Paper Industry: Budget Expectations

The Indian paper industry, estimated at about Rs 25,000 crore, is currently facing input pressures that have arisen due to the shortage of coal and pulp in the country. The industry has seen a drop in its operating margins with many companies posting consecutive losses over the last few quarters. The industry does not enjoy the status of a priority sector and hence the coal problem is one that needs to be seen with serious concern.

The paper and paper board products are growing moderately at the rate of about 7-8 per cent. The key growth drivers in the sector are the growing literacy rate in the country as well as the growth of the education sector. Also, with the growth of the industrial sector, paper board products have also reflected a good rate of growth with stationery and marketing & advertising products coming into favour.

Currently the industry is of about 10 million tonnes which is expected to double in 2020 and quadruple in 2030, thus leading to a compounded annual growth rate of about 8 per cent. This growth rate however would get affected as there are some issues to be addressed.

Currently the basic custom duty is 10 per cent. Indonesia and China enjoy huge export incentives. The US and EU have imposed heavy anti-dumping duties on the import of paper from these countries as a reason of which the Indian paper industry has become vulnerable to  imported paper from these countries. India is a raw material-deficient country as far as wood pulp, wood chips, etc are concerned.

These wood-related raw materials are quite costly and the current custom duty of 10 per cent is not beneficial for the sector. Besides, since paper is a non-core sector, coal requirement is also met through imports. Coal, due to high demand, has become very expensive and hence any import of the same has been impacting the profitability of the companies. The current import duty of over 5 per cent looks very unfavourable for the sector.

In the last budget the excise duty on paper and paper board was increased from 4 to 5 per cent while the basic custom duty was retained at 10 per cent. The custom duty on waste paper was reduced from 5 to 2.5 per cent. The budget was seen as positive by the industry. However, the stocks have not reflected a robust performance on the bourses. Most of the paper stocks have fallen, thereby indicating that whatever was done was not enough.

On the back of this the paper industry has put in the following demands:

• In order to insulate the domestic paper manufacturers from the Chinese paper manufacturers, the industry has requested the government to retain the basic customs duty at 10 per cent and re-introduce special additional duty (SAD).
• The industry is also seeking zero per cent duty on the import of raw materials like wood chips, wood pulp, etc.
• As the paper industry does not enjoy the status of the priority sector the government should make coal imports duty-free.
• Since the plant and machinery get obsolete in a short span of time, the depreciation rates should be restored to the earlier rate of 25 per cent.
• Excise duty on paper and paper board was increased to 5 per cent in the last budget. The government should restore the duty at the earlier level of 4 per cent.

Our Opinion

We believe that three of the demands are quite meritorious and should be considered by the government.

• The competition from the Chinese manufacturers is stiff in the manufacturing segment. With the paper industry being impacted by environment issues, energy shocks and currency fluctuations, we believe that a level playing field for the domestic players should be provided. This will also result in revenue receipts for the government.
• There is quite a big scarcity of raw materials like pulp and wood and as a reason of this many companies are operating at lower capacity utilisations. We believe that the duties on imported raw materials like wood chips, wood pulp, etc should be either removed or lowered. This will help this industry to grow at a little faster rate and also fight the imported paper manufacturers.
• The domestic coal production this year has not been very robust. Besides, new thermal capacities are being added which will result in more coal shortage in the domestic space. As such, the duty on imported coal should be removed as it will help the companies to reduce their input costs and remain profitable.