30 July 2012 16:40 [Source: ICIS news]
By John Richardson
PERTH (ICIS)--What is happening in India’s polyvinyl chloride (PVC) sector reflects some of the country’s big macro-economic challenges.
An additional 8.5m tonnes of PVC pipe demand could be generated in the space of just five years if the government can get its act together on economic reform, said an Indian PVC industry source.
This would greatly add to overall PVC demand that he estimated totalled 1.98m tonnes in the financial year ending 31 March 2012.
"We need a new breed of politicians able to push reforms through that would attract the domestic and foreign investment needed for a return to the GDP growth rates of a few years ago," he said.
"Sadly, there is no such new breed of leaders around at the moment."
India’s economy grew by 6.5% in the 2011-2012 financial year, the slowest rate of expansion since 2002-2003. In 2010-2011, GPP growth was 8.4%.
“More investment in infrastructure is needed,” the source added.
"Without the infrastructure spending we won't be able to tackle the inflation problem.
"Lack of efficient ports and roads and not enough electricity supply have caused steep cost increases.
"This is preventing the Reserve Bank of India (RBI) from making the interest-rate cuts we need to return to the previous growth trajectory."
Better roads and power supply would also encourage more manufacturing investment and thus create more jobs.
And more manufacturing jobs would help narrow the big income gap between India's low and middle-income earners and a relatively small, rich urban elite.
Income inequality had doubled in India since the early 1990s, according to an Organisation of Economic Co-operation (OECD) report released in December last year.
The top 10% of wage earners were earning 12 times more than the bottom 10%, up from a ratio of six in the 1990s, the OECD added.
India’s poverty rate – 42% of the population living on less than $1.25/day – was the highest in the seven countries covered by the study.
“At the other end, Argentina and Russia have virtually eradicated absolute poverty, using the same yardstick,” said the OECD.
The seven countries in the study were Argentina, Brazil, China, India, Indonesia, the Russian Federation and South Africa.
Some 70% of India's PVC demand is reliant on the pipes sector compared with a global average of 40%, continued the source.
This reflects the heavy dependence on agriculture as a driver of economic growth, as the big demand for pipes is mainly driven by irrigation.
India remains extremely vulnerable to changes in weather patterns because of the importance of the agricultural sector.
Last year, PVC demand was damaged by too-much rainfall during the monsoon, as summer lasted only 45 days compared with the usual 145 days.
Halfway through this year’s June to September monsoon season, rains have been 22% below average, said the India Meteorological Department in a statement released on 26 July.
This is equivalent to the amount of rainfall seen during the same period in 2009, when India suffered a drought.
The government could be forced to provide more low-cost energy to the agricultural sector in an attempt to compensate for a fall in farm incomes, said a 25 July post on the beyondbrics blog from the UK's Financial Times.
The post warned that, in a country short of energy, this would be at the expense of higher energy costs for manufacturing.
Higher manufacturing input costs would feed through to more expensive consumer goods, further damaging rural spending, added beyondbrics.
A bad monsoon is also, perhaps most importantly of all, likely to lead to poor harvests and therefore higher food prices.
This makes it unlikely that the Reserve Bank of India would be able to cut interest rates during its next meeting, which takes place on Tuesday on 31 July, said several economists. India’s benchmark lending rate is 8%.
"And the big worry for PVC demand is that the farmers could be short of money when the planting season arrives at the end of 2012. This would damage demand for PVC pipes," said the source.
"My base case for the financial year 2012-2013 is PVC demand growth of 8%, my worst case is 6-7% in the event of bad monsoon and the best case 10-11%."
But even if the best case scenario comes true, India’s PVC consumption will remain a long way behind that of China.
“China’s per capita PVC consumption, from roughly the same size of population as India, is roughly 10 kilos,” the source said.
“In India, it is just 1.5 kilos.”
For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.
Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.
|ICIS news FREE TRIAL|
|Get access to breaking chemical news as it happens.|
|ICIS Global Petrochemical Index (IPEX)|
|ICIS Global Petrochemical Index (IPEX). Download the free tabular data and a chart of the historical index|
Asian Chemical Connections