Global Outlook

Indian Government needs to introduce faster reforms for the pharma industry

Contributed by Nirmal Bang

By Nirmal Bang

The markets have already given a thumbs up to the Budget as the Sensex soared before giving up some gains. Industry stalwarts have been analyzing what aided markets despite low expectations prior to the Budget. Also apprehensions with respect to the extent of the stimulus withdrawal possible in the Budget had kept market participants away from investing. Union Budget 2010-11 is not a gamechanging Budget but is an incremental and conservative one to keep the economy on track.

For the pharma industry the increase in the weighted deduction for in-house R&D from 150% to 200% is a positive. It will be effective till 31st Mar ’12. The finance minister’s decision to improve food security and healthcare systems in the country is also highly commendable.

In the current years’ Budget, the government increased the outlay to the healthcare sector to Rs 22,300 crore from Rs 19,534 crore. The annual rural health survey for effective spend under the NRHM scheme and the convergence of NREGA with wider health insurance coverage through Rashtriya Swasth Bima Yojana is an innovative step to increase healthcare cover in rural India. The only positive step to help indigenous manufacture of consumables and implants is the import duty waiver for the manufacture of orthopedic implants.

The increase in the Minimum Alternate Tax (MAT) came as a disappointment and has a negative impact on business. This increase will hit pharma companies negatively. The decrease in surcharge would be eaten by the increase in MAT rate. The roll back in excise was expected but this hike in excise duty will raise input costs. There would be a general increase in prices of all manufactured goods as well as petrol and diesel.

Due to the creation of excise-free zones in various states, many pharma industries are facing lots of difficulties in capturing the domestic market and many units in excise zone have closed and several are on the verge of closing down due to the increase in unemployment figures. From excise-free zones the government is not getting any revenue but on the other hand the expenditure to develop infrastructure in excise-free zones is increasing.

Organisation of Pharmaceutical Producers of India (OPPI) president Ranjit Shahani said, “In its pre-Budget Memorandum, OPPI proposed budgetary fiscal measures and support in key areas to address the healthcare needs of the nation: infrastructure building, improving access to medicines, reduction in transaction costs, incentivizing R&D and reduction in tax burden and other measures. Overall, there is nothing significant in this Budget for the healthcare sector, as such.

Certain announcements by the FM in his Budget speech are being appreciated by the healthcare sector. Healthcare allocation increased to Rs 23,000 crore. A significant part may be utilized to build appropriate healthcare infrastructure. The extension of health insurance to National Rural Employment Guarantee Act (NREGA) beneficiaries is also expected to have a marginal impact in improving access to medicines to this section of the population. In view, Union Budget Proposals 2010-11 do not adequately address the healthcare needs of the nation.

The industry expected that by eliminating duty on all life-saving drugs they will be made more affordable to the patients. Unfortunately, this has not come true. Further enhancement of scope of weighted deduction on expenditure incurred on in-house R&D to 200% and the same on payments made to national laboratories, research associations, colleges, universities and other institutions for scientific research to 175%, are welcome steps. Income tax and other proposals of the finance minister will benefit the industry. An annual health survey will be undertaken to prepare the District Health Profile of all districts in 2010-11.

Uniform concessional basic duty of 5% for all medical appliances and exemption of import duty from specified inputs for the manufacture of orthopedic implants are good initiatives. Reduction of corporate surcharge from 10% to 7.5%, though corporate Minimum Alternate Tax has gone up to 18%. Tax incentives for setting up and operating “Cold Chain” infrastructure, which is an integral part in logistics for vaccines and many biotech products have been announced. The steps taken by the government to come out of the recession is appreciable.

The reduction in excise duty to 4% from 8% is the reason why the pharma industry as a whole survived during the economic meltdown. Due to excise reduction pharma companies in 23 states successfully fought the recession. Following this initiative, many companies decreased the maximum retail price on drugs and pharma and passed on the benefit to the customer.

Medical equipment, instruments and appliances are subject to a complex import duty regime. Multiple rates coupled with descriptions not aligned with tariff lines, result in disputes and at times prevent state-of-the-art equipment from availing the benefit of exemption. The manufacturers of orthopedic implants have shown that their inputs attract a higher rate of duty than the finished product. The finance minister has proposed to exempt specified inputs for the manufacture of such implants from import duty.

Reacting to the Budget, Nova Medical Centers CEO and managing director said, “The Union Budget 2010-11 looks very promising especially with respect to the healthcare sector and I am pleased with the increase in fund allocation for the sector.” Mukherjee touched upon skill development programmes too. The direct health skills gain could exceed 2.5 million per annum, provided we augment the right environment to encourage health skills by way of education, training and development.

On the healthcare front, the FM announced an increase in allocation for health and family welfare to Rs 22,300 crore along with incentives for R&D, that is enhancing the weighted deduction on expenditure incurred on in-house R&D from 150% to 200%. The FM also incentivized research associations, colleges and universities with a deduction from 125% to 175%, along with exempting the income of all approved associations.

While this is certainly a move in the right direction, the industry is in need of greater sops and a deduction of at least 300% would have resulted in much greater benefits. A sharper focus on breakthrough research will give the requisite fillip to R&D efforts in the country and give us an edge over other nations. The industry was also looking forward to an increase in healthcare infrastructure with creation of focused SEZs and tax holidays on exports. Both these issues remain unaddressed in the Budget.

The major challenge before the healthcare sector is fighting heart disease, diabetes and cancer which affect Indians the most. Planned intervention to enable the health system to reverse the ill effects of these diseases is needed. Other challenges include filling the shortage of health infrastructure and health human resources. There is a need to add 1,00,000 beds each year for the next two decades at a cost of Rs 50,000 crore per year. It would have been helpful if the government had developed an investment-friendly environment for this sector.

The service tax net being expanded to include health check-ups undertaken by hospitals for employees of business entities and health services provided under health insurance schemes offered by insurance companies may not be advantageous in ensuring better access to healthcare for the common man. It is also proving to be a deterrent for advocacy of preventive health.

To summarize, this Budget belongs to the farmer and the banker while recognizing and boosting entrepreneurial talent. For any country, economic growth must bring with it a faster growth of its healthcare sector and the health of an economy can often be judged by the health of its citizens. It is therefore imperative that the government realizes the importance of the healthcare sector for India’s growth and the need for faster reforms to bridge the growing healthcare aspirations of the people and give the sector the priority status it much deserves. Without this, India’s prospects will be hampered and the growth momentum will fail to remain at its current levels. The call to reform the Indian healthcare agenda goes unanswered again in Budget 2010-11. In totality, it is a progressive and people-friendly budget.