Remedy for growth

OUTLOOK/ DPCO

Pharma industry needs steady policy framework.

The Indian pharmaceutical industry today is being universally acknowledged as knowledge-driven and globally competitive. The signing of the Trade Related Intellectual Property Rights (TRIPS) agreement in 1995, which committed India to honour the WTO mandated product patent regime from 2005, marked the beginning of a fresh chapter in the industry's development. And it has evolved substantively "� from a reverse engineering-led industry, focused on the domestic market "� to a research-driven, export oriented industry with global presence.

With an estimated market value of $8.2 billion (at consumer prices, inclusive of exports) in 2004, India accounts for 2 per cent of the world market for pharmaceuticals. According to the global ranking estimates by various organizations, including McKinsey, India is the fourth largest pharmaceutical market in volume terms and the 13th largest market in value terms. The significant difference in the value and volume wise rankings of Indian pharma is largely attributed to the prices of drugs manufactured in the country, which rank among the lowest in the world. With the quality being maintained at par with international standards, India exports drugs to more than 200 countries across the world. With formulations contributing to 50 per cent of the exports, India's pharma exports were approximately $3.17 billion (KPMG study 2006).

Small players have been badly affected by two, policy-level developments: Many small manufacturers are contract manufacturers for pharma majors. Earlier they paid excise duty on their cost of manufacturing, now they have to pay excise based on the selling price (less abatement) printed on the medicine made by them. This has made sub-contract manufacturing unattractive for them. The second development, and this is far more serious, is the impact of excise-free regimes especially of Himachal Pradesh, Kashmir and Sikkim. Bigger units located in such places produce these medicines excise-free, whereas smaller units find it hard to establish new investments in these zones like other units. The industry associations like IDMA, CIPI and others (that represent many small units) have been asking for a reduction of excise rate to 8 per cent from the current 16 per cent, however, this has been rejected by the government. So this industry has to rediscover itself. As it now faces a new product patent regime, which require new production quality stipulations and investments and small units are at a disadvantage here vis-a-vis their counterparts in tax free zones.

The prices of the drugs in the domestic market are controlled by the Drug Price Control Order (DPCO) and are monitored by the National Pharmaceuticals Pricing Authority (NPPA). The Government introduced the DPCO in 1970 whereby all drug prices were controlled. Its objective was to protect consumer interest and ensure a restricted, but reasonable, return to producers by placing a ceiling on prices of certain mass-usage bulk drugs and their formulations. The span of control of DPCO has come down over time as it has been modified thrice with the number of drugs ruled by price controls being 370, 143, and 74 in 1979, 1987 and 1995, respectively.

The recent Pharmaceuticals Policy will further reduce DPCO coverage and increase market price surveillance. However, there's been a scare of a major reversal of this trend that has pushed investments into excise duty havens in the country. This short sighted approach has unnecessarily almost threatened to kill the domestic pharma industry in the country. Hence, the industry needs a steady and predictable policy framework as an essential input for sustained growth, to build global Indian pharmaceutical presence in future.

The writer is advisor, Crisil and Zydus Cadila