. After delinquent facilities are ordered closed, Sheikh claims, they usually can resume production a few weeks later after a paying a small fine but without doing anything to reduce emissions.

But Gaurav Moda, a partner at the consulting firm KPMG who works in the company’s Global Chemicals Institute, sees some wisdom in lifting the moratorium. The city may be polluted, he says, but it has improved compared with a few years ago. And the environmental group Blacksmith Institute (now called Pure Earth) removed Vapi in 2009 from a list of the world’s 10 most polluted places.

The moratorium served its purpose, Moda adds. Prevented from expanding in Vapi, many companies added facilities in other cities where they were required to use cleaner production processes. Companies can now take these better processes to Vapi and expand without significant environmental impact, he reckons.

And since the lifting of the moratorium, officials in charge of environmental protection have proven to be strict against companies that violate regulations. Last month, Gujarat authorities ordered a two-month closure of 42 plants producing paper, pharmaceuticals, agrochemicals, and dyes for not complying with environmental norms and for failing to install monitoring equipment.

Perhaps of most spectacular note, the Vapi water treatment plant, which is owned by Vapi Industries Association, was hit with a temporary suspension order last December after the Gujarat Pollution Control Board found that posttreatment water did not come close to meeting standards for biological and chemical oxygen demand, two key environmental metrics.

Among its many pledges and slogans, the Modi administration has advocated “zero defect, zero effect,” meaning that India should aim to produce high-quality products without environmental impact. Although environmentalists are skeptical, it could be that, given time, a less environmentally harmful chemical industry will take shape in Vapi.  

LOCAL MANAGER OF WORLD’S LARGEST CHEMICAL FIRM IS ENCOURAGED SO FAR BY THE MODI ADMINISTRATION

The views of Raman Rama­chandran, managing director of BASF India, have weight given his company’s size—it’s the world’s largest chemical maker—and its already substantial presence in the country. Ramachandran says he sees a lot to like about the new central government in India. “For the past year, there has been a sense of optimism in India about the whole economy,” he says. “For the first time, the government has come out with a much more comprehensive approach on a number of social and economic aspects of the country and is really trying to make it happen.”

To start with, he says, the government looks different. Ministries in the capital, New Delhi, are now far more disciplined, with emphasis on stricter deadlines and being approachable. Among its first moves, Prime Minister Narendra Modi’s administration combined 17 related ministries into seven groups. And bureaucrats are now empowered to make more decisions, which he expects to speed up the implementation of long-planned investment and infrastructure projects.

The new administration has come up with a number of initiatives that add up to an integrated approach to economic and social development, even if most policy details are for the moment missing. For instance, a Clean India campaign aims to improve public health by providing every Indian access to a toilet within a few years.

The Make in India campaign aims to stimulate manufacturing and industrial growth. But it’s also a social campaign, given that manufacturing could provide much-needed employment to young adults. Every year, Ramachandran notes, 10 million to 20 million youths enter the job market.

And through his much-publicized trips to foreign countries, Modi does more than promote investment and meet Indians living overseas. For instance, during his recent visit to Germany, he both met with industry captains and explored the possibility of working with Germany on skills development, an area in which the country excels.

In India, BASF employs close to 2,200 people and operates nine production facilities across the country. Since the Modi administration took office, BASF has started construction near Mumbai of an R&D facility that will accommodate as many as 300 scientists when ready in 2017. “As the economy expands in India, BASF will invest to capture the big growth opportunity that the country will offer,” Ra­machandran says.

Still, BASF is not planning one of its major integrated Verbund complexes in India to produce upstream petrochemicals and basic chemicals. He says the main hurdle is not infrastructure, the top challenge cited by most chemical company managers in India. It’s mostly that the size of the Indian market does not yet warrant such a commitment from BASF, Ramachandran says. And when the time comes, “the issues pertaining to feedstock and raw material availability will also have to be addressed,” he notes.

But in view of the high growth rates India is expected to experience in the coming years, BASF may well decide to tackle those practical challenges sooner rather than later.