INSIGHT: India PVC growth hit as rupee plunges

27 August 2013 15:28  [Source: ICIS news]

By John Richardson

India: More than a slowdownPERTH (ICIS)--Just a few months ago the consensus view on India was that whilst its economy might have slowed down, it was still in pretty good shape thanks to booming consumption amongst its middle class and a demographic dividend of a very youthful population.

But now the mood music has changed following the sharp depreciation of the rupee against the US dollar. The rupee has lost some 17% of its value against the greenback since May, making life very difficult for India’s petrochemical producers.

The rupee’s decline was triggered by hints from the US Fed that it was likely to taper quantitative easing (QE). Currencies of other emerging markets, such as Indonesia and Thailand, have also declined because investors are withdrawing dollars back to the States, as the threatened end of QE has led to higher US long-term interest rates.

“India, however, has been hit the hardest because it has become more apparent that QE money was papering over big cracks in our economic growth model,” said a Mumbai-based chemicals trader.

Back in December 2011, chemical industry executives were already warning about the weakness in India’s growth model.

“Manmohan Singh [India’s Prime Minister] has to compromise so much that policy has no direction anymore. Nothing is being done,” a senior polymer industry executive said at the time.

“It is not only coalition politics that is the problem. It is also because Singh is a civil servant with a weak political power base. He owes his position to the Congress power brokers. Therefore, everything he wants to do he has to run past the people who put him there, leading to dilution of all his objectives.”

Vital reforms that had been put on hold included tackling endemic corruption, opening up more industries to foreign direct investment, boosting manufacturing through improvements in infrastructure and dealing with India’s food distribution problems, the executive added.

Now many more statistics are being quoted highlighting India’s social and economic problems.

For example, UNICEF estimates that diarrhoea kills 400 young children in India every day, wrote The Economist in a 24 August article.

“Two-third of Indians lack proper sanitation. Some estimates suggest that 70% of drinking water is seriously polluted with sewage,” the article added.

A widespread concern is that India could fail to capitalise on its demographic dividend of a youthful population unless public health standards and infrastructure are greatly improved.

“Firstly, the issue is that too many young people cannot attend school to get the education that they need because of polluted water etc,” said a Hong Kong-based Indian citizen.

“And secondly, even if they are able to attend school and get the right qualifications, they might grow up to find there are not enough jobs because poor roads, ports and electricity supply etc could well continue to discourage manufacturing investment.”

Other alarming statistics that have come to the fore over the past few weeks include:

*A rise in India’s current account deficit to $90bn from $8bn in 2007.

*A further hole in government finances created by the fact that only around 3% of Indians pay income tax.

*A six-fold increase in the borrowing of India’s most indebted companies since 2007 to $120bn. Most of that debt, according to Ruchir Sharma, head of emerging markets and global macro at Morgan Stanley, is denominated in US dollars.

*Non-performing loans of 10-12% at India’s state-owned banks.

But is a lot of this just investor panic, and also hype designed to make money out of short-selling India, that could quickly dissipate if and when politics improves?

“We do need better leaders and hopefully that will happen after the next general election,” said a source with an Indian petrochemicals producer.

“But whether our new generation of politicians will have a clear mandate to govern is not certain because of the complications of coalition politics.”

The next general election is due to take place by May 2014.

Meanwhile, the weaker rupee, and the volatility in the value of the rupee versus the dollar, has already damaged growth in one petrochemicals market.

“Imports of polyvinyl chloride (PVC) have fallen over the last couple of months. This is partly because we are now in an off-season, but it is also due to higher costs for importers and all the uncertainty over the currency. Nobody knows which way to hedge,” added the source with the Indian producer.

Indian demand for suspension-grade PVC totalled 2.25 tonnes in the financial year ending 31 March 2013, he said.

“In April to July of the 2013-2014 financial year, PVC demand growth was a very healthy 15-17%, in line with the double-digit increases we have seen over the last 10-15 years. However, since July growth has slipped to  5-7%,” the source added.

It is obviously much too early to say whether this decline in PVC growth is anything more than a short-term blip.

But the longer that this crisis drags on, the more likely it is that lasting damage will be caused to many of India’s petrochemicals markets.

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

By: John Richardson
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