We need a new formula to keep our ‘formulations’ market dominance, writes Bharat Jhunjhunwala

Multinational companies (MNCs) had two-thirds of the domestic drug market of India in 1970. Then, the government had nullified ‘product patents’. The government allowed Indian companies to manufacture drugs patented by MNCs by alternative processes. This resulted in a fast increase in domestic drug manufacturing and not only Indian, but the world drug market was dominated by Indian companies. The dominance of Indian companies in the drug market, known as ‘formulations’, is maintained as of date.

The trajectory of the ‘active pharmaceutical ingredients’ or APIs that are the raw materials for the manufacture of the drugs, however, have followed a different course. Only one per cent APIs were imported in 1991 and 99 per cent were made within the country. However, this has changed steadily after the opening of the economy in 1991 and today, 70 per cent of the APIs are imported—mostly from China. The unavailability of formulations required to treat Covid patients in India can be traced to the unavailability of the imported APIs.

The present dominance of Indian companies in the formulations market is also under threat. According to Shaktivel Selvaraj of the Public Health Foundation of India, China may breach the formulations market of India in the next 5-6 years and oust Indian companies, just as they have done with the APIs.

Feeble steps

The government has announced that Rs 6,940 crore will be spent in the next six years to strengthen medical manufacturing infrastructure in the country. Further, 19 medical devices have been earmarked for purchase from domestic manufacturers. These are steps in the right direction but too feeble, given the emergency we are facing.

As said above, Chinese formulations are likely to take over the Indian market by the time the government builds this infrastructure. More is needed. Especially because the Chinese are able to produce the APIs at a lower cost despite the wages being five times more. We need to get our act together even if we want to save our formulations market.

The first step to be taken is regarding import duties generally, of which the APIs are a part. Our negative ‘trade balance’, that is, the excess of imports over exports was (-) 1.91 per cent of the GDP in 1999. It reduced marginally to (-) 1.79 per cent in 2004 during the reign of the Vajpayee Government. Then, it increased dramatically to (-) 2.99 per cent in 2014 during the reign of Manmohan Singh. It has reduced marginally to (-) 2.72 per cent in 2019 during the first stint of the Modi Government. Once again, this reduction is feeble, given that the trade balance was only (-) 1.79 per cent in 2004 at the end of the Vajpayee Government.

Jumpstart manufacture

The negative trade balance means that the cost of manufacturing of goods in India is more than the imported goods, hence businesspersons prefer to import - rather than manufacture them. The immediate step to be taken to jumpstart manufacturing in the country is to increase the import duties so that imports become expensive and domestic manufacturing is given a fillip. That has been elusive though.

Coming to the medical sector, Rajiv Nath of the Association of Indian Medical Device Industry has said that he is disappointed with the Budget for 2021-22, for not having increased the import duties on medical devices. Therefore, we need to increase import duties and bear the burden of high cost of domestic manufacturing for a while at least, if we have to manufacture the APIs and medical devices like ventilators and oxygen concentrators in the country.

The second step is that of investment in frontline medical technologies. The strength of Indian companies today lies in the manufacture of generic medicines that are outside the writ of the Patents Act. Inventions are made by the MNCs. They earn huge monies for the first 20 years during which patent protection is available to them—just as AstraZeneca is charging 50 per cent of the sale price of Covishield vaccine that Serum Institute is manufacturing in India under their licence. We need to invest huge amounts of money in the invention of new drugs.

Reportedly, Pfizer and AstraZeneca have received huge monies that helped them invent the Covid vaccines while India’s Bharat Biotech got a measly Rs 65 crore. Thus, Himanshu Baid of Poly Medicare has said that the Budget of 2021-22 does not provide any encouragement in this direction. Similarly, according to Satish Reddy of the Indian Pharmaceutical Alliance, the government needs to provide grants for the innovation of new molecules, automation and digital technologies.

Infrastructure investment

The third step is to invest in the infrastructure needed to jumpstart manufacturing in the health sector in India. The government had announced in March 2021 that Rs 6,940 crore would be spent in the next six years to build this infrastructure. But, as said above, Chinese formulations may have taken over the Indian market by then. Again, Himanshu Baid of Poly Medicare says this investment should have been frontloaded and done in the next three years.

The fourth step is to make available capital for investment. The cost of borrowing for capital investment in China is about 5 per cent against about 12 per cent in India. Further, countries are providing huge assistance to build their health sovereignty. For example, the United States Government has provided an assistance of US$765 million or Rs 5700 crore, repayable in 25 years to Eastman Kodak to build API manufacturing capacity in the United States. It is to be noted that this assistance has been provided under the Defense Production Act. In other words, the US Government believes that domestic manufacture of APIs is necessary to defend the country.

Future planning

The government must plan for the future. The Covid virus may mutate and jump the presently available vaccines. New viruses and pandemics may be in the offing because of the rapid change in the environment that has been unleashed by man. Therefore, the government must immediately take some steps. One, make a sharp and quick increase in import duties on all goods necessary for our economic sovereignty, including formulations and medical devices. We must be ready to face the ire of the developed countries, just as the United States had stopped giving imports from India the generalised preferences applicable to developing countries.

Two, the government must give big contracts to private innovators like Bharat Biotech for making frontline innovations; and it must issue compulsory licences to manufacture essential drugs. We must not forget that Vajpayee developed the nuclear bomb and Manmohan Singh stood up to protect preferential purchases of foodgrain from our farmers in the WTO. The Modi Government must similarly stand up to Western pressure and increase import duties and issue compulsory licences to protect our economic and health sovereignty.

The writer is former Professor of Economics, IIM Bengaluru

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