What does India's reduction of MDI tariffs mean?

On July 23rd, indiabudget.gov reported that India will reduce import tariffs on diphenylmethane diisocyanate (MDI) by 2.5 percentage points to 5.0% starting from July 24th, and plans to review the country's overall tariff structure over the next six months.

What does this tax rate reduction mean? We can look at it from two aspects.
From the reasons and background of the downward adjustment
Has India relaxed restrictions on MDI produced abroad? Actually, it's not like that. According to official documents, the reason for this tax rate reduction can be summarized as "promoting manufacturing, increasing exports, and realizing India's dream of becoming a manufacturing powerhouse".
In the document, the MDI subject to the tariff reduction has an important attribute: "used for spandex manufacturing". It should be noted that India is the world's second largest textile exporter after China, with a textile and clothing export value of nearly 40 billion US dollars in 2022. The spandex industry, as an important component of India's textile industry, is facing challenges due to the higher tax rate of MDI compared to spandex products. This tax structure theoretically makes the cost of producing spandex domestically higher than that of imported finished products, thereby suppressing the development of the local spandex industry and indirectly promoting the demand for imported products.
In addition, from the perspective of breakthrough production, it seems economically uneconomical for local Indian companies to pursue the self-produced and self used MDI.
Observing the gross profit margin of Wanhua Chemical and Covestro's polyurethane business and the price difference of isocyanate products from 2016 to 2022, it can be found that as the price difference increases, the company's gross profit margin decreases instead of increasing. In addition, the production of MDI products faces high technological barriers and cost barriers, which means that only a few top chemical companies with advanced technology and strong cost control capabilities can enter this field. These enterprises have significant advantages in MDI production technology and cost management, further exacerbating the difficulty of market competition.

It can be seen that the Indian government's decision to reduce import tariffs is not just a simple relaxation of restrictions on foreign MDI products, but a strategy that comprehensively considers the growth needs of the domestic industry, as well as the technical barriers and cost control complexities of MDI production.
It is worth noting that the Indian government had anticipated a slowdown in the country's GDP growth for this fiscal year. And this trend is likely to directly affect the speed of foreign direct investment (FDI) inflows into India. It is reported that in relevant reports, there are suggestions that India should increase investment from China to strengthen its manufacturing industry and enhance its export capabilities.
However, based on WTO data and the China Trade Remedy Information Network, it can be roughly estimated that from 1995 to 2018, India initiated a total of 221 anti-dumping investigations against China, becoming the country with the most anti-dumping investigations against China. Among them, chemical products were hit the hardest, accounting for 47.06% of India's total anti-dumping investigations against China.
Taking polyurethane as an example, India has launched multiple anti-dumping investigations against China in recent years, involving products such as polyester based thermoplastic polyurethane, polyether based thermoplastic polyurethane, polyurethane synthetic leather, etc.
From the perspective of MDI global supply and demand pattern
In terms of supply, according to incomplete statistics, the global MDI production capacity has exceeded 10 million tons, mainly concentrated in five major producers: Wanhua Chemical, BASF, Covestro, Huntsman, and Dow Chemical. These five companies collectively hold 91% of the market share, reflecting the high concentration of the industry.
In terms of demand, in 2023, the global demand for MDI will exceed 8 million tons, of which, globally, the production and sales of polymeric MDI will be the highest, accounting for about 70%. Its largest downstream is mainly polyurethane foam series. The application industries are mostly buildings and household appliances, and most of the new global layout will surround these fields.
Expand reading: Expand capacity by over 40%! The polyurethane center is about to be completed! BASF has another big move

The main downstream products of pure MDI, which account for about 30% of production and sales, are TPU, spandex, synthetic leather, etc. The application industries are mostly for daily use by the people.

That is to say, from the perspective of the overall demand for MDI and spandex, the fact that India has lowered tariffs on MDI used for spandex does not have a significant impact.
In addition, in terms of demand growth rate, MDI demand growth rate is positively correlated with the national economy. Before 2021, the global demand growth rate for MDI remained at around 5%. However, after 2021, due to the global economic recovery, the demand growth rate for MDI also experienced explosive growth, reaching 11.51%.
From this perspective, India's demand for MDI will further decrease as GDP growth slows down.