ACPWP97 THE STATE OF THE INDUSTRY - INDIA
April 1997 FO: ACPWP 97/2

ADVISORY COMMITTEE ON PAPER AND WOOD PRODUCTS

THIRTY-EIGHTH SESSION

Rome, 23 - 25 April 1997

THE STATE OF THE INDUSTRY


INDIA

Political and Economic Scenario

This year, India celebrates the Golden Jubilee Year of Indian Independence, a proud moment of its history. In spite of its vast size, ever increasing population, diverse religious belief's, different languages, infrastructure difficulties, substantial number of people living below the poverty line, India has withstood the taste of time by preserving democracy in the country.

During 1996, the Indian National Congress, the largest and oldest political party in the country, was in power until June 1996, when it completed its five-year term of office. However, in spite of fairly good political and economic performance, the party did not reach the majority to form the new government. Although the Bharatiya Janata Party (BJP) emerged as the single largest party, neither managed to reach the majority to form their own government. The President of India gave this party the opportunity to establish a majority, but the party failed to do so, surviving barely for thirteen days. The second largest majority, Congress party, instead of risking to prove majority with the support of other parties, preferred to support a third force from outside.

Thus, in June 1996, the third force, a conglomeration of thirteen parties with various faith principles and ideologies was formed. This party, named United Front, came into power with the external support of the Congress party. Apparently, for the last eight months, they have continued with the basic policies set out by the previous government. This indicates that the country is not deviating substantially from the earlier chartered path of liberalization set by the previous government.

As regards liberalization and free trade, it appears that this has become a universally-accepted policy from which nobody will turn back, but rather would like to move forward only. It is now to be seen whether a polarization takes place to form two stronger groups of political ideologies.

The current outlook for the Indian economy looks good. The experts expect the GDP growth rate to be more than 6.7 percent as against 6 percent in the previous year. The foreign currency reserves have gone up to US$ 19.5 billion as against US$ 16.3 billion in the previous year. The current account deficit is expected to be lower than 2.0 percent of GDP as against 1.5 percent in the previous year. The inflation rate has gone up to 7.48 percent as against 5 percent in the previous year.

Indian Paper Industry

As compared to 1995's production - 2.7 million tons - a growth of 5 percent can be reported for 1996. In this year the government made radical changes in the import tariffs by reducing the duty on paper. A few years ago newsprint was imported at a zero percent duty, but the accompanying rider specified that only actual users would be permitted to import newsprint, under the condition that for each ton of newsprint imported the user had to consume at least two tons of Indian newsprint. Further, the ministry slashed down customs duty on other papers from 60 to 20 percent and newsprint was allowed to be imported under open general license (OGL) at zero percent duty.

As a result, under the garb of newsprint, traders started importing writing, printing and coated varieties of paper in huge quantities at zero percent duty. Due to prevailing depressed

international trade, the imported material was much cheaper as compared to the Indian material and also availability was an additional benefit of credit which ran into months at a significant low rate of interest. Indian manufacturers, on the other hand, could extend their credit just up to one month. Thus prices took a downward trend and inventories started piling up.

To Illustrate

The current newsprint demand is approximately 630 000 tons. The domestic production during 1995-96 was approximately 412 000 tons (i.e., 65 percent of the demand), thus leaving a gap of 218 000 tons to be filled up by imports. However, due to cheaper imports of imported newsprint, the volume of imports have gone up to some 345 000 tons in the same year.

Result

The producer performance for the first half of 1996-97 are way down as compared to the same period in the previous year. Stocks have piled up heavily. Tamil Nadu Newsprint Ltd. (TNPL), the Indian newsprint giant, posted its bottom line as almost half for the first half of the current fiscal year, as compared to the first half in the previous year. As a result, most of the machines dedicated to producing newsprint in the country have ceased their operations or conveniently gone into an extended repair-and-modernization period. TNPL has also reportedly not made any newsprint for the last three months and still nurses huge stocks, Aurangabad Paper has for the first time in its history been closed for the last quarter. Another giant, Hindustan Newsprint and Papers Ltd. (HNPL) reduced its output from 9 000 to 5 000 tons per month and still carries 10 000 tons in stocks. However, the demand growth for paper and paperboard is stable. The above demand is expected to grow at a rate of 7.8 percent. The growth rate for the different varieties of paper and paperboard is expected to be as below:

Cultural Paper 6.7  percent

Industrial paper 8.2  percent

Speciality paper 7.0  percent

After understanding the problems, the Government of India has recently imposed 10 percent custom duty on newsprint and has excluded newsprint from the OGL list. A few more steps are being considered during this year's budget proposal, due on 28 February 1997.

New Investments/Expansions

In the wake of international competition and reduced tariffs on imported paper, most of the companies are reconsidering announced expansion plans and slowing down their implementation until they arrive at the economic scale of operation, appropriate technology and indication of market trends.

The ongoing schemes will be completed. Four to five major large-sized production units are expected to come into the market viz: Rama Newsprint and Papers Ltd. (RNPL) 150 000 tpy (newsprint and writing/printing - by using waste paper de-inking technology); Sinar Mas 115 000 tpy (writing/printing and coated paper - based on 100 percent imported pulp from Indonesia); ITC Bhadrachalam 120 000 tpy (coated board - based on waste paper and own pulp); Serveall 70 000 tpy (coated board - based on waste paper and purchased pulp); Sterlite 125 000 tpy (writing/printing, coated paper and newsprint - based on imported pulp and waste paper), besides marginal expansions planned in the existing units. Most of these units are aiming at exports for part of their production. However, some temporary excess production seems unavoidable in the industry for some period which might take the toll of weaker units.

Major Issues

Indian paper industry will continue to face the following major issues:

Raw Material

The industry cannot have its own land for captive plantation and has to make its own arrangements on scanty areas. A few mills have taken progressive steps in social forestry, but this arrangement is not adequate for the capacity they want to grow. Another option is agricultural residues where bagasse is the only source and this has to have some linkage with sugar mills. There has been a tendency to use more wastepaper (mainly imported). Mills will have to rely on large scale imports of wood pulp.

Energy

With rapid industrialization, demand for power is going up at a faster rate than the growth of supply. Paper industry will have to generate their own power to avoid interruptions in production due to power cuts.

Environment

The old method to treat environmental issues is no longer effective, therefore, overall strategy needs to be adopted to select proper process and equipment, and maximum segregation of effluents which should be treated selectively. The environment regulations and the enforcing agencies are becoming stricter every day. Also, the High Court and the Supreme Court insist on better environment practices, often passing strict orders. Thus, it has become necessary for the paper industry to improve its environment technologies.

Finance

In order to make the size of operations internationally competitive, investments are becoming very high. The industry will have to take recourse to international funds and overseas joint venture partnerships.

Outlook

The IMF report on India's economy is encouraging. Joint ventures with overseas partners are being put into practice. There has been a continuous improvement in the flow of foreign investment. In a survey conducted by a Japanese company, it was reported that India stood second on the list of countries preferred by Japanese companies for making new investments.

In a recent interview, the Finance Minister of India, Mr. P. Chidambaram, stated that the economy will become stronger as more sectors are opened to foreign competition. The large scale of capital goods in the first three years after the reform had caused apprehension that the domestic industry would suffer. Instead, the opening of the sector has resulted in its faster growth and has enhanced its competitiveness. The Minister believes that the same would be true for the still unopened and unreformed sectors.


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