Strengthening petrochemical backbone

Supply chain disruptions over the past few years have helped countries to focus on strengthening the critical components of national industrial value chains as a part of building strategic resilience. Industrial policy has seen a strong revival across the world, especially in advanced countries. This has included a combination of incentives and subsidies (such as those under the CHIPS Act in the US) and high tariffs (such as the Trump tariffs) to build capabilities in critical industries such as semiconductors. Countries that have built productive capacities are also trying to stop others from becoming their rivals (such as China, which banned exports of rare earth magnets). More than efficiency, strategic considerations are driving industrial policy.

Strategic considerations have indeed guided the selection of 14 sectors for India’s production-linked incentives (PLI) scheme launched in 2020. These include solar photovoltaic cells and modules, electric vehicles (EVs), advanced chemistry batteries, active pharmaceutical ingredients (APIs), special steels, and technical textiles. One sector that should also receive attention is petrochemicals, especially given its extensive linkages across the entire spectrum of economic activities.

The petrochemical sector converts oil and gas fractions into ethylene, propylene, and benzene, which serve as vital raw materials for automotive, construction, packaging, electronics, and textile industries. Petrochemical derivatives such as ammonia and urea constitute the bulk of fertilisers that anchor India’s food security. Over 60% of APIs rely directly on petrochemical intermediates. Advanced polymers are increasingly critical for EV components and energy storage battery systems.

With a very low per capita consumption — just 11 kg compared to 46 kg in China and over 100 kg in the US — India’s demand for petrochemicals will go up sharply with economic growth, urbanisation, and rising prosperity. India’s inability to expand the petrochemical industry in tune with expanding demand has led to growing import dependence. For instance, polyester imports in 2025-26 were 32% higher than in 2021-22, polyethene and polypropylene imports were 21% higher, and polyethylene terephthalate imports increased by a whopping 300%. India’s high import dependence — roughly 45% for petrochemical intermediates — is a source of vulnerability.

Thus, there is a clear case for strengthening the domestic production base to reduce import dependence, meet the growing demand, and possibly build a niche for exports, at least in select products. A stronger petrochemical industry will support the competitiveness of many downstream sectors, such as the man-made fibre segment of the textile industry.

An important development in recent years is the emergence of China as the dominant player with 46.3% of global petrochemical sales, undermining other countries including the US, Germany, Japan, Korea, and Taiwan. India remains a marginal player with 2.2% global share.

China has overwhelmed others with its pricing strategies achieved through a combination of massive scale of production, reaping economies of scale, huge state subsidies, and undervalued real exchange rates. A recent IMF working paper and the OECD Manufacturing Groups and Industrial Corporations database have corroborated the substantial scale of China’s state industrial subsidies, adding up to 4.4% of GDP.

The Indian petrochemical industry comprises several producers, spanning both the public and private sectors. Expanding the industry and mobilising the huge investments that would be needed in this capital-intensive sector, therefore, demands confronting the reality of global competition — even as a significant, competition-thwarting capacity lies within the neighbourhood. This may be discouraging Indian companies to invest. This hard reality has to be confronted, given the accumulation of industrial capacities in China in virtually all sectors, particularly strategically important ones.

This is where the relevance of industrial policy arises to address the “market failures” or the diverging private and social returns. Keeping in mind the growing domestic demand, its strategic importance in view of its extensive spillovers to downstream industries across economic activities, and India’s substantial petroleum refining base, an integrated policy support programme is needed to foster expansion of the industry in tune with growing national requirements, opportunities, and development aspirations.

The support programme should build on the current initiatives of the Centre and states to ease investment and operating conditions. The approach should be to reduce policy-induced cost disabilities faced by producers in India vis-à-vis their peers. Earlier research suggests that key focus areas would include the cost of land, power, logistics, labour, and taxes and duties. The experiences of other countries that have built and expanded productive capacities in the sector could also be drawn upon.

The time has come to steer industrial policy to focus attention on building and strengthening productive capacities especially in strategic sectors like petrochemicals, beyond semiconductors and shipbuilding that have already been taken up. In such a sector, time is of the essence and action is needed before emerging conditions in the global market make the task more difficult.

The writers are respectively former Deputy Director General, WTO, and Director, Institute for Studies in Industrial Development.

Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.