Tamil Nadu has been the home to chemical industry for several years, spread across Mettur, Tuticorin, Manali, Ranipet and Cuddalore. However, the industry did not expand in a big way. Actually, with three major ports, 16 minor ports and hundreds of industrial parks, there is a large scope for expansion. India faces some stiff challenges. The partnership trade agreements that we have with Japan and China, do not encourage large investments in the chemical industry. We spoke to Vijay Sankar, Deputy Chairman, the Sanmar Group and Ramkumar Shankar, Managing Director, Chemplast Sanmar Ltd. on the issues that affect the industry. Excerpts. INDUSTRIAL ECONOMIST (IE): Against the global chemical industry size of around $4.7 trillion, India\u2019s chemical industry is only about $160bn. How does India stack up in this? VIJAY SANKAR: India is the fastest growing chemical market in the world, with an annual growth rate of 8 to 9 per cent p.a. There is also a massive deficit of many chemicals and petrochemicals in the country, which is only likely to grow further with the years. Already, the country imports around $45bn of chemicals. There is a huge potential for the growth of the chemical industry in India. We believe that the chemical industry GVA can go up to $500bn by 2025. IE: In that case, what\u2019s holding back India? RAMKUMAR SHANKAR: Firstly, the capital costs in India are higher than in comparable countries. Secondly, given the higher population density and the pressure on land, it is a challenge to find large parcels of land to set up new projects. Also, there are infrastructural issues, like inadequacy of a gas pipeline network, inability to move products efficiently either by inland waterways, domestic shipping, road or rail and issues with relation to the availability of quality power on a sustained basis. Importantly, the very easy access to the Indian market, facilitated by import tariffs that are lower than what prevail in comparable countries, make it more attractive for foreign companies to export to India from their bases in their respective home countries, rather than set up plants in India. IE: Gujarat is India\u2019s major producer of chemicals state with a 57 per cent market share. Why has Tamil Nadu with 6 per cent fallen so far behind? Is it possible to play catch up? VIJAY SANKAR: Gujarat has had a few advantages that have enabled it to encourage chemical industry growth. Firstly, with around 1600 km it has the longest coastline in India. Secondly, Gujarat has also been helped by the fact that there are multiple refineries and crackers within the state, which provide feedstock to downstream industries. Proximity to the highly industrialised western belt also drove the early location of chemical industries into Gujarat. Tamil Nadu has the potential to grow its chemical industry, if not to the extent of Gujarat, at least to a few times its current size. On the length of the coastline, Tamil Nadu is not far behind, with around 1160 km. Where the state falls back is the lack of even one naphtha cracker; thus there is no feedstock advantage for any downstream industries to be set up. More refineries and a naphtha\/mixed-feed cracker would greatly encourage the growth of the chemical industry in Tamil Nadu. IE: What is the global and national scenario for 2040? Are, the country and the state, geared to meet the demand? What needs to be done? RAMKUMAR SHANKAR: From a current size of $160bn, and even assuming a conservative, long-term growth rate of 7 per cent, the industry size is likely to touch $700bn. Also if we look at the per-capita consumption, we are currently around 1\/10 the size of China, and assuming we reach current Chinese levels by 2040, our chemical market size should be around $1.6 trillion. Thus, the industry growth potential is enormous. If steps are not taken to encourage investment today, to meet this potential demand, we will end up in a situation where the country will be massively dependent on imports. This will have consequences, both on dependable availability, as also on trade deficits and impact on currency value. Given this, as a country, we need to work seriously on encouraging investment in India. Prime Minister\u2019s Make in India programme is thus a step in the right direction. But investment in India will need to be incentivised, through rationalisation of import tariffs, updation of various industrial laws to meet the requirements of modern-day business and a critical re-look at trade policy. IE: The chemical industry is under the 100 per cent FDI route from the 1990s. Why aren\u2019t foreigners investing in droves? RAMKUMAR SHANKAR: This is the billion-dollar question! This is because of the skewed import tariffs and trade pacts. India has one of the lowest levels of import tariffs for chemicals making it easy for global majors to merely export to India from their manufacturing bases in SE Asia and or other countries. This problem is further compounded by the various FTAs entered into by India with ASEAN, Japan, Korea, etc., wherein the import tariffs are incredibly low. Unless India takes a hard look at tariffs and FTAs, such FDI is unlikely to happen. An excellent example of an industry where India took the right steps is the automobile industry. By keeping tariffs high, export of automobiles to India was discouraged. Since the global majors did not want to miss out on the vast Indian market, they were thus compelled to set up manufacturing bases in India. This is the model that needs to be followed in the chemical industry as well. IE: What are the implications of Japan-India trade agreement? Would similar agreements with China follow? VIJAY SANKAR: India and Japan have a Comprehensive Economic Partnership Agreement (CEPA) by which the tariff on many chemical products is being systematically reduced every year until it reaches zero. This is adding to the problem faced by the domestic chemical industry. In our own example, we make PVC resin. The CEPA has committed to reducing Indian duties on import of PVC from Japan from the standard 7.5 per cent to 0 per cent, by 2020. The duties have already been cut to around 2 per cent and will become 0 per cent in two years. The consequence of this is that Japan, which was exporting around 2500 tonnes of PVC resin per year to India before the CEPA came into effect, has now started to export about 30,000 tonnes to 35,000 tonnes per month of PVC to India. This has had significant adverse implications for the domestic industry in India. RAMKUMAR SHANKAR: While thankfully, due to the limitations on PVC resin capacity in Japan, they may not be able to increase this export quantity further, China\u2019s is another matter altogether. China\u2019s PVC capacity is around 25 million tonnes while their domestic demand is only about 17 million. They thus have significant idle capacity within their country. If the RCEP trade agreement is signed, with no protection from China, it will be opening the floodgates for PVC dumping from China into India. This will kill the domestic industry and all incentives to set up any further capacity in India. In the long-term, this would be highly damaging to the interests of our country and the downstream industry. Thus, we should have a serious re-think on giving any concessions to China under RCEP.