Budget 2022: Duty rationalisation, addressing FTA anomalies should help chemical sector

Union Budget 2022-23: Extension of PLI schemes for more chemical segments would support the domestic manufacturing sector and encourage capacity additions

Sai Krishna January 26, 2022 21:36:21 IST
Budget 2022: Duty rationalisation, addressing FTA anomalies should help chemical sector

Indian Union Budget 2022: Mechanisms needed to fast-track specialty chemical sector growth. Image courtesy Man vyi/Wikimedia Commons

The Indian Chemical industry is estimated to be around $178 billion in FY19, of which specialty chemical is estimated to be around $32 billion. The sector produces around 80,000 products and employs around 2 million people. The industry is expected to be a major contributor to government policies like ‘Atmanirbhar Bharat’ and ‘Make in India’, driven by growth in domestic consumption and demand from the export market, partly supported by growing diversification of the supply chain being adopted by global players under ‘China+1’ strategy.

In order to leverage the opportunity to its full potential, some of the bottlenecks and issues need to be addressed. Some of these measures, which can be addressed in Budget 2022 are listed below:

Rationalization of duty structure and addressing anomalies arising from FTA

The industry has faced duty structure anomalies arising from FTAs (free trade agreements) with several countries, leading to inverted duty structure for several downstream and intermediate products, which had also resulted in insufficient capacity creation for these products which are used as feedstock for specialty/value-added products. Further, high duties on key raw materials and building blocks that are not available domestically have also impacted the competitiveness of domestic manufacturers.

While in recent years some of the duty structure-related issues have been addressed such as reduction in basic customs duty on Naphtha from 4.0 percent to 2.5 percent in the Budget 2021-22 and some of the anomalies under FTAs have been rationalised, however, further rationalisation in duty structure is needed, with a reduction in duties for key raw materials and building blocks and addressing the instances of inverted duty structure by increasing duties on intermediates/downstream product to encourage domestic production of value-added products.

Production Linked Incentives (PLI) Schemes

Extension of PLI schemes for more chemical segments would support the domestic manufacturing sector and encourage capacity additions. Currently, PLI scheme has been extended to Active Pharmaceutical Ingredients (APIs) and key starting materials (KSMs).

Incentives for exports

Incentives for boosting exports in the chemical sector can be announced. Schemes like Remission of Duties and Taxes on Exported Products (RODTEP) can be extended to the chemical sector also

Cluster-based development and ESG risk management

Any fiscal incentives/budgetary allocation for cluster-based development under existing programs like PCPIR (Petroleum, Chemicals and Petrochemicals Investment Region) or other such programmes will also help in domestic capacity creation. Such cluster-based development will also be beneficial for environmental and social risk management, due to shared facilities enabling better compliance with tightening environmental norms.

Support for Research and Development (R&D)

In order to produce more value-added products, it will be necessary for the domestic industry to increase its R&D spend. Any incentives/rebates for R&D-related capital expenditure by the industry will be favorable.

The writer is Assistant Vice President & Sector Head – Corporate Ratings, ICRA Limited. Views are personal.

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