India’s petrochemical industry is one of the major contributors to the country’s GDP. It serves as a backbone for development of various other manufacturing and non-manufacturing sectors viz. agriculture, healthcare, infrastructure to name a few. With enough processing capacities, established linkages, high domestic consumption and investment sources, the domestic industry has enormous potential to emerge as one of the major global players.
Over the past decade, the Government of India has entered FTAs with major global economies. However, it has been observed that majority of agreements concluded by India have adversely affected the growth of the domestic petrochemicals industry. Reduction in tariff has largely attracted imports in petrochemical sector. Large-scale imports have crippled domestic manufacturers. Partner nations continue to dump their products into India taking advantage of reduction in duties.
Benchmarking against global leaders and various trading partners it is observed that India faces a comparative disadvantage owing to inadequate infrastructure and tariff regimes, as a result the domestic market has not grown to its full potential. Therefore, the domestic petrochemical market is import-dependent and investments in petrochemical in India have become unviable.
Various studies indicate that the trade deficits between India and its trading partners – ASEAN countries, Japan and South Korea, have more than doubled for the petrochemical sector, increasing from $5.1 billion to $12.5 billion, during FY10 to FY18. Resultantly, India is a net-importer of petrochemical goods, as developed countries through subsidies and tariff reduction render domestic manufacturers uncompetitive. The skewed landscape has cast a dark shadow on the financial viability of both existing and new investments.
While existing FTAs have created massive dumping gateways for developed nations, the proposed FTAs, particularly the mega FTAs such as Trans-Pacific Partnership (TPP), Trans-Atlantic Trade and Investment Partnership (TTIP) or Regional Comprehensive Economic Partnership (RCEP), may further provide undue opportunity to developed countries in the Indian market, thereby curbing expansion of domestic petrochemical industry and posing threat to investments made in the sector, if not properly drafted.
The government must support development of new projects by framing of policies that subsidise infrastructure and utilities, thereby reducing the investment burden. Several countries such as Singapore’s Jurong Island and China’s industrial park in Shanghai have evolved as major petrochemical clusters by adopting policies that promote development of their domestic industries.
Considering India’s overall trade, exports plus imports, hovering around 40 per cent of GDP, the policymakers may exercise caution and consider sectoral sensitivities before entering new FTAs. The government needs to develop a framework of policies that encourage the development of domestic industry and spur investments. Besides, India needs robust foreign trade policy reforms to ensure sustainable economic development.
Considering the impact of FTAs on domestic petrochemicals industry, India may undertake the following steps:
- Constitution of an FTA regulatory board or any other body entrusted to review existing FTAs and formulation of FTAs under negotiation.
- Designation of the petrochemical industry as a ‘core industry’.
- Built-in safeguard duty provision in FTAs, to be notified soon after operationalization.
- Exclusion of key petrochemical products sensitive to domestic industry from any tariff reduction.
- Comprehensive standards framework for the petrochemicals sector to arrest unhindered market access of FTA trade partners.
- Foreign participation through the FDI route for capacity building, as opposed to the FTA route
(The author is Chairman – FICCI, Petrochemical and Plastic Industry Committee, MD & CEO, HPCL- Mittal Energy Limited)