COVID-19 pandemic is not only a global health catastrophe, it is also a hard-hitting economic crisis for several economies. This period has been a trying time for the manufacturing industries in general, and highlighted the urgency for India to become self-reliant. Though the ‘Atmanirbhar Bharat’ rhetoric anticipated growth after a brief pause, the continuing pandemic has affected the “self-reliant” discourse quickly. The pandemic exposed the fact that India is dependent on imports for essential medical equipment. The irregularities in supplies not only skyrocketed the domestic prices for certain medicines but also disturbed foreign trade due to the restrictions on exports. The low availability of Key Starting Material (KSM) in India has highlighted the weak points of India’s pharmaceutical sector.
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 US market. It is the only country with largest number of Pharma plants that are US-FDA compliant. Home to nearly 1400 WHO-GMP (Good Manufacturing Practices) approved Pharma Plants, with 253 European Directorate of Quality Medicines (EDQM) approved plants, it is the third largest in the world by volume. The Indian pharma industry, however, is still valued as the 14th largest with its exports contributing to only 3.5 of the total pharmaceutical exports globally.
Indian pharma industry did well in formulations and indigenous medicines sector but with the gradual liberalisation, the pharma market was flooded with imports from China. The country is heavily import dependent to fulfil its drug requirements. Around 70% of the 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 1/3rd compared to Indian manufactured APIs. China became the stalwart for API production and exports as they successfully developed cost-effective technologies. They acquired an advantageous edge with large scale manufacturing operations, cheap and shared utilities, along with supportive government policies.
The highly subsidised pricing of Chinese APIs led to 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 due to various reasons, including the high cost of technology and infrastructure requirements for manufacturing it.
The drug prices in India are considered the cheapest in the world. But the strict price control policies of the government neither allows the manufacturers to invest in R&D of new drug formulations, nor does it ensure universal accessibility. Unvetted manufacturing plants across the country, 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% 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 can 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 prevent 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 launched targeted financial incentives to promote manufacturing of raw materials, and to bring back a larger production of APIs to India. The Union Cabinet took a decisive step to establish three API parks with common utilities, identifying and reducing the dependencies on China for 53 APIs, introduced the Production Linked Incentive (PLI) scheme to further reiterate India’s aim to be self-reliant.
Around 35%-40% 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 diseases. 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 domestically but also enter international markets with comparatively higher age groups.
Shortage of delivery points and the lack of accessibility to drugs continues to be bottlenecks even for the pharma companies to fully utilise 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 the 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 the chance for India to become truly atmanirbhar in the pharmaceutical segment.