18 July 2011 Business International trade relations: pp controversy

Plastic Degradation

Mutual ill-will over an anti-dumping row hits India-Saudi Arabia relations
Plastic Degradation
T. Narayan
Plastic Degradation

In Riyadh’s exclusive club of royals and business tycoons, among whom rank some of the world’s wealthiest, frowns and sneers appear on the faces of its members at the mention of three words—India, Reliance Industries Ltd (RIL) and Mukesh Ambani. Aware of Ambani’s political and economic clout, Riyadh has come around to believe, rightly or otherwise, that it was at his company’s behest that New Delhi has invoked the anti-dumping law against Saudi companies that want to sell polypropylene (aka PP), an important ingredient in making plastic and other items, in the Indian market. Such is the anger and dismay in Riyadh that the anti-dumping controversy threatens to cast a shadow on the strategic partnership that Prime Minister Manmohan Singh and the Saudi king, Abdullah bin Abdul-Aziz Al Saud, fostered through the signing of the Riyadh Declaration last February.

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India called the anti-dumping law into use after a complaint was filed against the Saudi companies by RIL, Asia’s largest PP producer which has carved out a 70 per cent stranglehold on the Indian market. Bengal-based Haldia Petrochemicals Ltd subsequently signed on to RIL’s complaint, but its comparatively small share of the market has convinced the Saudi firms of the hand played by Ambani in fanning the PP controversy. India, sources say, has been informed by the Saudi Arabian leadership that it would not “expect such an unprecedented, economically harmful and WTO (World Trade Organisation)-inconsistent approach to be applied to a strategic partner with which one seeks to expand trade and improve relations overall”.

But what exactly is the anti-dumping controversy between India and Saudi Arabia? Employed in the context of international trade, the term anti-dumping has gained much currency after the accession of most countries, including both India and Saudi Arabia, to the WTO agreements. The anti-dumping law is often invoked against a foreign manufacturer for exporting a product to another country at a price much lower than that prevailing in the receiving country’s market. The low price of the product in the manufacturer-exporter’s country is achieved because of the government subsidising the costs involved in its production. Occasionally, it is also initiated against a foreign manufacturer that tries to flood the market of another country in order to bring about a steep decline in prices, consequently muscling out rivals unable to cope with the resultant sustained low prices and losses. Obviously, the lowered prices are good news for the domestic consumers.

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RIL MD Mukesh Ambani

India has resorted to invoking the anti-dumping law because it perceives Riyadh as having subsidised the Saudi companies’ manufacture of PP, couching this perception in the euphemistic phrase of “particular market situation”. This is what the Saudis oppose—on the basis of “principle”. Indian officials dealing with the anti-dumping case say the Saudi supply of propane, used in the production of PP, isn’t transparent. In other words, it is being supplied to Saudi manufacturers at a price lower than the existing market rate. An Indian official told Outlook, “The 30 per cent (consequent) offset that the Saudi government gives its industry affects the market and creates unfair conditions.”

India accuses Riyadh of subsidising production of polypropylene. Saudi Arabia fears others will make similar charges.

Saudi officials, however, dismiss these charges, arguing that the country’s vast reservoir of gas (propane is a byproduct of natural gas processing and petroleum refining) and the location of its processing facilities help reduce the costs substantially, particularly the expenses incurred on transporation. Countries that are not oil and gas producers do not enjoy such advantages. Saudi Arabia also claims that gas is supplied to its manufacturing companies at the commercial rate prevailing in the international market. The PP controversy has gathered such momentum that it has reached even King Abdullah, who has duly appointed a task force chaired by the Saudi deputy minister for petroleum affairs, Prince Abdulaziz bin Salman, to resolve the contentious issue.

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Riyadh has given such salience to the PP issue because the prestigious Saudi Basic Industries Corporation (SABIC) is, willy nilly, implicated in the controversy. Describing itself as one of the world’s “leading manufacturers of chemicals, fertilisers, plastics and metals” that are supplied to other manufacturing companies, SABIC is the showpiece of Saudi Arabia’s diversification efforts in sectors other than oil. Not only are Saudi elites invested heavily in SABIC, Riyadh fears India’s anti-dumping case could lead to “copycat” actions in Turkey and the European Union, which are potentially much larger markets than India. The Saudis’ attempt at seeking redressal is to essentially ensure such cases do not dog it elsewhere.

The origin of this controversy dates back to 2009, when RIL lodged a complaint against the Saudis. As is the procedure, the Indian government sent a team to Saudi Arabia to investigate; its report prompted the government to issue notices to Saudi companies declaring that duties would be levied on their PP exports to India. It’s only now that the issue has begun to loom large, what with Riyadh sending a series of senior-level delegations to Delhi. The PP issue is also expected to pop up in a Joint Commission meeting scheduled between India and Saudi Arabia in the coming months. Faisal H. Trad, Saudi ambassador to Delhi, told Outlook, “I can assure you that unless the anti-dumping case is resolved by then, it will be on the top of the meeting’s agenda.”

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Indian officials are vehement in their denials of Saudi Arabia’s insinuations against RIL, which told Outlook it had no comment to offer. A senior mea official, aware of the controversy, told Outlook, “We are not in the business of favouring any particular Indian business group. We have filed the case against Saudi Arabia on merit. India deeply values its relationship with Saudi Arabia, but unfair trade practices can’t be justified.”

A strained relationship with Riyadh has inimical implications for New Delhi. Not only is Saudi Arabia India’s main source of oil, it is also where more than two million Indians work and remit home $15 billion. Riyadh has also begun to look to India as an important destination for investment; the Saudi market too provides a potentially huge market for Indian investors and companies.

This is precisely why serious efforts are afoot to ensure the PP issue is resolved without dragging it to the WTO. As Trad says, “You wouldn’t want to go to court against your strategic partner.” Ultimately, the two countries will weigh their gains and losses before fashioning their strategies on the PP controversy.

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