With incessant and nagging challenges of raw material availability, adherence to environmental norms, and competing with swiftly increasing cheaper imports, the Indian pulp and paper industry has the arduous target of creating 10,00,000 tonnes of integrated capacities in pulp, paper, and paperboard to meet the consumption demands, of course a daunting task without conducive policy environment. Does ‘Make in India’ take stock of challenging manufacturing conditions of this much vital industry?
Through Make in India, the Govt. is making a renewed push to create a self-reliant manufacturing base in the country and expects manufacturing share in GDP to rise to 25 percent by 2022. To grow at a rate of 9-10 percent over a three-decade period is a key challenge for India and a robust manufacturing sector is quite critical for this to happen. The Govt. therefore has identified 25 sectors that would get incentives-support and has promised to align policies to boost investments in them. The Govt. has brought in a number of structural reforms so far in view to meet various targets under Make in India initiative and many other reforms are underway.
The Govt. is making efforts both in augmenting domestic or indigenous manufacturing and in opening FDI in a very rigorous manner for foreign manufacturing companies to come to India. Moreover, tremendous employment generation potential has also been envisaged as part of Make in India. The government hopes to create 100 million new jobs by 2022.
However, the initiative and much of the reforms done or underway must address the industry challenges in real time and the same must be perceived the industry. Whereas some problems cut across the industry, many of them are industry-specific and it is, therefore, a must that structural and regulatory reforms should keep these specific challenges in mind to make the initiative really successful. Let’s see how the Indian paper industry and its challenges may be integrated into Make in India initiative by recording some views of the industry:
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The Paper Industry, Well-Positioned to Push ‘Make in India’ With Proper Policy Backing
Mr. A. S. Mehta, President, JK Paper feels that with around 1 tonne of integrated capacity to be created annually for the next 8 years, and with huge employment possibilities, the Indian paper industry makes a good case for ‘Make in India’. In his opinion, a concerted national policy framework addressing some persistent challenges as regards to raw material scenario, and rising paper imports, would do well for the paper industry.
Paper Mart: What does the Govt.’s ‘Make in India’ campaign mean for the Indian pulp and paper manufacturing sector?
A. S. Mehta: A picture of the demand for paper in India would provide a better perspective as how to align ‘Make in India’ with the paper industry. India’s consumption of paper is expected to increase from the current 16 million tonne per annum (mtpa) to at least 24 mtpa by 2024-25, assuming business-as-usual scenario, and could be even higher.
Out of current consumption of 16 mtpa, over 2 mtpa is being imported. So over the next 8 years, about 1 mtpa of integrated pulp, paper and paperboard capacity has to be created in India on an annual basis over current capacity to meet the growing demand.
More so, as the Indian pulp and paper industry provides direct employment to 5 lakh people, and indirectly to around 15 lakh, the industry would also be a vehicle to carry the mantle of Make in India. So, from the paper industry point of view, there is definitely a big case for Make in India, especially when the demand in the developed world is on the wane.
PM: Talking of execution, industry complains there hasn’t been any movement in the pulp and paper sector and that the industry has not been directly addressed through the program. Is it true? What are those bottlenecks that the industry wishes to see addressed cogently through a policy framework?
A.S.M: The industry has already made significant capital investments over the last 5-6 years to ramp-up capacities. But to make further investments, one has to bear in mind the viability of the invest-ments, which at present is impacted significantly by both availability and cost of raw materials, and escalating imports (of finished products).
As mentioned above, about 12.5 percent of the current demand is met by imports. This has further increased when imports from ASEAN nations, by virtue of zero duty under the Indo-ASEAN FTA have started to enter the Indian market in a big way. With RCEP negotiations underway, this would only grow manifold as China is also part of RCEP. This acts as deterrent for capacity expansion on a big scale, and imports could come to account for half of the domestic market in another 10 years.
As things stand at present, industry will be discouraged from further investments in capacities, especially Greenfield capacities, if right enablers are not in place.
PM: The Govt. is talking about structural reforms, some already done and some underway. Are these reforms in any way targeting industries like pulp and paper? Can you specifically name some of these reforms and comment their impact on your industry?
A.S.M: The govt., under the leadership of Mr. Narendra Modi has undertaken various structural reforms over the past 3 years. Most of the efforts have been geared towards improving the ease of doing business, which would enable us to be more competitive, whether it is in the areas of taxation, unhinging business from bureaucratic controls by moving to a single-window mechanism, more digitization, improving the welfare of farmers. But the most important of them all is a concerted effort to improve the creaking infrastructure so as to reduce the logistic costs, which is one of the primary reasons for our low competitiveness. But it would create an impact only in the medium term. We need some push for short term as well.
PM: Do you think Make in India program has been able to strike a balance between indigenous manufacturing and promoting foreign manufacturing base in India? Or, is it skewed more towards foreign MNCs through relaxing FDI norms? What more do you think should be done to boost our own domestic production base?
A.S.M: At present it looks more like the latter, whether we see in the sphere of mobile telephones, services or automobiles. FDI has nearly doubled over the last 3 years with the bulk of its digital economy comprising outsourcing, telecommunications, e-commerce, etc with no real manufacturing set-up being witnessed despite such big numbers (barring a few assembly lines in electronics/ mobiles) and mostly top-up funding in existing set-ups (automobiles, telecom etc.) and undergoing consolidation.
A clear demarcation needs to be made where the domestic players are in a position to utilize its wherewithal to make the next step, and where foreign investment is imminent. This will differ from industry to industry. As far as paper industry is concerned, we are quite capable to make the necessary investments, provided the returns are enough to meet the financial obligations. But at present, that is not feasible in view of lower margins due to cheaper imports from FTA countries where raw material cost is much lower.
PM: As is known, the pulp and paper industry is highly capital intensive? Do you think that relaxed credit norms also constitute, among other things, the ease of doing business? Has the Govt. done enough in this direction?
A.S.M: The overall disinflationary situation in the country has enabled RBI to carry out an accommodative monetary policy over the last 2 years, wherein policy rates have come down by 175 basis points since Jan 2015. Although the bank’s lending rate cuts were not commensurate, yet rates are lower. But with the developments elsewhere, most importantly US Federal Reserve ushering in rate hikes, interest rates has reached a nadir for the time being. So interest costs can’t go below this, and thus it is important to remain competitive in other areas too, especially in raw material costs.
PM: The pulp and paper industry has of late become tremendously technology intensive because of huge environmental compliance pressure. Do you think the Govt. could do more to facilitate the technology infusion in the industry by relaxing norms vis-à-vis machinery and technology import from outside?
A.S.M: Paper industry has remained on the technology curve, more so from the early 90s when advancements in printing technology in copier machines, with up gradation from liquid toner to dry toner and now digital printing, saw further evolution of premium quality grades of paper.
In the new paper machines that have come up over the last few years, we are already seeing broader widths, faster speeds and more automation and sophistication. Going forward, this trend will get further accelerated because of increasing competition as also the need to integrate the Indian industry in line with global trends.
Moreover, with the industry in the developed world, reaching saturation, it is an opportune moment for us to seek the better technologies available with them and move up on the overall technological radar. Here govt.-to-govt. initiatives will definitely give a fillip to the overall process. However, nothing visible has been done by the Government to facilitate the industry.
PM: Make in India is also seen as the answer to India’s unemployment puzzle and skill development has gained enormous traction with this initiative. Has the Indian paper industry been able to address unemployment and skill development as part of the initiative or as a direct consequence of the Govt.’s support?
A.S.M: As I have reiterated above, the Indian pulp and paper industry provides employment to about 20 lakh people (both direct and indirect), and with the industry expanding at about a similar rate to the growth of the economy, it is well positioned to address the job angle (an important part of Make in India).
As far as skill development is concerned, the industry encourages trainees, in every sphere, whether it is sales and marketing, finance or plant-level endeavours. Moreover, the Govt. is planning an initiative for skilling where every child will have an option to go for vocational education/training, after finishing ten years of schooling amongst other choices of humanities, science, commerce, technical education or medical education. This will greatly facilitate job-readiness among the youth.
PM: A policy framework on its own cannot be successful unless a broader ecosystem of robust logistics and supply chain system is in place. What does the Indian paper industry feel about this aspect and what improvements does it expect?
A.S.M: Our ability to compete with imports is hindered by the current state of infrastructure, where logistic costs are very high vis-à-vis our competitors from Asia. Moreover, in the absence of a dedicated industrial plantation program, which most of our competitors have, our costs of raw materials are higher, sometimes by as much as USD 60 to 100 per tonne, which also inhibits our competitiveness.
Indian paper manufacturers, over the last 25 years has been undertaking farm-forestry efforts at their own ends, and also invested huge amounts to upgrade and implement clean technology, product quality etc. with more investments also in the pipe line.
A concerted national policy is required to reap the full benefits. While a National Agroforestry Policy was announced in 2014, it seems a long way when it is actually implemented. This could have strong backward linkages with the farming community, and also help the Govt. in its quest to double farmer’s income over the next 5-6 years.
It would also help in greening India and would increase forest by 1 percent in 5 years time, if 2.5 million hectares is planted out of the degraded forest land, in addition to creating huge employment to tribal people.
Given the proper policy backing, and provision of a level playing field vis-à-vis imports, the paper industry is well-positioned to take forward the Prime Minister’s initiative of ‘Make in India’.
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No Specific Policy Movement for the Paper Industry Under ‘Make in India’
The Govt.’s ‘Make in India’ program doesn’t directly address the paper industry’s lingering concerns and has failed to spur any Greenfield capacity expansion in the industry, feels Mr. Saurabh Bangur, Vice Chairman, The West Coast Paper Mill Ltd. Lack of a concrete plan on the procurement of raw material is restricting the growth of the industry, he says.
Paper Mart: What does the Govt.’s ‘Make in India’ campaign mean for the Indian pulp and paper manufacturing sector?
Saurabh Bangur: ‘Make in India’ is an initiative through which the Govern-ment is encouraging the industries to create a self-reliant manufacturing capacity within India. If the campaign is to be taken in the context of the pulp and paper industry, there had been no specific policy movement in terms of major capacity creation in this sector in the last many years. Technically, this campaign holds no good for this sector. There has been no Greenfield expansion, but only a few Brownfield expansions have happened. Whether it is expanding existing capacity, having new capacity, building new sites or plants, no substantial action has taken place on part of the Govt. which is in the favor of pulp and paper industry.
PM: Talking of execution, industry complains there hasn’t been any movement in the pulp and paper sector and that the industry has not been directly addressed through the program. Is it true? What are those bottlenecks that the industry wishes to see addressed cogently through a policy framework?
SB: Indian Paper Manufacturers Association (IPMA) has been communicating this with the Govt. for the last two years. Any entrepreneur would like to grow their business and at the end expect a decent ROI. If there is no return on the investment, why would anyone invest? Presently, the industry is coping up with two major issues. The first major concern of the industry is the cheaper imports coming from the ASEAN countries that are putting pressure on our current sale prices and production. Industry is not able to get decent returns on investments in the existing capacity; that is why building up new capacities is absolutely out of question. Second challenge being the raw material issue, which hasn’t been addressed properly, makes the paper manufacturers worrisome. It is now high time that the Govt. addresses these issues seriously.
Sadly, lack of a concrete plan on the procurement of raw material is restricting the growth of the industry as on one side people talk about the paper industry cutting trees and at the same time the industry doesn’t get good supply of raw material at competitive rates. The industry has impaired supply chain vis-à-vis raw material and there is no visible backward integration happening in terms of industry-owned plantations. The industry does not have proper linkages for raw material support, which the big giants in our neighboring countries have. That is why their products are quite competitive as compared to the Indian manufacturers. There could be numerous challenges; but for this industry to be sustainable, the Govt. must frame policies in favor of local manufacturers.
Wood, which is our main raw material, is again a sensitive matter where farmers are involved. The industry has collectively come out with a model to have a collaborative understanding with the Forest Development Corporations (FDC) to use degraded forest lands in respective states, where both the mills and the department can seek advantages together. We don’t want ownership of the land; we just want a secure produce on them. We want plantations to be grown for wood on the land and we shall pay a remunerative price of that wood. Just to take this thing forward, the Govt. has even come out with a new forest policy. A draft paper of this policy was given to the industry, where certain views were taken from us. I presume that Govt. is beginning to take notice of our sordid raw material scenario and has started working on that. When we last met with the MoEF minister, we put the aforementioned partnership model. We are expecting a positive response as we have been asked to lock our feedbacks.
PM: The Govt. is talking of structural reforms, some already done and some underway. Are these reforms in any way targeting industries like pulp and paper? Can you specifically name some of these reforms and comment their impact on your industry?
SB: Definitely, there are certain reforms brought by the Govt. which are generic in nature like GST. GST is the talk of the town and the manufacturing units as a whole will extract benefits out of it, which includes paper industry among the beneficiaries. But, talking about reforms concerning particularly pulp and paper industry, there has been nothing as such. An immediate action to arrest cheaper imports from the ASEAN countries is very much essential. As per DGCIS statistics on March 2017, imports from ASEAN countries in the last financial year has been Rs. 1332 Cr. as compared to Rs. 782 Cr. in the financial year ending March 2016. This is a jump of almost 70 percent in a year.
We are going to propose to the Commerce Ministry on imposing some sort of safeguard duty on the cheaper imports. We will explain how the industry is bleeding and how cheaper imports are making our profit margins suffer. We are actually building up a case right now, and I am sure the Govt., after setting up an enquiry in this matter, will impose safeguard duty within couple of months. On the top-line aspect, we will definitely be able to get some relief. As far as raw material concern is there, these type of issues are long term ones.
Coming back to the point, I would like to state candidly that the reforms pertaining to pulp and paper industry haven’t been initiated as yet.
PM: Do you think Make in India program has been able to create a right policy atmosphere like the one existing in other countries having strong manufacturing base? What more do you think should be done to boost our own domestic production base?
SB: Make in India might be applicable in many sectors in India, but it is holding no good for the pulp and paper sector as aforesaid.
Today, setting up a unit outside India is more beneficial than setting one here. Having a new unit in any of the ASEAN countries could give access to cheaper raw materials, coal, manpower, finance and even favorable land laws. We are putting efforts in talking to the Govt., addressing all these issues of the industry.
We, paper manufacturers want to expand in India because there is a large consumption base in the country. We all see that demand is here in India that is why import is making its way. The installed capacity of the industry is currently stagnated at around 14 million MT per annum and the entire domestic demand which is estimated at approximately 6 percent p.a. shall be catered by imports volume. Why can’t the Indian paper manufacturers expand capacity and be a part of the Make in India campaign? The question remains unanswered.
PM: As is known, the pulp and paper industry is highly capital intensive? Do you think that relaxed credit norms also constitute, among other things, the ease of doing business? Has the Govt. done enough in this direction?
SB: Indian pulp and paper sector has been high capital intensive and will remain so in future as well. Not only in Indian context, but even overseas, paper industry is conceived to be a high capital intensive. I guess nothing can be done on that ground but, of course, access to cheaper source of finance would be a major relief to the industry for making large investments. In the past, the paper industry has tapped cheaper sources of finance for funding the capital expansion programmes, in the form of loans whether domestic or overseas.
Yes, we are capital intensive and there are many facilities given to the Indian entrepreneurs where we can borrow money from outside. Govt. can look into having easier/flexible norms for selected corporates having healthy cash flows to get access to cheaper loans from overseas for their capex/ working capital requirements.
PM: The pulp and paper industry has of late become tremendously technology intensive because of huge environmental compliance pressure. Do you think the Govt. could do more to facilitate the technology infusion in the industry by relaxing norms vis-à-vis machinery and technology import from outside?
SB: You have actually hit the nail. A lot of technological innovations are required in order to meet the challenges. There are some environmental norms, which are not practical, and we have been communicating to the Govt. for a solution, for example, the zero liquid discharge (ZLD). The Govt. wants us not to discharge water which is practically impossible for the pulp and paper industry. The Govt. has stringent norms for air pollution as well. Yes, the norms are getting stricter over the years, and the industry is trying to adhere as far as possible.
PM: Make in India is also seen as the answer to India’s unemployment puzzle and skill development has gained enormous traction with this initiative. Has the Indian paper industry been able to address unemployment and skill development as part of the initiative or as a direct consequence of the Govt.’s support?
SB: If you talk about curbing unemployment with Make in India campaign for the pulp and paper industry, it is not doing any good even indirectly.
PM: A policy framework on its own cannot be successful unless a broader ecosystem of robust logistics and supply chain system is in place. What does the Indian paper industry feel about this aspect and what improvements does it expect?
SB: Logistics is an important challenge. In order to make 1 tonne of paper, we require 6 tonnes of backend volume; we require 4 tonnes of wood and 4 tonnes of coal and chemicals. Transporting this packing material etc. etc. huge amount of backend volume to the factory and the finished paper goods to the market require a robust logistical infrastructure in place, scenario of which is not very encouraging in larger part of the country in terms of road-rail-shipping infra. In such scenario, all sorts of logistic efforts would be welcome by the paper industry. I am sure, with a robust system, a high rotation cycle of transportation, and the location of the mills nearer to the raw materials, can help the industry gain huge benefits out of it.
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The Paper Industry, Not a Focus Area
Mr. Ved Krishna, Head of Strategy, Yash Papers Ltd. doesn’t feel much buoyant about the ‘Make in India’ program and feels that the Govt. has not provided the due recognition to this industry and the current scenario is also not so enabling for the industry to rise to global standards.
Paper Mart: What does the Govt.’s ‘Make in India’ campaign mean for the Indian pulp and paper manufacturing sector?
Ved Krishna: In my understanding, pulp and paper is not a focus area for the government. India is resource starved and the industry needs resources. The current situation does not enable the industry to rise to world standards and hence it is unlikely that the government would provide due recognition.
PM: Talking of execution, industry complains there hasn’t been any movement in the pulp and paper sector and that the industry has not been directly addressed through the program. Is it true? What are those bottlenecks that the industry wishes to see addressed cogently through a policy framework?
VK: In my understanding, an environmentally fragile country like India needs to be careful when creating a macro-economic climate for a certain Industry. There would be few policy recommendations. First, we need to incentivize waste paper collection and maximize the same. Segregation at source needs to be ensured. Secondly, we need to avoid burning of agro-residues whether straws or bagasse. They are a poor fuel and a better fiber. Same needs to be made available to the industry. Thirdly, we need to promote agro forestry, provide industry with degraded forests and enable soft loans to farmers for social forestry. Lastly, we need to invest in technologies that enable utilization of various fibers that get wastes such as jute, banana, hemp, rice straw etc.
PM: The Govt. is talking about structural reforms, some already done and some underway. Are these reforms in any way targeting industries like pulp and paper? Can you specifically name some of these reforms and comment their impact on your industry?
VK: I am not aware of any significant reforms for the pulp and paper industry. General reforms in taxation (GST) are desperately needed and would create a much better business environment
PM: Do you think Make in India program has been able to strike a balance between indigenous manufacturing and promoting foreign manufacturing base in India? Or, is it skewed more towards foreign MNCs through relaxing FDI norms? What more do you think should be done to boost our own domestic production base?
VK: The campaign has not helped either. The base infrastructural changes would need to be conducted to make the scenario conducive for long term investment. Fiber availability, transportation, shipping, energy, industrial infrastructure and land reforms would be necessary.
PM: As is known, the pulp and paper industry is highly capital intensive? Do you think that relaxed credit norms also constitute, among other things, the ease of doing business? Has the Govt. done enough in this direction?
VK: The investors always have many options and they would invest where there is safety and growth. Our banks are burdened by huge NPA’s and bureaucracy. There are pressures on them to lend in sectors which are risky, hence it becomes difficult for them to prioritize a low return sector like ours. We have to make a significant change in our thinking if we are to see lasting change. We have to truly free the credit sectors from the clutches of the government and let them operate like a free business like any other. Credit would automatically flow towards sectors that show promise.
PM: The pulp and paper industry has of late become tremendously technology intensive because of huge environmental compliance pressure. Do you think the Govt. could do more to facilitate the technology infusion in the industry by relaxing norms vis-à-vis machinery and technology import from outside?
VK: The priority needs to be to protect the environment; however, the approach needs to be more collaborative rather than instructive. There needs to be a long term strategy created along with industry, technologists and policy makers. It needs to list the targets along with technologies and enabling finance for the same. There needs to be a cohesiveness of thought and implementation. The board needs to play the role of an enabler and facilitator rather than just of implementer.
Our joint focus needs to be the environment and we need to embrace technology from all over the world. We cannot afford to adopt a protectionist attitude.
PM: Make in India is also seen as the answer to India’s unemployment puzzle and skill development has gained enormous traction with this initiative. Has the Indian paper industry been able to address unemployment and skill development as part of the initiative or as a direct consequence of the Govt.’s support?
VK: We need to stop playing numbers and truly start looking at the rot at the foundation. There need to be sweeping reforms to our education pedagogy and delivery else we are sitting on a time bomb. The country has a huge young population that is completely unemployable. We have work culture and ethics that are continuously becoming weaker. We need to shift our focus to quality rather than just quantity and move quickly. At present we do not have a single institute in the country that trains operators. Our operators are poorly skilled and lack deep understanding of the process. We need to get together to bring changes. We need to appreciate that it is people that are going to create all the difference.
PM: A policy framework on its own cannot be successful unless a broader ecosystem of robust logistics and supply chain system is in place. What does the Indian paper industry feel about this aspect and what improvements does it expect?
VK: Absolutely, it is difficult to compete at a global level with the current infrastructure and attitudes. We need to build high speed freight corridors for within the country and exports. We need to eliminate the bottlenecks that hamper the speed of transactions and execution. We need to ensure we have a straightforward system to move goods and materials.
