By John Richardson
WHAT is happening in India's polyvinyl chloride (PVC) sector reflects some of the macro-economic challenges we discussed earlier this week.
An additional 8.5m tonnes of PVC pipes 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 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," said the source.
"Sadly, there is no such new breed of leaders around at the moment."
More investment in infrastructure is needed, he said.
"Without the infrastructure spending, which could trigger the estimated 8.5m tonnes of extra PVC pipe demand, 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," he added.
"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 etc would also encourage more manufacturing investment and thus create more jobs.
More manufacturing jobs would narrow the big income gap between India's low and middle-income earners and the small, rich urban elite.
Some 70% of India's PVC demand is reliant on the pipes sector compared with a global average of 40%, the source added.
This reflects the heavy dependence on agriculture as a driver of economic growth, as the big demand for pipes is mainly driven by irrigation.
Thus, India remains extremely vulnerable to changes in weather patterns.
Last year, PVC demand was damaged by a too-much rainfall during the monsoon. Summer lasted only 45 days compared with the usual 145 days.
This year the concern is that there won't be enough rainfall. To date, the monsoon has delivered 22 percent less rainfall than in an average year.
Poor harvests, resulting in higher food prices, are likely to make it even harder for the RBI to cut interest rates which currently stand at 8 percent.
"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 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%."