Global View

12 June 2000 00:00  [Source: ICB]

India's performance over the past decade could have been more spectacular. But the country is turning a corner and taking on the world.

India is an enigma. With its large population - and a sizeable proportion highly educated - a keen entrepreneurial spirit and a strong legal system seated in democracy, it could have been expected to have made more of a mark on the world petrochemicals stage over the past decade.

Despite many optimistic voices and numerous much-touted mega-projects since the government's economic reforms of 1991, liberalised India has failed to meet its own - or outsiders' - expectations. Even Indian nationals acknowledge that, when it comes to foreign direct investment, India would appear to have lost out even to China. All the more disappointing since India has been less affected by the Asian economic difficulties than its southeast Asian neighbours.

Nevertheless, while foreign direct investment may not have been as forthcoming as was hoped, the domestic industry has not stood still. Progress may have been slow, but fundamental changes continue to take place. The government has voiced its commitment to privatisation - it has set up a ministry specifically for the purpose; consolidation is beginning to take place - most notably in the polyester sector; new plants have been built to economic scale; tariff barriers are gradually reducing; and, perhaps most significantly, product patent protection will be in place by 2005.

India continues to offer access to a large pool of well-educated scientists and engineers, coupled with low labour and plant construction costs - around one-tenth those of the western world. The country's telecommunications have improved dramatically in recent years and development of the infrastructure is ongoing. Additionally, the Indian government has relaxed its licensing requirements, and is now seeking projects with up to 100% foreign ownership.

In their largest joint effort to date, the government, through the Ministry of Chemicals & Fertilisers, and the Federation of Indian Chambers of Commerce and Industry (Ficci) are staging IndiaChem 2000* this October to encourage greater participation from western countries in India's chemicals, petrochemicals and pharmaceuticals sectors (ECN 5 June 2000). Suresh Prabhu, the Indian minister for chemicals and fertilisers, believes that India has the potential to attract up to $5bn in foreign direct investment into the chemicals and petrochemicals sector over the next three to four years.

India has held a toehold in petrochemicals since the early 1960s, but it is only in the past decade that plants of significant scale have been developed. IPCL's and Gas Authority of India's gas crackers at Nagothane and Auriaya and Reliance Industries' naphtha cracker at Hazira provided the initial impetus. More recently, IPCL's gas cracker at Gandhar and Haldia Petrochemicals naphtha cracker at Haldia have come onstream.

India's total consumption of major petrochemicals - synthetic fibres, polymers, elastomers and surfactant intermediates - is estimated at a modest 5m tonne/year. Current consumption of polymers, for example, stands at a mere 3kg/year per capita, way below world average of 17kg per capita, and even a factor of three to four below that of China.

Over the past four years, according to the ministry, India's production capacity for chemicals (including inorganic and organic chemicals, paints and dyestuffs, agrochemicals and speciality chemicals) has grown 36%; petrochemicals/polymer capacity has grown 27% over the same period.

The polymer capacity surplus, a result of significant lldPE/hdPE and PP expansions, is expected to be absorbed by 2002-03 as new initiatives look set to boost demand way in excess of GDP growth. Notably, the cost advantage of alternative packaging materials is being removed by a reduction in excise duty on plastics contained in the Union Budget and, since March, the foodgrains/sugar packaging sector has been opened up to PE/PP.

Government estimates put the growth in petrochemicals and polymers as high as 12-14%/year in the short term, bringing total expected petrochemicals consumption to 11m tonne/year by 2006-07. By 2007, India would potentially require an additional 19 polyolefin, five PVC and two polystyrene plants. By 2010, India is projected to be the third largest polymer consumer after the US and China.

Despite the obvious market opportunities, foreign investors or collaborators still appear wary. The image persists of inefficient elephantine organisations, government bureaucracy, low quality products and poor delivery performance. But there is a much more positive side: the Indian private sector is forging ahead. If ever proof were needed that it is possible to execute worldscale projects on time and within budget in India then it comes in the form of Reliance Industries' new complex at Jamnagar, Gujarat (see page 32).

Jamnagar is typical of the 'new' vision for a resurgent India. All production units use worldclass technologies: Foster Wheeler (coker unit), Pritchard (sulphur recovery), Unipol (PP), UOP (aromatics) for example, and Bechtel was the main contractor. Yet, according to Reliance vice chairman and managing director, Mukesh Ambani, the completed capital cost was about 40% lower than similar refineries, not factoring the higher complexity that has been built in. The complex has catapulted Reliance beyond pole position in the domestic market to the world stage: it now has assets in excess of $12bn and stands as the third largest paraxylene producer and fifth largest PP producer worldwide.

The complex also marks the realisation of founder Dhirubhai Ambani's dream. As a young man working for Shell's distributor in Aden in the 1950s, Ambani aspired to build a bigger and better refinery back home in Gujarat. The back-integration of Reliance from Ambani's purchase of four knitting machines in 1966 through the manufacture of fibre raw materials and basic petrochemicals, finally to the setting up of refinery and upstream operations is one of India's success stories of the 20th century.

While Reliance might be in a class of its own, some of the leading medium-sized private sector companies share aspects with it: most are the brainchilds of individual entrepreneurs, now managed, at least on a day-to-day basis, by second generations of the same family. Typical are the Mehta family at Deepak Nitrite and the Shroffs at United Phosphorus.

For these companies, also with roots in the late 1960s and early 1970s, the initial drive was the need for import substitution to achieve self-sufficiency. For example, Deepak Nitrite (see page 35) was initially promoted to manufacture sodium nitrite as an import substitute. Similarly, United Phosphorus (see page 38) began with the manufacture of red phosphorus to supply the Indian match industry.

A large domestic market, coupled with the protection afforded by high import tariffs buoyed the fledgling industry, but it also inevitably led to a proliferation of smaller inefficient units, the image India is now trying to leave behind.

For the more ambitious companies the progressive reduction in tariffs and the opening up of the Indian market is not seen as a threat. Instead it is serving to stimulate a more customer-focused approach tailored to the specific needs of the domestic market. Such companies are also seeking to enhance their overseas presence and to establish themselves as world class organisations. Such a two-pronged approach is typical. Deepak Nitrite, for example, is targeting international growth through its fine chemicals arm, while Deepak Fertilisers and Petrochemicals remains focused on the domestic market.

In their international role, the more ambitious Indian companies accept that they are in competition with the multinational majors. They have moved forward from being product orientated, to meet India's need for self-sufficiency at whatever cost, to today talking of process competencies. On a product-by-product basis, these companies can match the quality standards of the world majors.

In their attempts to transform to world class organisations, Indian companies are increasingly focusing on quality and environmental standards, with ISO 9000 and ISO 14001 certification becoming more common. According to the ministry, more than 70 companies are signatories to Responsible Care. The larger growth companies are also investing in R&D.

But there is another side to Indian corporate life which sets it apart from employers in the West. Accepted as part of the role of the industrial entrepreneur is participation socially in the region in a major way.

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Alongside its Jamnagar complex, Reliance has created its own township, 'Reliance Green', a 226-acre residential area accommodating 2500 employee families, with shopping amenities, a school, a community hall, a recreational centre and its own hospital and ambulance facilities. In addition, a 1900-acre plantation which will have 2m trees, including teak and mango, is being established, not merely to 'green' the otherwise barren area but to be developed into a sustainable business in its own right. While Reliance vice chairman and managing director, Mukesh Ambani, took the lead in establishing the refinery, his wife, Nita, took control of the social aspects. Similar initiatives are undertaken throughout the private sector. Sandra Shroff, the wife of United Phosphorus founder Rajju, for example, was instrumental in setting up the first school and a hospital in Vapi. Deepak Nitrite has established two corporate trusts, the Deepak Medical Foundation and the Deepak Charitable Trust, involved in welfare and aid work.

Even within the state sector, there are signs of a more competitive approach. IPCL is the subject of a proposed part-privatisation programme, with Reliance widely tipped as the most likely candidate to acquire the 25% stake being relinquished by the government and with it, management control of the company. The other pre-qualified bidders are Mitsubishi and a consortium of Indian Oil Corp (IOC) and the Soros-Chatterjee group.

CAPACITIES FOR MAJOR PETCHEM PRODUCTS '000 TONNE/YEAR

Product	1997-98	1998-99	1999-2000
Synthetic fibre
Acrylic fibre	105	110	129
Nylon filament yarn	22	22	28
Nylon industrial yarn/	44	44	50
tyre cord
Polyester filament yarn	828	848	848
Polyester staple fibre	575	591	591
Total synthetic fibre	1574	1615	1646
Polymers
ldPE	200	200	200
lldPE/hdPE	515	800	1445
PP	550	550	1360
PVC	780	780	780
PS	144	172	252
Total polymers	2189	2502	4037
Source: Ficci

ECONOMIC GROWTH IN INDIA
GDP growth in India for 2000-01 is likely to be 6-7%
Inflation rates are marginally higher than the previous year, but still 4-5%
Long-term interest rates have declined significantly. The ten-year Treasury rate is around 10.50%/annum
Foreign exchange reserves have passed $37bn, imparting considerable stability to the Indian rupee

Source: Reliance Industries

Although, once again, the process is taking longer than was originally scheduled, IPCL is itself already taking some initiatives aimed at improving efficiency. Ashok Chawla, joint secretary within the Indian government's Department of Chemicals & Petrochemicals and recently appointed 'caretaker' chairman and managing director of IPLC following the departure of KG Ramanathan, points to the new Gandhar cracker. 'It is of optimum size, state-of-the-art, energy efficient and its funding is at a competitive rate.' By contrast, the Baroda plant is saddled with vintage technology and a large workforce. Here a voluntary early retirement scheme is planned and, for the longer term, there remains the possibility of mothballing the existing cracker and building a new one. Additionally, IPCL is now investing to integrate its corporate IT systems. 'We need a quantum jump to be online with all our offices and distributors,' says Chawla.

On a smaller scale, Reena Ramachandran, chairman and managing director of Hindustan Organic Chemicals, a government enterprise manufacturing aniline and other aromatic nitrogen compounds, is credited with turning the company around in the past few years from a loss-making company when she took over, to a profitable organisation this year. Ramachandran has reduced the workforce through a voluntary early retirement scheme and 'privatised' its quality assurance laboratories by extending its services at a charge to other local companies.

TARIFFS-WTO COMMITMENTS

	Current import tariffs		WTO bound rates
POY	20%		20%
PSF	20%		20%
PTA	20%		40%
MEG	20%		40%
PE	30%		None
PP	30%		None
PVC	30%		40%

Source: Reliance Industries

*The IndiaChem 2000 exhibition and conference is taking place in New Delhi, 6-8 October.

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