Background of Indian Pharma
India is the third-largest producer of pharmaceuticals by volume and the fourteenth-largest producer by value. It is the world’s largest supplier of generic drugs and meets roughly 60% of global vaccine demand. India also supplies approximately 40% of generic demand in the United States and approximately 25% of total demand in the United Kingdom. The total value of drug and pharmaceutical exports between April 2020 and February 2021 is $22.15 billion.
According to a FICCI report, the pharmaceutical industry is expected to grow at a CAGR of 12% to reach $ 30 billion by 2030, up from $41.3 billion in 2020. Over the last two decades, the industry has grown at a CAGR of around 13%. The government has launched several initiatives to encourage investment in this sector. The government approved a production linked scheme (PLI) for the pharmaceuticals sector from FY21 to FY29 in February 2021. This scheme is expected to bring in approximately $15 million in investment into the sector.
China’s Role in the Indian Pharma sector
India is heavily reliant on China for raw materials and intermediaries, primarily active pharmaceutical ingredients (API) used in the production of drugs and medicines. China supplies roughly 70% of India’s total drug requirements. APIs are chemical compounds that are required in the production of a finished drug/medicine. APIs are necessary for a drug because their effects cure the disease. For example, paracetamol is the APIs for Crocin which cures headache and pain relief.
China raised the API prices of four of the market’s top-selling drugs in April 2020. According to some Indian pharmaceutical companies, the prices of some drugs, such as Azithromycin and Ornizadole, as well as anti-inflammatory drugs like nimesulide and paracetamol, have increased by 60 to 90 %.
China continued this trend of price increases in November 2020, and raw material prices have multiplied since then. The price of paracetamol, the most commonly used drug, has increased by nearly 100 % since November, while the price of Enzyme Rutoside, used in the manufacture of pain relief drugs, has increased by 233 percent, from Rs 1,770 kg to Rs 5,500 kg. In addition, commonly used drugs such as vitamins, parasite infestation, and the drug ivermectin have seen API increases ranging from 30 to 40%.
China’s motive behind the price hikes
China essentially seeks a monopoly on the production and manufacturing of drug raw materials. Price hikes increase manufacturing costs for the Indian pharma industry, and because the Indian pharma industry is only allowed to raise pharma product prices by 10%, this results in losses for the Indian pharma industry due to increases in import costs and manufacturing costs. If the price increases continue, India will soon face a pharmaceutical cost crisis. Another reason for these price increases is China’s reaction to India’s PLI scheme. The scheme aims to achieve self-sufficiency in the production and manufacturing of raw materials for pharmaceuticals.
China employs a dumping strategy as well. In international trade, this method involves price discrimination in which the price of a product in an importing country is lower than the price of a product in an exporting country. China lowered the price of the raw material ATS – 8, which is an API for the cardiovascular drug atorvastatin.
India is the only other producer of this raw material. Because India is the only competitor, China reduced the price of ATS – 8 so that other countries would prefer to import it from China rather than India due to lower costs. This would result in higher profits for China’s industry and lower exports, resulting in lower profits for India.
It is clear that China is engaging in unfair trade practices because international trade theories suggest that trade should be mutually beneficial, and based on these price increases, trade between India and China is not mutually beneficial in the pharma sector. Mercantilism is a term used in international trade theories to describe this practice. It refers to the government’s manipulation of trade practices to gain more power and wealth.
How Does India Get out of this Issue?
India will become more self-sufficient in the production and manufacture of these drugs and intermediaries. The government’s PLI program is a step toward independence in this sector. The prime minister announced a Rs 6940 crore scheme in March 2021 to reduce the country’s reliance on China for API imports for the next eight years. An additional Rs 3000 crore has been set aside for the establishment of bulk manufacturing parks over the next five years. Production of low-cost drugs and medicines is only possible with government support, making API production a viable option for India.
According to a KPMG report titled India’s API Industry: Reaching Full Potential, India has a strong hand in manufacturing costs, skilled labour, manufacturing standards, and technological advantages, but it lacks in research, infrastructure, and finance costs, among other things.
Finally, to reduce its reliance on China and other countries, the country should invest more in research and development and cost-effective practices. To attract FDI into this sector, the government must also implement a variety of schemes and policies.
EY- Ficci report – Indian Pharmaceutical Industry 2021- Future is Now.
McKinsey report- Indian Pharma 2020, Propelling access and acceptance, realising true potential