The chemical industry in the country is going through an interesting phase. At a time when overall industrial production is on a decline, the chemical industry is posting healthy growth of over 10% and income from sales has grown up by about 20%.

The positive outlook can be further seen with a record 820 new projects that are under various stages of construction and implementation in the country with a total capital expenditure of about Rs 5,00,000 crore. Almost 25% of this investment is being chanelled to build capacity of speciality and knowledge chemical, an area where India can take a lead.

Jai Hiremath, vice-chairman and managing director, Hikal Ltd, a leading speciality chemicals manufacturing company, says that the overall growth prospects of the industry looks good at around 12-15%. ?India is already very strong in drug manufacturing and crop protection. We need to diversify into application oriented specialty chemicals.?

Speciality chemicals are high value added chemicals used in manufacturing of polymers, adhesives, sealant and speciality paints and coatings. They are produced in lower volume than bulk chemicals, of which petrochemicals, made from oil feedstocks, are the most common. Knowledge chemicals, on the other hand, are broadly described as those based on research especially for the pharmaceutical and biotech industry.

Globally, knowledge chemicals are expected to grow at 3.75% and they have a higher profit margin. In contrast, basic chemicals are growing at a rate of 0.6%, and margins are less than 5%.

Moreover, the government regulations and incentives have benefited the knowledge and speciality segment as the companies were able to leverage on the knowledge premium on patented products by developing improved processes.

Currently, the industry has a wide product portfolio with basic chemicals accounting for 57% of the production, followed by speciality chemicals at 25% and knowledge chemicals at 18%. Experts feel that by 2010 the composition of speciality and knowledge chemical would grow over 50%. Says Sankalpa Bhattacharjya, manager, Strategic & Commercial Intelligence Transaction Services, KPMG, ?Speciality chemicals and knowledge chemicals are the new areas of growth in India. Companies need to collaborate with research institutions and customers to drive product innovation.?

Indian chemical industry is the third largest in the Asia and ranks twelfth in the world. The industry accounts for 12.5% of the country?s industrial production and 15% of manufacturing capacity. The industry contributes about 10% to the total exports and accounts for 6.7% of the country?s GDP. In fact, the wide spectrum of products can be broken down into a number of categories including inorganic and organic chemicals, drugs and pharmaceuticals, plastics, petrochemicals, pesticides, agro-chemical and fertilisers.

Progress made in the country in the petrochemicals sector was slow because it was import driven for many years. However, the most notable growth has been in the plastic segment with versatile applications in industry, homes and offices. For polymers or plastics consumption, it took over 40 years from 1950 to 1990 for the country to reach the consumption of one million tonnes.

The industry has changed over the years to match the growing needs of the country. It has also emerged from a protected environment where it was mainly feeding to the domestic market. Says Hiremath, ?India is well positioned in this industry. Currently the import duties are very low. We are also exporting many products and we need to look at more mergers and acquisitions to achieve global scale.?

The chemical industry in India is still highly fragmented with as many as 12,000 firms operating in the country. Though opportunities for the industry are plenty, most of the chemical companies in the country are in the unorganised sector, which hampers growth. There are no players in the chemical industry in the country having more than 10% share and the top 10 players account for only 23% of the total market share. Even geographically, too, about 70% of the companies are located in the western part of the country.

The growth prospect in the industry has opened up opportunities and many leading industry players are looking to gain by achieving economies of scale either organically or inorganically. This has ushered in a phase of restructuring and consolidation.

Says KPMG?s Bhattacharjya, ?The Indian chemical industry is very fragmented and most of the players are in the unorganised sector. Firms have a problem in getting funds for scaling up operations. Most players are just feeding the domestic market and exports is not a priority for them.? The country exports only 2% of the global exports.

To attain scale and raise exports, companies need to focus on research and development. Bhattacharjya feels that there would be consolidation in the industry, which is important to innovate and expand operations in other parts of the world. ?Consolidation in the value chain will also enable global companies to look at India as an outsourcing hub. Companies need to spend more on R&D to compete in global markets.?

Industry experts feel that the government can support the industry by rationalising labour and implementing pollution control laws and assisting in establishing mega industrial estates to realise economies of scale.