Production linked incentive scheme needs to be revised to attract industry
The pharmaceutical industry is a key sector for the Atmanirbhar Bharat programme. The Phase-I Production-Linked Incentive (PLI) scheme in this sector was aimed at reducing import dependence on Active Pharmaceutical Ingredients (APIs), Pharmaceutical Intermediates (DIs) and Key Starting Ingredients (KSMs). The plan was expected to attract a lot of interest as countries began adopting measures to reduce their dependence on China for APIs. However, the response to the plan did not live up to the expectations.
A total of 239 applications were received in the two rounds from an industry of over 3,000 firms. Out of these 61 were selected. As 11 beneficiaries withdrew from the scheme, the number came down to 50 on December 9, 2021, as against the maximum number of 136 beneficiaries mentioned in the guidelines. No beneficiary was identified in five of the 41 products notified for the scheme.
build investor confidence
A recent study by us on this plan, published as a working paper of the Institute for Studies in Industrial Development (ISID), suggests that India needs a strategy to realize the objective of reducing import dependence. What is needed is not just a plan. There are three areas where this PLI scheme needs modification. Other complementary measures also need to be implemented for India to become self-reliant in API, DI and KSM.
Firms will invest in production in India if they see a possibility to produce at prices cheaper than the cost of imports. Since cheaper imports from China are critical to maintaining its global capacity in exporting formulations, investors will face investment uncertainty if the proposed measures do not ensure price competitiveness of domestic production. More than half of the business of this industry comes from exports. Imports from China are reported to be 35-40% cheaper than indigenously made products. Therefore, any strategy aimed at achieving self-reliance must focus on achieving value competency in production.
Technology plays a very important role in reducing import dependence as Indian producers have some advantages over Chinese producers such as overcoming constraints on scale of operations. Without suitable technology, API/DI/KSM manufacturers in India would not be in a position to beat their Chinese counterparts in pricing. There is no technical component in this PLI scheme.
Second, the plan also emphasizes new manufacturing facilities, which may not make business sense for firms that have idle capacity. Many companies used to produce these products and production stopped due to introduction of cheaper imports from China. Allowing use of existing but defunct or underutilized facilities for production would have resulted in a better response.
Third, the history of the development of the indigenous pharmaceutical industry in India shows the importance of an industrial policy that is consistent with trade and science and technology policies. This PLI scheme remains a standalone measure; It is not linked to other relevant policy measures.
About three-fourth of the production of pharmaceuticals in India is done by MSMEs. Historically, large private sector firms have been interested in formulations, not APIs. Since APIs are sold under their chemical names and without branding, large firms are not interested in their production. The production of APIs by large firms, if at all, is largely for captive consumption. However, the focus of the PLI Phase-I scheme is on large firms. If the definition of MSME existing at the time of announcement of the scheme is used, the data we get for 13 of the beneficiary firms shows that they are all large firms. If the new definition is used, all except one are large firms. Policy makers seem to be interested in taking advantage of the efficiencies associated with scale-up operations by encouraging larger firms. But it is equally important to include small firms which are majorly involved in KSM/DI/API business.
involving public sector enterprises
Despite two rounds of applications, no beneficiaries were identified (or no applications were received) in the five products, which are all antibiotics. From our interactions with industry, it appears that four out of five products – neomycin, gentamicin, tetracycline and clindamycin base – are APIs that are not widely used by industry. This could be one of the reasons for the lack of enthusiasm by the industry. However, we should note that such APIs may be of great importance to public health. In such cases, Public Sector Enterprises (PSEs) should be entrusted with the production of APIs and their KSMs and DIs. The major role played by the Public Sector Undertakings in the development of the indigenous pharmaceutical industry in India can never be forgotten.
Reji Joseph and Rama Arun Kuma are faculty members at ISID, New Delhi. thoughts are personal
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