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Budget 2021: Pharma sector expects a booster shot, tax sops from FM Nirmala Sitharaman

With a cohesive effort from both public and private players, the Indian bio-pharma industry has the potential to unlock tremendous growth over the next few years

Budget 2021: Pharma sector expects a booster shot, tax sops from FM Nirmala Sitharaman

Biopharma has remained the dominant industry of the 21st century, and the trend is set to solidify in the post-pandemic world

Over the past year, the world has faced a deadly pandemic and lived through an unexpected economic shutdown. World-over, central banks have been flushing the economy with unprecedented levels of liquidity. And just days before the world marks a year since the first lockdowns came into effect, reports have shown that the global economy is on track to make a faster-than-expected recovery.

Despite its ongoing economic battles, India has managed to make a swift recovery too. Recently, the International Monetary Fund (IMF) projected a growth rate of 11.5% for the country. It said that the Indian economy is set to grow at a better rate than China, France, and the United States, following a stronger than expected recovery from pandemic-related lockdowns.

As India continues to rise to the challenges presented by the COVID-19 pandemic, all eyes are now on Finance Minister Nirmala Sitharaman. The "once-in-a-century" budget she promised is right around the corner and market leaders across industries are hoping for a fiscal roadmap that can address all potential bottlenecks on the path to a $5 trillion economy.

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A focus on job creation, R&D, and the development of infrastructure is the need of the hour. The government also needs to incentivise capital markets to promote innovation, introduce policies to incubate high-potential startups, and promote academia-industry collaboration. Reducing the Indian manufacturing industry's dependence on imports will be another crucial step in this regard.

Aatmanirbhar route to becoming self-sufficient

Last year, as local businesses across the country tackled pandemic-related disruptions, Prime Minister Narendra Modi issued a call for "Aatmanibhrar Bharat," a move to support local businesses and, in effect, empowering the country's economy.

With one of the focus areas being the basic chemicals and active pharmaceutical ingredients (API) industries, the government also went on to announce a production-linked incentive (PLI) scheme to incentivise local manufacturers to set up or expand existing operations.

The move could be a game-changer for the Indian pharmaceutical industry, which has become increasingly dependent on imports of many Key Starting Materials (KSM), intermediates, and APIs from cheaper foreign manufacturers.

According to a 2020 report by KPMG and the Confederation of Indian Industry, the country imported APIs worth Rs 16,900 crore from China in FY19. In contrast, it exported back APIs worth only Rs 160 crore. The report also noted that imports from China had steadily increased from 62% in FY12 to 68% in FY19. It identified China as the sole supplier of several critical intermediaries and APIs, including those in high-burden disease categories like diabetes, tuberculosis, and cardiovascular diseases.

A dependency of this magnitude on imports from a single country can put the Indian bio-pharma industry at risk of supply disruptions like those observed as recently as last year. Case in point being the supply shock created by pandemic-led trade restrictions, that have pushed the prices of vital medicines like ofloxacin, ampicillin, metronidazole, and metformin up by 15-40%.

Also Read: Budget 2021: Date, time, sector-wise expectations; everything you need to know

Furthermore, such fluctuations do not comprise one-off cases: previously, the imports from China were severed in 2008 during the Beijing Olympics and later in 2018, when China implemented its "Blue Skies" policy.

The most effective solution to this problem is for India to boost the domestic production of APIs. A shift in this direction will also attract global pharmaceutical manufacturers looking to relocate their operations from China.

By proving itself as a reliable alternative, India could become a viable destination for big pharma companies and their drug discovery, CDMO, and API development and formulation business.

India already has the technological capabilities and a strong chemical industry required to enable this transition. Its prospects are also strengthened by a skilled workforce, top manufacturing standards, and high process efficiency.

But it lacks the infrastructure and capacity required to become a truly optimal alternative to China. The pharmaceutical industry also faces high regulatory friction and receives inadequate support from the government. By addressing these issues, Budget 2021 can unlock immense potential for the Indian bio-pharma industry.

The Budget the Pharma industry needs

Biopharma has remained the dominant industry of the 21st century, and the trend is set to solidify in the post-pandemic world. A boost to the domestic pharma industry at such a time could result in a substantial stimulus for the economy at large. To do so, the government can look at countries that lead the way.

Support for innovation and R&D is critical to the pharma industry. In India, the industry, and academia continue to work in silos, creating a divide between the theoretical and pragmatic realms.

To address the problem, the government should introduce measures that encourage interactions between the two domains. It should also set up infrastructure like new universities, research departments within universities, independent research centres, and startup incubators, etc. to reward scientists working on R&D.

The strategy has proven fruitful for China, which is boosting R&D and innovation funding to encourage post-doctoral candidates to create robust domestic IPs.

The government also needs to drive investment into pharma research, as the discipline serves a purpose greater than simply revenue generation. Public funding has played a crucial role in this regard, especially in countries like the USA, the UK, Switzerland, Korea, etc.

Bio-pharma companies have raised millions in these capital markets, even despite generating minimal - even zero - revenue. The Indian government needs to similarly incentivise a culture that funds research for the sake of research.

This is crucial since pharma development does not attract a high volume of private investors and HNIs in India, unlike the tech-services sector. The government should also look to build an ecosystem that drives traditional capital markets and venture funds to support research. At the same time, through tax subsidies, the government can reward pharma businesses that are successful at revenue generation.

Industry experts are also hoping that the government will consider the Katoch Committee recommendations from February 2015.

According to the report, "the key requirements for API industry include the availability of land, basic infrastructure such as water and electricity, and common state-of-art facilities such as Effluent Treatment Plants (ETPs), steam, testing facilities, etc."

To meet these needs, the government can create large-scale integrated clusters, like the Hyderabad Pharma City Industrial Park, with cutting-edge infrastructure facilities that can attract private sector companies.

With this model, all companies within these parks will benefit from common utilities, while the industry will be able to pay for the services it accesses, based on usage terms. Industry experts are also expecting the government to introduce subsidies aimed at reducing electrical costs over the next five years.

Incentives are also required to drive the development of pharma infrastructure. The government should consider allowing longer moratoriums and extended repayment tenures for soft loans taken by developers of valid projects, coupled with tax rebates and holidays for cluster developers.

The Katoch report also recommended the creation of "professionally managed dedicated equity funds for the promotion of the manufacture of APIs," for which the government can enable the provision of capital to API companies at special interest rates.

The infusion of finance will help the industry expand and drive employment. In line with the committee's recommendations, the government can also provide income tax incentives to manufacturing companies. At the same time, it can also introduce measures to incentivise domestic buyers of indigenous APIs.

There is also a need for the government to reduce the regulatory friction faced by the pharma industry. A good step in this direction will be to provide a single-window clearance system that addresses all licensing needs - from imports to testing - of active ingredient manufacturing.

There is also a need to set clearly defined timelines for providing environmental clearances, with priority approvals for API and basic chemical manufacturers. Meanwhile, to ensure that the industry takes appropriate measures to minimise environmental harm and pollution, the government can offer subsidies on sustainable, green technologies.  

Ultimately, these measures can enable the transformation of India into the manufacturing hotspot of the world. Such a transformation will not only drive growth for the industry but will also help to increase exports, reduce the trade deficit and attract API and intermediate business from big pharma players across the globe.

The resulting boost for the domestic API industry will have a far-reaching impact on the Indian pharmaceutical industry, which is already the largest provider of generic medicines in the world.

The government and domestic players will also need to stay focused on long-term goals and dynamically approach the process. To meet the needs of the industry at such a scale, the government will need a structured approach instead of a few big-bang announcements.

Similarly, industry players will need to recognise that such a massive transformation cannot be brought on overnight. China, for example, took almost 40 years to attain its position as the manufacturing destination for businesses around the world.

But with a cohesive effort from both public and private players, the Indian bio-pharma industry has the potential to unlock tremendous growth over the next few years. It is now down to Budget 2021, to provide the pharma industry with the key to do so.

(The author is Chairman and MD of Laxai Life Sciences)

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