Intellectual Thoughts by Sanjay Panda: December 2011

India: emerging in Specialty Chemicals

India has slowly becoming a significant player in the international chemicals market. As India's edge in speciality chemicals is more and more visible, it is not just multinationals that are ramping up their sourcing plans from India; even home-grown firms are creating new capacity, increasing productivity and going in for acquisitions. MNC’s like BASF, Clariant, Lanxess, Chemtura etc are already invested significant amount and in the process of investing additional capital to expand their business.

India is expected to drive growth in the $650 billion global speciality chemicals market. India's speciality chemicals industry is expected to grow at a CAGR of 15% - almost double the growth of the global industry. Exports of speciality chemicals from India are poised to grow from $4 billion in 2007 to $13 billion in 2013, representing a CAGR of 22%.

The largest exporter of chemicals in the world is still Europe with $955 billion The EU still accounts for 90% of total chemical exports. They are the world leaders not just in production, but also the largest exporters. The second largest is the USA with $180 billion. India exported just $24 billion which is quite insignificant at this moment.

India has improved from its export figure of $22 billion two years ago, but China had clocked chemical exports worth $88 billion. Japan had $78 billion worth of exports. Though India's growth is good as compared to the past, even fantastic, it is rather small if one compares to China.

FDI in Indian retail

Decision to allow 51 per cent FDI in multi-brand retail and 100 per cent in single-brand retail should easily count as one of the boldest economic reform measures initiated by the government. At this moment all the poltical parties are opposing the idea in the pretext of that this move would destroy domestic small retail businesses and result in more job losses. They think fears of wiping out small retail shops and kirana ( mom and pop)stores.  But comfort should come from the many conditions that have been attached to the entry of foreign capital into the sector. Retail multinational, keen on entering India with a 51 per cent equity, will be required to procure at least a third of their raw materials from small Indian companies, allocate a minimum of 50 per cent of their investments to create backend infrastructure and operate only in towns or cities with population of more than one million. These are tough conditions and should be able to address fears of job losses with the advent of big retail multinationals.

On the positive side, the entry of big retail should result in a marked improvement in the efficiency of the retail chain. Large multinational retail firms will bring not only their capital but also more advanced technologies and processes that will bring down transaction costs and improve the retail delivery system. It is also expected that the presence of big retail chains and competition will have an impact on inflation. 

The share of organised retail in the total retail business in the country, estimated at around Rs 25 lakh crore, is still very low, at only seven per cent. China’s share of only the top 100 retail groups in its total retail business is over 11 per cent. Clearly, India has much to catch up on, and the decision to allow FDI in the retail sector should help start the process.