Economic analysis of the Indian paper industry

Abstract

The Indian paper industry has been significantly affected by the changes in the economic and policy environments. The industry has been completely de-licensed and prices are no more state controlled. Foreign companies are expected to set up their production facilities in India very soon. The forestry and environmental regulations have also contributed to the scarcity of raw material, and increase in the costs of manufacture. All these changes have had their impact on the competitiveness of the Indian paper industry. The industry has coped with these changes in a variety of ways. Some firms have changed their raw material mix by using alternate raw materials like bagasse and agricultural residue. Others have entered into long term agreements with producers of raw material to ensure a steady supply. On the other hand, firms have modified their output qualities and variety to suit the market. In cases where the increased cost of manufacture could not be transferred to the customer, the industry has been forced to reduce production, and/or diversify into other products within and outside the industry. ' This study is aimed at studying the competitiveness of paper manufacture in India. The research objectives put forth are (a) study the comparative advantage of paper manufacture in India, (b) assess the factors influencing industry performance that affect industry comparative advantage, and (c) study and typify the industry adaptation strategies. The Domestic Resource Cost (DRC) analysis was performed to evaluate the comparative advantage of the industry. Case studies of two large bagasse based firms that use the best technology in the country were undertaken. Industry level stochastic frontier profit functions and cost functions were estimated for assessing factors influencing the performance of the industry. Data was drawn from the computer databases of Prowess (CMIE) and Capital Line Ole (Capital Market), and other company sources. The performance was studied across the seven different Raw Material - Technology - Output (RTO) options that are feasible in the industry. Top management of 41 firms responded to a mailed questionnaire on industry perception of the changes in the industry environment, and the industry response to these changes. The industry adaptation strategies were studied using classification of the firms as Enactors, Sustainers, Controllers, and Diversifiers. The resource cost ratios indicate that the country enjoys significant comparative advantage in the manufacture of paper and paperboards and has no advantage in both printing and writing paper and newsprint. The profit and cost function analyses find that firm size is the most important variable in determining the profitability of the firms. We also found that bagasse based manufacture is significantly more profitable than other RTO options. Inefficiencies are significant and scale economies exist in the industry.

The industry has identified five major changes affecting the paper industry significantly: (l) reduction of customs duty for the import of paper from I40 per cent to 20 per cent in May I995; (2) removal of restrictions on the import of newsprint; (3) forest policy of l988 that curtailed raw material supplies to the industry; (4) strict implementation of the environmental Protection Act, 1986; and (5) DE licensing of the industry. These changes are perceived to significantly (a) increase the cost of manufacture; (b) enhance competition; (c) force higher quality and productivity; (d) decrease capacity utilization, and increase overall industry capacity; and (c) shift production to those based on alternate raw materials like bagasse. As regards adaptation strategies, the industry is found to be predominantly using the strategy of sustainers - adapting their own raw materials, processes and products to the changes in the industry environment. Agree-residue based mills are found to be consolidators, since they have to lock in their supplies to take care of seasonal variations. Very few large firms with enough financial and market power have managed to become enactors of the environment, whereas niche market operators like manufacturers of specialty paper are diversifiers. The study has significant implications for managers, investors, and policy makers interested in the paper industry. The study highlights the comparative advantage enjoyed in the manufacture of paper and paperboards, and brings out the lack of comparative advantage for the country to manufacture newsprint and printing and writing paper, and suggests that investments be made in bagasse based mills to produce paper and paperboards so that the industry becomes viable and internationally competitive. It has implications for the restructuring of the industry when competition from imports and foreign firms is felt by the domestic industry.