Import duty on feedstock for petrochemicals be fixed at zero rate to boost domestic value addition: ASSOCHAM Study

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India's trade imbalance with GCC to deteriorate with tariff elimination on petrochemicals under proposed FTA

There is an urgent need to fix import duty on feedstock for petrochemicals including naphtha, natural gas liquids (NGL), propane and butane at zero rate to make investments in this sector financially viable and encourage domestic value addition as currently all these feedstock have higher duty resulting in nil to negative protection to the sector, according to an ASSOCHAM study.

The import tariff for the next level of products can be at a slightly higher level with progressive increase in duty rates to encourage domestic value addition, more so as there are compelling reasons to remove the duty anomaly prevailing in the petrochemical sector so that domestic investment becomes financially viable, suggested a study titled 'Import Dependency of Indian Manufacturing,' conducted by The Associated Chambers of Commerce and Industry of India (ASSOCHAM).

Import duty rationalization across petrochemical value chain is imperative for increasing domestic capacities and reducing dependence on imports, said Mr D.S. Rawat, secretary general of ASSOCHAM while releasing the study.

The ASSOCHAM study has also warned that tariff elimination on key petrochemicals under the proposed FTA with six nation Gulf Cooperation Council (GCC) would result in massive surge in imports thereby further deteriorating India's existing trade imbalance with GCC countries.

India, owing to its limited production capacity, depends on imports for toluene to meet its demand and its geographical proximity to the GCC makes it vulnerable to threat from GCC imports as it has surplus exporting capacity of toluene and is increasing its capacities to touch about 20 montmorillonite (MMT) by 2015, it added.

In its study, ASSOCHAM has also emphasized upon the need to explore alternative feedstock produced from sources like coal, biomass and others as most of the petrochemicals like ethylene, propylene and aromatics are currently produced via conventional routes utilizing naphtha (derived from crude oil) and ethane (derived from natural gas).

The study has further suggested the domestic producers to price their products in line with prices prevailing in the Southeast Asia (SEA) as imports are relatively free. As end-product prices are market driven, most producers irrespective of their cost of production have to maintain the selling prices in line with market prices and this results in varying margins for producers having different feedstock thereby affecting the investment prospects.

India's import duty structure provides for nil incremental tariff protection between key petrochemical inputs (naphtha, liquefied natural gas and propane) and their end products (building stocks like ethylene, propylene, benzene, and butadiene) as well as major petrochemical products like polymers, further noted the study.

Besides, the tariff protection is even negative for many products such as polymers vis-vis preferential duty for countries that have signed free trade agreement (FTA) with India, it added.

India is a net exporter of naphtha, the basic feedstock, while it imports large quantity of petrochemical products and this has been discouraging value addition within the country, highlighted the ASSOCHAM study.

An accelerated reduction in import tariff on polymers from 40 per cent in 2001-02 to five per cent in 2007-08 has resulted in increased flow of imports, the study added.

Besides, the five per cent import duty on naphtha feedstock for production of polymers has reduced the differential between upstream and downstream (polymers) to zero in India, while in other countries in the region and even in developed economies, this differential is 6.5 per cent.

India's five per cent import duty is much lower than that of Malaysia (20-30 per cent), Philippines (15 per cent), Indonesia (20 per cent) and China (6.5-8.4 per cent), noted the ASSOCHAM study. This disparity is affecting the competitive viability of the domestic investment in petrochemical sector.

Import tariff on other key petrochemical inputs like propane, catalysts, capital goods and others further reduces the competitiveness of domestic petrochemical industry, the study added.

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