India must seize chance to become 'atma nirbhar'

Rashi Sharma

The Covid-19 pandemic is not just a global health catastrophe, but also a hard-hitting economic crisis for several economies. This period has been a trying time for the manufacturing industries in general and has highlighted the urgency for India to become self-reliant. Though the ‘Atmanirbhar Bharat’ rhetoric anticipated growth after a brief pause, the continuing pandemic has quickly affected the 'self-reliant' discourse. The pandemic has exposed the fact that India is dependent on imports for essential medical equipment. The irregularities in supplies have not only skyrocketed the domestic prices for certain medicines but also disturbed foreign trade, due to restrictions on exports. The low availability of key starting material (KSM) in India has highlighted the weak spots of India’s pharmaceutical sector.

Overdependencies

Indian firms have established themselves as leaders of the global pharmaceutical landscape while meeting domestic demands. Reportedly, India holds a fifth of all global manufacturing sites catering to the US market. It is the only country with the largest number of pharma plants that are US-FDA compliant. It is home to nearly 1,400 WHO-GMP (good manufacturing practices)-approved pharma plants and 253 European Directorate of Quality Medicines (EDQM) approved plants, the third largest in the world by volume. The Indian pharma industry, however, is still valued as the 14^th largest, with its exports contributing to only 3.5 of the total pharmaceutical exports globally.

The industry did well in the formulations and indigenous medicines sector but with gradual doses of liberalisation, the pharma market began to be flooded with imports from China. The country is heavily import-dependent to fulfil its drug requirements. Around 70 per cent of our pharmaceutical requirements are met by Chinese imports of some basic raw materials, particularly the APIs (active pharmaceutical ingredients) – the bulk components to produce finished drug formulations. These Chinese bulk drugs or APIs cost approximately 1/3^rd of the price of Indian manufactured APIs. The Chinese became stalwarts in API production and exports, as they successfully developed cost-effective technologies. They acquired the edge with large-scale manufacturing operations, cheap and shared utilities, aided by supportive government policies.

The highly subsidised pricing of Chinese APIs led to the shutting down of domestic API manufacturing facilities in India. Indian firms gradually disengaged with the production of APIs, as the capital investments on them did not yield higher returns. The cost of API in India is higher for various reasons, including the high cost of technology and infrastructure requirement for their manufacture.

The drug prices in India are considered the cheapest in the world. But the strict price control policies of the government neither allows manufacturers to invest in R&D of new drug formulations, nor does it ensure universal accessibility. Unvetted manufacturing plants across the country and dependence on cheap imports, have increased the local capacity for drug formulations. However, this overproduction sometimes does not meet global standards, making it difficult for exporters procuring from third-party manufacturers to explore newer markets.

Being the only sector open to 100 per cent FDI and suitable for the US market, India’s scope to export to other countries has, however, been limited. This poses a risk for the Indian manufacturers in the long run. The recent announcement by the Trump administration aims at curbing generic pharmaceutical imports and boosting local manufacturing. The ‘America First’ agenda could thus be a major setback for one of India’s leading exports.

This raises several interlinked questions on the trajectory of Indian pharma – whether it is the production (or the lack) of APIs affecting the performance of the Indian market, or what are the policy implications to scale up domestic operations. There is a pressing need to address these issues, which are preventing Indian pharma companies from becoming major players, despite their global potential.

The way forward

India needs clear and proactive interventions to ensure an all-conducive supply chain. This will not only boost local manufacturing, but also find ways to reduce dependence on external factors. India’s 'Look East' policy aims at reducing trade dependencies on the US and the EU. In consonance with that policy, it is important for the government to work towards revamping the structure of the pharma industry. The government has launched targeted financial incentives to promote manufacture of raw materials, and to bring back the bulk of API production to India. The Union Cabinet has taken the decisive step to establish three API parks with common utilities, identifying and reducing the dependence on China for 53 APIs, introduced a Production-Linked Incentive (PLI) scheme to further reiterate India’s aim to be self-reliant.

Around 35-40 per cent of the capacity is idle. The government needs to efficiently use the existing API units. According to a McKinsey report, the driving factors for growing the domestic market in India can be attributed to the higher burden of disease. The local production of APIs is incentivised through the rapidly growing population of the country. This provides avenues for pharma companies to not only cater to domestic but also enter international markets.

Shortage of delivery points and the lack of accessibility to drugs continue to be bottlenecks even for pharma companies when it comes to fully utilising the domestic market. The affordability of drugs will rise due to sustained growth in incomes and increase in insurance coverage. Greater spending on healthcare and government sponsored programmes are necessary to cover rural markets. Improving economic growth is imperative for investments in healthcare infrastructure and financing and higher per capita disposable income.

For a sustainable market and a robust growth rate, innovative business models should be developed for an equilibrium in drug price controlling and local manufacturing costs. Though the government has eased its protectionist policies, timely and effective implementation is crucial to address the challenges of the pharma sector.

As countries are willing to invest in the Indian market for the supply of Covid-19 vaccine and medical equipment, this is India's opportunity to become truly atmanirbhar in the pharmaceutical segment.

The Observer Research Foundation

source https://www.freepressjournal.in/analysis/india-must-seize-chance-to-become-atma-nirbhar