Pharmaceutical Industry in India- the Sunrise Sector

Indian pharmaceutical sector could be the next IT industry for our economy, both its ability to leverage our skilled manpower and to emerge as a global powerhouse. According to a report, in 2017 the pharmaceutical sector in India was valued at US$ 33 billion and in May 2018, the Indian pharmaceutical market grew at 10.8 per cent year-on-year. The country’s pharmaceutical industry is expected to expand at a CAGR (compound annual growth rate) of 22.4 per cent over 2015–20 to reach US$ 55 billion and is likely to be among the top three pharmaceutical markets by incremental growth and 6th largest market globally in absolute size. India contributes the second largest share of pharmaceutical and biotech workforce in the world.

The row over faulty hip-resurfacing system provided in India by Johnson & Johnson shows shortcomings in the legal and institutional mechanism to deal with quality issues in pharmaceutical industry. This episode has made it abundantly clear that global pharmaceutical companies would continue to treat Indians as second rate patient-customer. The conduct of Central Drugs Standard Control Organisation (CDSCO) in the whole affair also leaves much to be desired. India should use this experience to plug gaps in the legal and institutional framework applicable to the pharmaceutical industry and ramp up the working of the CDCSO. All these will bode well for the domestic pharmaceutical industry and place it on a firmer footing.

Generic drugs form the largest segment of the Indian pharmaceutical sector. A generic drug is a medication created to be the same as an already marketed brand-name drug in dosage form, safety, strength, route of administration, quality, performance characteristics, and intended use. Generic drugs tend to cost less than their brand-name counterparts because generic drug applicants do not have to repeat animal and clinical (human) studies that are required of the brand-name medicines to demonstrate safety and effectiveness. The market for the generic drug has been accelerated by increasing number of patent expiration of branded drugs and government initiatives in all the countries. Increasing prevalence of chronic diseases and ever-rising cost of hospitalization and medicines are responsible for the growth of generic drugs market.

India is the largest provider of generic medicines globally in terms of volume. Indian pharmaceutical sector industry supplies over 50 per cent of global demand for various vaccines, 40 per cent of generic demand in the US and 25 per cent of all medicine in UK. Presently over 80 per cent of the antiretroviral drugs used globally to combat AIDS (Acquired Immuno Deficiency Syndrome) are supplied by Indian pharmaceutical firms. Around 40.6 per cent of India’s US$ 16.8 billion pharmaceutical exports in 2016-17 were to the American continent, followed by a 19.7 per cent to Europe, 19.1 per cent to Africa and 18.8 per cent to Asian countries.

Apart from the global demand for Indian pharmaceutical products increase in the size of middle class households coupled with the improvement in medical infrastructure and increase in the penetration of health insurance in the country will also influence in the growth of pharmaceuticals sector. In this context National Health Protection Scheme (NHPS), also known as ‘Aayushman Bharat’ which seeks to provide insurance cover to 10 crore families for an amount of Rs. 5,00,000 is expected to be a watermark for the Indian pharmaceutical industry. A vastly improved access to medical facilities under this scheme to the hitherto excluded population is expected to provide a significant boost to the domestic health service and pharmaceutical industry.

A serious threat to the Indian pharmaceutical industry comes from its global counterparts. The big international pharmaceutical companies and their governments have been trying to lobby with the Indian government to make patent protection more stringent despite the fact that both compulsory licensing and prohibition of ever greening, provided under the Indian Patents Act, 1970, are valid under the TRIPS agreement of the WTO. It should not surprise us that India regularly figures on the ‘Priority Watch List’ of the Office of the United States Trade Representative (USTR) for providing ‘weak’ intellectual property protection. The annual ranking by ‘Global Innovation Policy Centre’ of the US Chamber of Commerce also ranks India poorly for its IPR climate. Any change in Indian IPR law made under foreign pressure will prove to be detrimental to the interest of the domestic companies.

Another threat emerges from manufacturing practices of some of the domestic pharmaceutical companies. As of 2016 there were around 10,000 generic manufacturers in India, of which only 1,400 were WHO GMP (Good Manufacturing Process) –compliant and only 523 of them were US FDA-approved. Now that the Indian companies have captured a significant part of the global generic drug market, it faces a very intense international scrutiny regarding its systems and processes. Any instance of poor manufacturing by one company is likely to attract global attention and affect the brand equity of Indian pharmaceutical industry as a whole. It is time that CDSCO sets higher benchmarks for quality standards for the drug and pharmaceutical industry.

Regulatory complexity is another obstacle faced by the Indian pharmaceutical industry. One of the most commonly cited reason for the growth of Indian Information Technology industry is the lack of governmental interference. While such a scenario is not possible for the pharmaceutical industry considering it literally deals with matters of life and death, the regulatory burden can certainly be reduced. Currently, five ministries of the Government of India are involved in regulating drug and pharmaceutical industry. ‘Price control’ under which the Government fixes the maximum price that can be charged for a medicine also needs to strike a fine balance between the health interests of the consumers and the financial health of Indian pharmaceutical companies.

The bulk import of cheaper Active Pharmaceutical Ingredients (API) from China has led to an evisceration of the Indian manufacturing capacity in the sector. In order to ensure the long term health and independence of the Indian pharmaceutical industry, it is required that instances of dumping of API from China are quickly identified and remedial measures taken. It is equally important that issues that hobble Indian manufacturing are removed.

Gopal Krishna Agarwal

National Spokesperson of BJP on Economic Affairs

Member Board of Governors Indian Institute of Corporate Affairs (IICA)

gopalagarwal@hotmail.com

Petroleum Pricing in India – Economics override political expediency

Petroleum prices are always a contentious issue. Historically, political expediency overrode economic considerations. Central government has some compelling reasons not to interfere into market forces, which are currently being effected by global factors. 

India imported 256.32 million metric tonnes of crude oil and petroleum products in 2017-18 and paid Rs. 6,52,896 lakh crore. The import dependence of India in the case of crude oil is over 80 percent. Further the Indian basket of Crude Oil represents a derived basket comprising of Sour grade (Oman & Dubai average) and Sweet grade (Brent Dated) of Crude oil processed in Indian refineries in the ratio of 72.38:27.62 during 2016-17. The price of Indian crude oil basket was $106.85 per barrel (1 barrel=159 litres) in May, 2014. It fell down to $39.88 per barrel in April 2016 and has gradually increased since then and is around $78 per barrel.

It is also important that we look into the tax structure and petroleum prices. On 3^rd September 2018, the price build-up for Diesel and Petrol in Delhi was as follows:

Sl. No.	Description	Unit	Petrol	Diesel
1.	C&F (Cost & Freight) Price (Moving average basis)	$/bbl	84.20	90.59
2.	Average Exchange rate	Rs/$	70.22	70.22
3.	Price Charged to Dealers (excluding Excise Duty and VAT)	Rs/Ltr	39.21	42.85
4.	Add : Excise Duty	Rs/Ltr	19.48	15.33
5.	Add : Dealer Commission (Average)	Rs/Ltr	3.63	2.51
6.	Add : VAT (including VAT on Dealer Commission)	Rs/Ltr	16.83	10.46
7	Retail Selling Price at Delhi- (Rounded)	Rs/Ltr	79.15	71.15

(Data from Indian Oil Corporation Limited)

With every dollar increase in the international price of crude oil, the cost of petrol and diesel in India increases by Rs. 0.50/ litre and a fall in the exchange rate of Indian rupee against US dollar increases the cost of petrol and diesel in India by Rs. 0.65/ litre.

The revenue generated by the taxes on petroleum products is very important for both the Central as well as State Governments. The contribution to central and state exchequer by the petroleum section is significant and in the last few years is as follows:

Year		2014-15		2015-16	2016-17	2017-18 (P)
1.	Contribution to Central Exchequer (in crore) through Tax/ Duties on Crude oil &  Petroleum products	1,26,025		2,09,354	2,73,225	2,84,442
2.	Contribution to State Exchequer (in crore) through Tax/ Duties on Crude &  Petroleum products	1,60,526		1,60,114	1,89,587	2,08,893
3.	Total Contribution of Petroleum Sector to Exchequer through Tax/ Duties      (1+2)	2,86,551	3,69,468		4,62,812	4,93,335

We have to remember that, 42% of the Basic Excise Duty collection at the Centre is given to State governments for infrastructure and welfare programs and 60% of the balance 58% of the Basic Excise Duty collection is spent on Centrally Sponsored Welfare Schemes in the States i.e. total amount transferred to States is (42+34.8)= 76.8 percent. And every one rupee reduction in central duty leads to a loss on about Rs 14000/= crores to the central exchequer.

Earlier, Under Administered Price Mechanism (APM), petrol /diesel prices were not market linked and prices were being modulated, the steep increase in international prices of oil used to exert severe pressure on the oil marketing companies (OMCs). The retail prices of these commodities were kept below the cost resulting in large under-recoveries for OMCs. From the year 2004-05 to 2013-14, the total under-recoveries was Rs. 8,53,628 crores and there was significant subsidies for the same.

Year	Under-recovery (crore)	Cumulative Total (crore)
2004-05	20,146	20,146
2005-06	40,000	60,146
2006-07	49,387	1,09,533
2007-08	77,123	1,86,655
2008-09	1,03,292	2,89,947
2009-10	46,051	3,35,998
2010-11	78,190	4,14,188
2011-12	1,38,541	5,52,729
2012-13	1,61,029	7,13,759
2013-14	1,39,869	8,53,628

The subsidies for these under recoveries, during the period of 2004-08 when the international crude prices were increasing rapidly, proved grossly insufficient. Since the fiscal position of the Government was already precarious, it could not increase the subsidy to this sector. The UPA government then resorted to issuance of ‘oil bonds’ to the OMCs. These interest-bearing bonds called, The Oil Bonds were not even reflected on the balance sheet by the UPA Government, resulting in artificial measurement of the burgeoning fiscal deficit.

Between 2005-06 and 2009-10, the Oil Bonds worth Rs. 1,42,202 crore were issued by the Government with rate of interest ranging from 7.33 percent to 8.4 percent per annum repayable up to 2024-25 by successive governments. Oil companies have either sold these bonds or used them as collateral to raise cash. OMCs have sold oil bonds worth Rs 1,24,536 crore and had to bear a loss of around Rs 5,000 crore in selling of these bonds at discounted rate because the bond market did not have much appetite for these bonds. Till date the Government has repaid around Rs. 70,000 crore to the holders of these bonds and out of this amount, only Rs. 10,000 crore (approx) has gone into the repayment of the principal component and the rest towards the interest obligation. Thus the outstanding principal amount on these bonds is Rs. 1,30,000 crore. Most of these bonds will be matured by 2024-25, putting heavy burden on current as well future governments.

An important part of the solution to the problem can be focusing at the alternative energy source. In the year 2015-16, the source wise share in consumption of energy was as follows:

Sl. No.	Source	Share ( in percentage)
1.	Coal and Lignite	46.28
2.	Crude Petroleum	34.48
3.	Electricity from hydro, nuclear and other renewable sources	12.75
4.	Natural Gas	6.49

Therefore the policy of the Shri Narendra Modi government is to move towards renewable sources of energy. But one cannot readily switch between them and other sources of energy. To make our economy less dependent on oil would be a long drawn process, which can be accelerated by conducive government policies. Modi Government is working on this long-term solution.

It is evident than in order to reduce our dependence on imported oil, we need to generate more energy from coal and lignite, which we have in abundance and also focus on electricity generation from hydro and other renewable sources like wind and solar. Since the government is focussed on having 1 GWh of installed solar capacity by 2022, we will see an increase in its share in the source wise energy share in the coming years. Till then economic prudence should override political expediency.

Gopal Krishna Agarwal

National Spokesperson of BJP on Economic Affairs

Member Board of Governors Indian Institute of Corporate Affairs (IICA)

gopalagarwal@hotmail.com

Is Good Economics Bad Politics!

Economics relates to allocation of resources to various segments of the economy. It can tell you the methodology or the means of allocation of resources for enhancing production, efficiency in distribution and equitable consumption. There is always a tradeoff between competing demands in any economy as the resources are limited. Good economics implies following such economic policies that pushes the ‘Production Possibility Curve’ outwards. Politics can broadly be understood as the means to the political power. Success in politics is achieved by taking steps that increases the possibility of winning elections.

Good Economics ensures larger benefits to the large population. And if political parties work towards the wellbeing of large sections of society winning elections thereby, it is good economics and good politics. The effective communication with the electorate about the outcome of economic decisions and level of awareness & education of the citizens, determine, whether good economics is good politics.

In a democracy, where demands are generated by different stakeholders, there is a political cost to every decision. Technocratic prescriptions can ignore the political economy but a politician will always keep an eye on the political consequences of any economic policy. 

Political cost to economic decisions can be reduced through better communication skills of leadership; successful leaders are generally good orators. Cost reduction can also be achieved by increased educational outreach and higher level of awareness amongst the electorate. The time frame for impact assessment of economic decision will also determine the correlation between the economic decision and its political cost. Because the result of some of the steps taken by the government might take years to be reflected in changed ground realities, but the elections have to be won every five years. In India the problem is further compounded by the fact that we have multiple elections at the Centre and the States.

At times, powerful interest groups with high stakes in maintaining status quo, exists within a Nation. Their own compulsions take precedence over economic decisions leading to bad politics. Sometimes divisive forces in a society raise their head and bog down the decision making process of the state, creating chaos. Existence of strong public institutions and pillars of democracy is a safeguard for decision-making process. The selection criterion for the right candidate by the electorate at the elections, influences the considerations for decisions of the political parties. In an ideal democracies good economics is always good politics, but rarely such situations exists, otherwise how you can explain farm loan waivers and subsidies instead of investing resources in infrastructure for better quality of life.

Mostly, the form of governance and prevalent political structure, determine, whether good economics is good politics. Nations should build sustainable institutions to; safeguard minority interest and maintaining balance of power between pillars of governance and holding free & fare elections. Countries spending on education, transparency, information sharing and disclosers establish a healthy and a vibrant political system. Then alone a positive relationship between good economics and good politics is sustained.   

By Political System we mean a system of government. Political System is a complex system of categories involving the question of who should have authority and ownership of resources and what the government’s influence on its people and economy should be? And Political Structure refers, to institutions or groups and their relations to each other, their pattern of interaction within political systems and to regulations, laws and the norms present.

Out Constitution specifically says that Political Democracy has no meaning till we achieve Economic Democracy. Economic Democracy means that the benefits of economic development reach to all the segments of society, across caste, religion and geography. This equity can only be achieved by good economics.

In a mature and just nation, Good Economics is Good Politics; Economic Democracy and Political Democracy coexist in an efficient governance model. If this healthy relationship is non-existent, then there is lot to be desired from the institutions, government, political parties and the citizens, all taken together.

Gopal Krishna Agarwal, National Spokesperson for Economic Affairs, BJP

Email: gopal.agarwal@bjp.org

Mobile:  9810019753