The Hindu Business Line : Time paper industry went global

The Indian paper industry has considerable untapped potential. And low entry barriers make it attractive to new entrants; the sector is completely de-licensed and allows 100 per cent foreign ownership.

— U. Subramanyam

The Indian paper industry has had limited global linkages.

Naresh Gupta

India has the potential to emerge as a manufacturing hub for paper much as it is one for automobiles, auto-parts, and pharmaceuticals. Yet global MNCs and investors have overlooked Indian paper sector for long and have preferred other BRIC (Brazil, Russia, India, China) nations. The time is ripe now for them to explore opportunities in India.

Current status

Demand growth is saturated in the US, Europe and Japan even as it is vibrant in Latin America, Commonwealth of Independent States (CIS) and in Asia. Paper demand, primarily of cultural paper, has been dented by substitution from electronic modes of communication; packaging paper has been replaced by plastic in the industrialised world. In developing nations such as India, use of the Internet and other electronic modes of communication has not made deep inroads yet. The places that manufacture paper are also changing. The earlier centres of paper making — the US, Canada and Scandinavian countries — are slowly but surely losing out to Brazil, Chile, Indonesia and China.

global linkages

Only two or three Indian companies have sourced funds through foreign equity offerings or availed of debt from financial institutions such as the IFC and ADB.

In manufacturing, the Birlas were the first to have ventured into Kenya long ago. In the seventies, the Thapars with others promoted a large pulp company in Thailand from which they later exited.

They have now acquired a large pulp and paper mill with huge forestry concessions in Malaysia. The Aditya Birla Group has also acquired large rayon grade pulp mill in Canada and is pursuing plantation activity in Laos. Apart from these, the industry has been exporting small tonnages, 2.5 per cent of total production, to nearby countries in Saarc and West Asia.

On the other hand, the exposure of global paper companies to India has also been limited to marketing their finished paper in the Indian market. In manufacturing, the only example is of Sinar Mas of Indonesia having invested in a greenfield project of coated paper, which was later sold as it decided to concentrate on China.

Indian scenario

The Indian paper industry has considerable untapped potential. Its total production at 8 million tonnes and per capita paper consumption of around 7 kg may appear low. But even a modest increase of 1 kg per capita translates into 1.15 million tonnes of additional paper demand.

It is projected that domestic demand for paper would rise to around 20 million tonnes by 2020. On the basis of raw material use, the industry is classified into three segments: wood and bamboo (40 per cent); Bagasse and agri residues (30 per cent); and Waste paper (30 per cent). India is the only country to be using so many varieties of fibre in paper making. Indian paper manufacturing units have, by and large, shown better margins and return on investment than their counterparts elsewhere.

Import tariffs on paper products are being steadily reduced in recent years and are now pegged at 10 per cent for paper and at 5 per cent for project imports to the industry. India is deficient in fibre but large degraded land (100 million hectares), tropical climate, millions of unemployed youth and a pool of scientific and technical personnel are waiting to be harnessed . The industry has also been carrying on with outmoded technology. India offers many opportunities for investment in the paper sector:

Manufacturing: To tap into increasing paper demand, a greenfield project or a joint venture (JV) with an existing or new partner is a clear option. Paper demand is growing at a healthy rate of 8 per cent per annum due to positive changes in several key socio economic drivers . India is also becoming a hub for the global publishing and printing industry and needs high-quality paper to suit high-speed machines.

Forestry and plantation: Using degraded forest lands for commercial plantation, if allowed, can change the face of the industry. Large use of Clean Development Mechanism benefits could also be availed. Getting into plantation by setting up large labs to develop new native bio-engineered clones of pulp-wood with higher cellulose content and multiplication thereof through tissue culture are areas where investments would reap rich returns.

Consulting: Many small and mid-range paper companies requite technical help in managing their business. Their number is more than 700 and most of them are keen to upgrade their facilities but don’t know how to go about it.

Technology: A need exists for setting up pulp and paper machinery manufacturing facilities in India to meet the requirements of the subcontinent. Technology helps reduce usage of power, water, fibre and chemicals .

Distribution: Indian paper distribution is still dominated by six to seven layers. It needs to be de-layered to cut down the distribution costs.

India imports nearly 4 lakh tonnes of pulp, 20 lakh tonnes of recycled paper and about 2.5 lakh tonnes of finished paper annually. Investment in production facilities can reduce this import dependence significantly. Low entry barriers to the Indian paper sector also make it attractive to new entrants; the sector is completely de-licensed and allows 100 per cent foreign ownership.

(The author is an alumnus of IIM (A) and has a long association with the Indian paper industry.)

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