India's pulp and paper sector

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PESTLE Analysis

PESTLE analysis is a useful tool for understanding the industry situation as a whole, and is often used in conjunction with a SWOT analysis to assess the situation of an individual business.

PESTLE stands for “Political, Economic, Sociological, Technological, Legal and Environmental” factors. The questions to ask are:

§ What are the key political factors likely to affect the industry?

§ What are the important economic factors?

§ What cultural aspects are most important?

§ What technological innovations are likely to occur?

§ What current and impending legislation may affect the industry?

§ What are the environmental considerations?

Political Factors

The Political factor refers to the governmental policies which are much influenced by the economic situation in a country. It is a macro aspect of analyse which deal with major changes to the government policies of a country. It has great influence to the business outlook and confidence. Political factors often comprises of

- Current taxation policy

- Future taxation policy

- The current and future political support

- Grants, funding and initiatives

- Trade bodies

- Effect of wars or worsening relations with particular countries

Economic factors

The Economic factor is an area where macro economic environment can affect the outlook and competitiveness of any business sectors in the country. Economic factors comprises of

- Overall economic situation

- Strength of consumer spending

- Current and future levels of government spending

- Ease of access to loans

- Current and future level of interest rates, inflation and unemployment

- Specific taxation policies and trends

- Exchange rates

Social factors

The Social factors refers to the cultural aspects of the country. Social factors comprises of

- Demographics
- Lifestyle patterns and changes
- Attitudes towards issues such as education, corporate responsibility and the environment
- Social mobility
- Media views and perceptions
- Ethnic and religious differences

Technological factors

Technological factor is more tangible and easy to validate. It includes ecological and environmental aspects, technology incentives such as Research & Development incentives, automation reinvestment, high capital setup and rate of technological change in certain business. The technological factors include:

- Relevant current and future technology innovations
- The level of research funding
- The ways in which consumers make purchases
- Intellectual property rights and copyright infringements
- Global communication technological advances

Legal factors

Legal factors often comprised of

- Legislation in areas such as employment, competition and health & safety
- Future legislation changes
- Changes in European law
- Trading policies
- Regulatory bodies

Environmental factors

Environmental factors includes

- The level of pollution created by the product or service
- Recycling considerations
- Attitudes to the environment from the government, media and consumers
- Current and future environmental legislative changes.

Paper Industry in India

Paper industry in India is the 15th largest paper industry in the world. It provides employment to nearly 1.5 million people and contributes Rs 25 billion to the government's kitty. The government regards the paper industry as one of the 35 high priority industries of the country.

Paper industry is primarily dependent upon forest-based raw materials. The first paper mill in India was set up at Sreerampur, West Bengal, in the year 1812. It was based on grasses and jute as raw material. Large scale mechanized technology of papermaking was introduced in India in early 1905. Since then the raw material for the paper industry underwent a number of changes and over a period of time, besides wood and bamboo, other non-conventional raw materials have been developed for use in the papermaking. The Indian pulp and paper industry at present is very well developed and established. Now, the paper industry is categorized as forest-based, agro-based and others (waste paper, secondary fibre, bast fibers and market pulp).

In 1951, there were 17 paper mills, and today there are about 515 units engaged in the manufacture of paper and paperboards and newsprint in India. The pulp & paper industries in India have been categorized into large-scale and small-scale. Those paper industries, which have capacity above 24,000 tonnes per annum are designated as large-scale paper industries. India is self-sufficient in manufacture of most varieties of paper and paperboards. Import is confined only to certain specialty papers. To meet part of its raw material needs the industry has to rely on imported wood pulp and waste paper.

Indian paper industry has been de-licensed under the Industries (Development & Regulation) Act, 1951 with effect from 17th July, 1997. The interested entrepreneurs are now required to file an Industrial Entrepreneurs' Memorandum (IEM) with the Secretariat for Industrial Assistance (SIA) for setting up a new paper unit or substantial expansion of the existing unit in permissible locations. Foreign Direct Investment (FDI) up to 100% is allowed on automatic route on all activities except those requiring industrial licenses where prior governmental approval is required.

Growth of paper industry in India has been constrained due to high cost of production caused by inadequate availability and high cost of raw materials, power cost and concentration of mills in one particular area. Government has taken several policy measures to remove the bottlenecks of availability of raw materials and infrastructure development. For example, to overcome short supply of raw materials, duty on pulp and waste paper and wood logs/chips has been reduced.

Following measures need to be taken to make Indian paper industry more competitive:

* Improvements of key ports, roads and railways and communication facilities.

* Revision of forest policy is required for wood based paper industry so that plantation can be raised by industry, cooperatives of farmers, and state government. Degraded forest land should be made available to the industry for raising plantations.

* Import duty on waste paper should be reduced.

* Duty free imports of new & second hand machinery/equipment should be allowed for technology up gradation.

Outlook

Outlook for paper industry in India looks extremely positive as the demand for upstream market of paper products, like, tissue paper, tea bags, filter paper, light weight online coated paper, medical grade coated paper, etc., is growing up.

PESTLE ANALYSIS OF THE PAPER INDUSTRY

The pulp and paper sector presents one of the energy intensive and highly polluting sectors within the Indian economy and is therefore one of the main particular interest in the context of both local and global environmental discussions. Increases in productivity through the adoption of more efficient and cleaner technologies in the manufacturing sector will be most effective in merging economic, environmental, and social development objectives.

POLITICAL FACTORS AFFECTING THE PAPER INDUSTRY

Policy

India's pulp and paper sector has been protected by government policy for more than three decades. Controls on production, distribution and prices impeded the growth of the industry substantially. During the paper shortage in the 1970s and further on in the 1980s the government actively supported the venture into the paper sector in providing financial incentives to technocrats and entrepreneurs through financial institutions (Datt and Sundharam, 1998). To protect the rising small paper mill industry and ensure their existence along with larger, more economic paper mills the government gave a variety of excise concessions and reliefs. In 1974, the Government of India enforced paper manufacturers to produce white paper and supply it at a concessional rate to the educational sector and to the governmental departments. Fiscal levies accounted to as much as 35%-40% of the selling price adding to the already high-cost based prices of paper. The government additionally established high import duties on imported paper and paperboard to reduce import dependency. Export of paper was banned during the whole period. (1998)

The Government of India reacted on the lasting stagnation and financial problems of the sector in the 1980s in removing price and distribution controls on white printing paper in 1987. This allowed the paper industry to receive profitable returns on paper products and thus provided incentives to increase capacity utilization and establish new capacity. Also, the Government of India exempted paper units from excise duty, provided they used 75% of non-conventional raw materials for production. However, this exemption was abolished again in the 1990s. The concept of broad-banding has been extended to paper products since 1985-86. This implies that firms now experience the freedom to manufacture any variety of paper within the overall limit of licensed capacity (1998).

Since 1992, the government has taken further measures to improve the situation of the paper sector. They include excise rebate to small units, abolition of customs duty on the import of paper grade pulp and wood chips, removal of statutory control over production, price and distribution of white printing paper and provision of infrastructural support by increased allocation of coal and wagons. While import duty on paper in 1991-92 was as

high as 140% it has since gradually been reduced from 65% to 40% and further to 20% in May 1995. Yet, customs duty on inputs and intermediates have not been brought down on 11 a similar scale. Import of wood pulp for the production of newsprint and newsprint products are allowed on a more flexible scale. Moreover, obligations regarding licensing and excise duty have been alleviated. While the Monopolies and Restrictive Trade Practices Act (MRTP ACT) from 1991 abolished industrial licensing for almost all industries, the paper and newsprint industry except the bagasse based units has not been exempt yet. Reasons for continued licensing of these industries were given as: security and strategic concerns, social reasons, hazardous chemicals and environmental impacts.

Growth of paper industry in India has been constrained due to high cost of production caused by inadequate availability and high cost of raw materials, power cost and concentration of mills in one particular area. Government has taken several policy measures to remove the bottlenecks of availability of raw materials and infrastructure development. For example, to overcome short supply of raw materials, duty on pulp and waste paper and wood logs/chips has been reduced.

ECONOMICAL FACTORS AFFECTING THE PAPER INDUSTRY

Pulp and Paper Production in India

Although per capita paper consumption in India is very low compared to other countries the paper industry holds a considerable share in manufacturing production. Today more than 380 small and big paper mills produce a variety of different paper, paperboard as well as newsprint products. Cultural paper constitutes the biggest share in production with 41% (in 1991), followed by kraftpaper with a share of 27%, paperboard with 17%, newsprint with 12% and specialty paper at 3% . Installed production capacity increased substantially from 0.77 million tonnes2 in 1970-71 to 3.95 million tonnes in 1994-95. Production, however, has not increased accordingly. While in 1970-71 production ran at almost full capacity, in 1994-95, only 2.51 million tonnes of paper and paper board were produced. Capacity utilization had decreased from 99% in 1970-71 to a low of 60% in 1992-93 and slightly increased again to 64% in 1994-95.

Size, type and quality of the paper producing units are very diverse. As of 1995, more than 50% of paper and paper board products were produced in only 38 paper mills. The average size of a paper mill in India was 10,400 tonnes per year (tpa), compared with 85,000 tpa in Asia and about 300,000 tpa in Europe and North America. About two thirds of India's paper mills have a capacity of less than 18,000 tpa (Meadows, 1997). Large

mills are defined as mills with an installed capacity exceeding 20,000 tpa. Medium size mills have a capacity between 10,000 tpa and 20,000 tpa while small mills are defined as mills with a capacity of less than 10,000 tpa. According to this definition, only 48 large mills holding a share of 52% of total capacity were counted in India in 1990. The range of size within this category varied considerably, between 20,000 tpa and more than 100,000 tpa. Large mills account for nearly 90% of the cultural paper production.Small and medium size paper mills became important when due to a severe paper shortage in the early 1970s the government promoted the immediate establishment of small, readily available paper units. This following cheap second hand technologies were imported that could be set up in any part of the country. As a result of the paper shortage and overallgovernment pricing policy the small and medium sector with more than 300 paper mills accounted for almost 50% of installed capacity and production in 1992. They produce primarily low quality paper such as kraftpaper and paperboards from recycled paper and various agro-fibers. Yet, the small units suffer from high production costs, uneconomic operation, low quality and negative impacts on the environment. About 150 small mills are currently closed or sitting idle. Already old when imported the units have further degraded since, which has led to the current situation of low productivity, low efficiency, excessive resource consumption, obsolete technologies, capacity underutilization and low scale of operation. International competition and the high quality and low production costs of imported paper will also force many small mills to close. Furthermore, most small and medium size pulp and paper mills cannot economically provide chemical recovery and pollution control systems. Therefore, they are highly polluting industries contributing substantially to the overall level of emissions and environmental problems.

Demand for paper and paper products has continuously been increasing over time. Consumption of paper and paper board equaled 1.2 million tonnes in 1980-81 and increased to 2.6 million tonnes in 1994-95. This trend is expected to be maintained in the future. Per capita consumption of paper, in 1995, was one of the lowest in the world. Nevertheless, production today as in the past could not meet demand. Imports accounted for about 7% of consumption in 1980-81. With the increase of capacity through small mostly agro-based paper mills in the early 1980s, imports of paper and paper board decreased to only 2% of consumption in 1985 and to less than 1% in 1990-91. In 1994-95, however, they reached up again to over 10%. Shortage of newsprint has been even higher both in the past and today. On average, about 0.2 million tonnes of newsprint (about 40% of consumption) had to be imported in the last few years.

Meeting this rising demand will provide a major challenge to the Indian pulp and paper sector. The industry will have to undergo significant modernization and expansion processes. Existing mills will have to renovate and modernize in order to optimize capacity utilization. During this process small agro-based mills are most likely to not survive. They will have to close down due to incapability to meet environmental standards, to operate on economies of scale and to compete against larger agro-based mills for raw materials. Small recycled fibre-based mills are more likely to sustain market forces in adopting measures to cut production costs by importing waste paper or pulp. However, their existence crucially depends on the overall development of the international market price for these materials.Most likely these prices will increase as demand for wastepaper increases worldwide, and wastepaper recovery rates are already very high in many developed countries. Medium agro/recycled fibre-based mills are expected to possess cost effective potentials for both modernization and expansion. Similarly, large integrated mills have a high potential to undergo the needed modernization and expansion restructuring. Expansion, however, can only be based on forest material to the extent of 25% according the guidelines issued by national forest policy in 1989. They will thus need to mainly be based on recycled fibres, purchased pulp or dedicated forest management.

SOCIAL FACTORS AFFECTING THE PAPER INDUSTRY

Linked to the economic factors above social changes have significantly impacted the paper industry in relation to changing demographics in terms of the customers it targets. As such then changes in customer's needs and preferences for quality paper products and changing preference towards the paper rather than fiber or plastic has increased the pace of the demand in terms of meeting these needs. Increased globalization arguably has led to customers demanding faster responses to their needs creating much more competitive business fields attempting to satisfy these desires. The industry is not only about technology but about pictures illustrating the industry attempt to relate to the lifestyles of consumers. This is because customers have become more environmental sensitive as well as technique and quality orientated as a result of higher educational levels and income levels creating much more discerning customers in relation to these.

The sociological context of human resource has been a major influence. Flexibility in terms of labor in Indian paper industry has been mainly achieved by enlarging the scope of tasks and a relaxation of organizational boundaries within the business industry. As a result It provides employment to nearly 1.5 million employees in India to meet the growing demand for paper. Paper manufacturers are producing white paper and supply it at a concessional rate to the educational sector and to the governmental departments as well as per regulation given by the government.

TECHNOLOGICAL FACTORS AFFECTING THE PAPER INDUSTRY

Currently, governmental as well as sector initiatives focus on overcoming the acute raw material constraints, implementing and adopting better technologies, increasing production, productivity and efficiency, expanding to economies of scale and decreasing environmental effluents. Various new technologies are entering the Indian market that support these movements.

Presently, large paper mills are more efficient, using better and more modern technologies and appropriating economies of scale. Additionally, they provide chemical recovery facilities which reduce both emissions and external energy requirements. However, the large paper mills also face severe basic problems such as high production costs, raw material constraints and low productivity. Overall performance has been best in medium size firms with regards to average profitability

LEGAL FACTORS AFFECTING THE PAPER INDUSTRY

The abolishment of customs duty on imports of paper grade pulp and wood chips was accompanied by a sharp rise in international prices of wood pulp and waste paper in 1994 that escalated the costs of production considerably. Many, particularly small paper mills cannot compete in the market any longer and have to either reduce production or go out of business.

Indian paper industry has been de-licensed under the Industries (Development & Regulation) Act, 1951 with effect from 17th July, 1997. The interested entrepreneurs are now required to file an Industrial Entrepreneurs' Memorandum (IEM) with the Secretariat for Industrial Assistance (SIA) for setting up a new paper unit or substantial expansion of the existing unit in permissible locations. Foreign Direct Investment (FDI) up to 100% is allowed on automatic route on all activities except those requiring industrial licenses where prior governmental approval is required. Environmental regulations have been set up following increasing environmental impacts in the line with rapid industrialization as well as greater awareness of environmental protection and ecological balances. The Environmental Protection Act was implemented and a Central Pollution Control Board established to set up discharge standards that should be enforced by State Pollution Boards. The standards have become more stringent over time. Since 1989 even small paper mills have to follow discharge standards in the form of minimal standards regulating liquid, air and solid waste discharges.

ENVIRONMENTAL FACTORS AFFECTING THE PAPER INDUSTRY

Raw Material Constraint

Regarding the use of raw materials in India one can categorize three types of mills: forest based mills, agro waste/residue based mills and recycled fibre based mills. In 1992, forest based raw materials account for about 49% of total raw material inputs for paper, paper board and newsprint production, while the share of agricultural residues and wastepaper amount to 29% and 22% respectively (Sharma et al., 1998). The consumption share of forest based materials has been declining over time and is expected to further decrease to 47% by 2000. The share of agricultural residues shows a steadily increasing trend from 1980 to today and is expected to further rise in the future. At the same time wastepaper use which has risen from 13% in 1985 will approximately hold its share. The small paper mills set up in the early seventies almost exclusively use agro waste/residues as raw materials for paper production. Large mills, so far, have mainly been based on forest material for paper production. This includes bamboo, hardwood and eucalyptus. While agro waste/residues such as rice straw, wheat straw, etc. are relatively short cycled regenerative and abundant, the availability of forest based raw material is rather limited.

Reduction of forest material consumption:

With the implementation of central and state government policy towards forests protection and forestation, pulp and paper mills now have to take responsibility for the reduction of forest material consumption and forestation efforts. The government is encouraging the industry to create plantations on degraded forest and waste land (dedicated forest program). The overall constraint of raw materials will force the paper industry in future to rely more and more on imports of pulp or final paper products. To overcome the raw material shortage the government has liberalized the import of raw materials and given excise concessions for the use of non conventional raw materials.

Environmental Impact

The pulp and paper industry is a chemical process industry with major impact on the environment. The potential pollutants from a pulp and paper mill can be classified into four categories: (1) liquid effluents, (2) air pollutants, (3) solid wastes and (4) noise pollution.

The environmental problems faced by large and small paper mills are entirely different. Pollution control is more difficult for small and medium size agro-based units. Chemical recovery in these units is not economically viable and therefore black liquor and lime sludge are not being burned for heat recovery. It is estimated that a 30 tpd small paper mill 10 can be almost three times as polluting as an integrated paper mill of 200 tpd.

For the same reason as wastepaper production requires substantially less energy than other processes its environmental impact is also much lower. As shown in Sharma et al. (1998) water pollution in the form of wastewater is up to 90% lower compared to wood and agro-based production. Solid waste from wastepaper production is shown to amount to only a tenth of that from agro-based production. The type and quantities of solid waste generated differ considerably across mill types.

Stricter environmental regulations added to the constraint on raw materials. As mentioned above programs such as the dedicated forest program were implemented implying increasing costs for firms to ensure sufficient availability of raw materials. Furthermore, environmental regulations regarding air, water as well as solid waste effluents forced many small paper mills to close down. Small and medium size pulp and paper mills very often cannot economically provide chemical recovery facilities. They therefore suffer from higher emissions as well as higher external energy requirements since recovered chemical and waste products can effectively be used for cogeneration of steam and electricity. The decomposition analysis allows to gain further insights on the contribution of both input factors and productivity change to output growth.

Conclusion

In this paper, we analyzed the India's pulp and paper sector from various angles. We developed economic as well as engineering indicators for technological change and political, social, legal and also the environmental factors. We discussed our findings within a broader context of structural and policy changes in the sector. The economic analysis showed that productivity has decreased over time with a bias towards increased use of material over labor and capital inputs. The decrease was mainly due to the increased number of small and less productive units that were set up following the acute paper shortage in the early 1970s. In the sub period of 1982 to 1990 along with the establishment of larger plants as well as first liberalization measures productivity showed increasing though fluctuating trend. Yet, since 1990, the sector has suffered a tremendous downfall in accordance with overall economic recession.

The paper sector has been marked by continuous shortages in supply of various products, especially white printing paper and newsprint. Meeting future demand, which is expected to increase considerably, will continue to be a challenge as major expansion and modernization efforts would have to be undertaken while raw materials scarcity prevails and price development on international markets is unfavorable to the industry.

Future production has to be economically viable and environmentally sound and needs to be more efficient in terms of resources use and production. As major policy changes have been implemented in the 1990s to overcome the acute problems in the paper sector. We further pointed out low cost potentials for reducing environmental pollution and improving overall plant productivity. However, the implementation of initiatives towards energy efficiency is being hampered by barriers both of general and process specific nature occurring at the macro and micro level of the economy. Lack of information about potential savings and existing technologies are among the barriers. Energy and environmental audits could substantially help overcome these barriers. The analysis reveals that energy policies in general and price-based policies in particular are efficacious for overcoming these barriers in giving proper incentives and correcting distorted prices. Through the removal of subsidies energy prices would come to reflect their true costs, while environmental taxes could be imposed to internalize the external costs (including environmental costs).

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