Time for major policy overhaul 

BUDGET-2017 EXPECT

Chemical industry in India is the third largest producer in Asia and ranks sixth largest across the globe. The country’s chemical industry is expected to double its share in global chemical industry to five to six percent by 2021, which translates into a healthy growth of up to nine percent in the next decade.

In their quest to cash in on the vibrancy, many MNCs are focusing on India for their manufacturing hub. Cost-effective labour, availability of key raw materials, large consumer markets and adaptability to technology are some of main attractions that are driving those companies to establish a strong manufacturing base in the country.

With the high significance of chemical industry in Indian economy, the industry players are nurturing some expectations from the Union Budget that could help address the bottlenecks and give impetus to growth. Incentives for export units under Make-In-India program: Indian chemical industry is a net importer with imports of $19bn compared to exports of $12.7bn for FY15. Government needs to incentivise the Chemical units set-up with new technology catering to export market to give boost to the exports thereby reducing the current account deficit.

Expediting GST with capped rates: Although the Union Government has achieved consensus on bringing legislation on GST, a speedier roll-out is essential for the benefit of select industries like chemical. , which have capital intensive manufacturing locations and a number of logistical activities to reach customers.

Presently, for inter-state sale of goods, most companies set up a warehouse in the destination states and resort to a stock transfer for bringing tax efficiencies, which could be done away with in the GST regime. Moreover, it will reduce administrative burden of multiple taxes. This will potentially improve efficiencies and reduce costs. Capping of GST rates at 18-20 percent for chemical industry will have a strong positive impact on the sector.

Rationalisation of Corporation tax: Given the continuous development, the industry needs to plough back a significant amount of profits for its growth. A reduction in corporation tax would lead to fund technology and modernization, which, in turn, can accelerate growth in the long-run.
Rationalisation of taxes in SEZ: The purpose of SEZ has not been served as much as desired when reforms were first introduced.

The Centre needs to rationalise taxes, especially removal of MAT, levied on the units located in SEZs, which could also augment the Make-In-India initiative. Competitiveness of domestic players: There are instances of inverted duty structure in several products where customs duty on import of final product is lower than its raw material[1]. This makes it difficult for the domestic players to effectively compete in the market. The government should revisit the duty structure for the specific products where rationalisation is required for protection of domestic industries.

Technology transfer: The key aspect of the chemical industry, especially specialty chemicals and agricultural chemicals, is the technology based on which the performance/yield is measured. While it has provided tax incentives for R&D, it is essential to support/fund the technology acquired by domestic industries for rising to the global standards.

The government should consider a budgetary allocation for partially funding such technology, which would be in the larger interest of the economy. Simultaneously, it needs to prepare a better patent protection roadmap to avoid technology infringement.

Infrastructure: Government initiatives like PCPIRs and cluster approach are in the process of implementation; nevertheless, there is quite a delay in project execution. An allocation for building robust infrastructure to support such clusters on a PPP model would help in smoother and timely completion of projects in such regions.

Skilled manpower: With the rapid growth in the industry, players are facing short fall in availability of skilled manpower/chemical engineers. To cater to this, one needs to invest in setting up skill-based training institutes and more ITIs.

Reduction in import duty: To help the industry, and impact on its already low margins, import duty on key petrochemical feedstock like naphtha, ethane and propane and reformate needs to be rationalised. India is facing challenges due to cheap imports from low power cost countries in South, SE Asia and the Middle East. In terms of technology,

India is second only to Japan in adoption of latest technology by investing substantially. However, the high cost of power renders Indian manufacturing at a comparative disadvantage. Import duties on various substances like membrane cell plant, soda ash, pvc, edc and VCM should be reduced.

National Chemical Policy: The overly delayed National Chemical Policy has to be formulated on a priority basis for enabling environment, infrastructure and duty structure for the industry in the country. It will place a framework for promoting safety & security and R&D in the sector. This will bolster the growth of the country's chemical industry and make it more competitive. (The writer is with Deloitte Touche Tohmatsu India LLP)ATIONS - INDIAN CHEMICAL INDUSTRY

By Savan Godiawala