The future of Agrochemicals in India
29 Jan 2018
Agrochemicals are the chemicals that are used in agriculture, which includes chemical fertilizers, insecticides and herbicides. Most of the agrochemicals are a combination of two or more chemicals which have active ingredients that provide the desired effects. In addition, the inert ingredients stabilize or preserve the active ingredients which help in production. Agrochemicals play a crucial role in agriculture. Some agrochemicals are hazardous to the health of the workers and general public. However they can be used if proper precautions are taken. Agrochemicals are used across the World to improve and protect the crops as well as the livestock. Fertilizers are applied in order to obtain a higher yield from the crops which are protected from insects and diseases by the use of agrochemicals.
Agrochemicals are the largest and the most diverse group of chemical compounds and are also known as pesticides. They are mainly used for the improvement of crop yield and plant protection. Nearly about 30% of the potential food production valued Rs. 150 bn is lost due to insects, weeds, rodents, birds, plant pathogens and in storage. Hence the use of pesticides is very important. The pesticides industry plays a vital role in the agriculture sector. For a country like India, which is dominated by the agriculture industry, the agrochemical segment is of significant importance.
Agrochemicals have been associated with environmental damages. With the use of excessive fertilizers, there could be contamination of groundwater with nirate and this could make it unfit for consumption by humans or livestock. There is also a widespread contamination of the environment with different types of pesticides such as DDT, dieldrin, and aldrin. This is risky for humans and about one million pesticide poisonings have occurred globally each year resulting in 20,000 fatalities.
United States is the largest producer of agrochemicals globally, followed by Japan, China and India. Indian economy is agriculture oriented which makes the agrochemicals industry a very significant industry for the economy. India’s agro chemicals consumption is one of the lowest in the world with a consumption of just 0.58 kg per hectare as compared to US which has a consumption of 4.5 kg per hectare and Japan at 11kg per hectare. In India, the maximum share of pesticide consumption goes to paddy which is 28% followed by cotton which is 20%. With a constant rise in the population and the decreasing availability of land, the use of pesticides in India has to improve further. The bio pesticides market is expected to grow in the future with the support of the Government and an increase in the awareness about the use of environment friendly pesticides.
The Indian market of agrochemicals is fragmented in nature with more than 800 formulators. There is fierce competition with a large number of organized sector players and their share. With constant mergers and acquisitions, the large buyers are buying out the small manufacturers and increasing their share in the industry. Key market participants include United Phosphorus Ltd, Bayer Cropscience Ltd, Rallis India Ltd, Gharda Chemicals Ltd, Syngenta India Ltd, BASF India Ltd, etc. The market share of the large players depends on the introduction of new molecules and on the product portfolio. The top ten companies control about 80% of the market.
The biggest challenge for the agrochemical industry is the high research and development cost. To develop a new agrochemical molecule takes an average period of 9 years and costs approx. USD 180 million. In order to remain competitive, Indian companies need to focus on the challenges in building the capabilities which will help develop newer molecules in a cost efficient manner. Every company faces an issue with the research and development expenses, to develop new molecules; they need to invest a huge sum and a long period of time for the research.
With the increasing number of users, effective distribution through the retailers is essential in order to ensure the availability of the product. Companies have been directly dealing with the retailers by removing the distributor from the value chain and thereby reducing the cost of distribution as well as offering competitive prices to the farmers.
Impact of Demonetization
Prime Minister NarendraModi’s bold move of demonetization has led to a slowdown of the Indian agriculture sector and related industries like agro chemical industry. Keeping in mind the huge dependence of the farm sector on cash, the farmers may be adversely affected. Agricultural growth in India fell to 0.2% in 2014-15 and grew by not more than 1.2% in 2015-16, due to the lack of monsoon and back to back droughts. Farmers are unable to buy seeds and fertilizers as well as other agri inputs due to the lack of cash on hand. The demonetization is impacting the agro chemical industry adversely.
Impact of GST
With the rollout of the major tax reform, GST, there are two segments of agrochemicals with different tax rates. Chemical fertilizers are to be taxed at 12% and pesticides at 18%. This rate is higher than the Value Added Tax which was applicable before the rollout of GST. Further, a proposed 5% GST on road transport could further increase the retail prices. Most States did not levy any VAT on organic manure, micronutrients and bio fertilizers earlier but the 5% GST means an increase in retail prices of the minor fertilizers.
Pesticides are important in increasing the productivity in agriculture and in reducing the food losses. The pesticide products are taxed at 18% which was earlier taxed at 15%. Other agricultural inputs are given a different treatment, with seeds being exempt from taxation, fertilizers taxed at 5%, exclusive tractor components at 18%. The taxes on fertilizers and pesticides will lead to an increase in the prices of farm output.
However, these are early days for GST and it is expected that it will bring a balanced approach in the sector. In addition, the GST is also expected to bring the middle men in the organized sector and ensure respite to the farmers across the agriculture industry.
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