Ever since India had liberalized its markets and eased it economic policies, it had witnessed unprecedented growth in all sectors. Especially the pharmaceutical and drug manufacturing industry moved in a scorching pace and some of the entities metamorphosed into multinational players. Today globally the Indian pharma industry is ranked third in terms of volume of production with a market share of 10 per cent and is ranked 14th largest value- wise .
While Andhra Pradesh had taken a lead in the southern region to establish a pharmaceutical and biotechnology hub in the country, many other states in the north have taken it as a model. Northern states like Himachal Pradesh, Haryana, Uttarakhand, Chhattisgarh, Bihar, Gujarat and Rajasthan too have adopted the growth policy of Andhra Pradesh. Especially northern states like Himachal Pradesh and Uttarakhand have done exceptionally well to build a concrete industrial base for pharma sector. Within just 5-6 years these two states could attract a large chunk of pharma investors. More than 300 companies were set up in Himachal Pradesh and about 60 in Uttarakhand in a short span of two years.
Though the growth looked to be positive and encouraging, unfortunately the industry is now facing headwinds due to the expiry of the tax benefit period. The state governments will not able to prolong their support post expiry of the tax benefit period for the industry. Because of this many of entrepreneurs are slowly shifting their base to other liberal destinations or to the states of origin like Andhra Pradesh from where they came from.
As the tax benefit period is over, new investors and entrepreneurs are being taxed heavily. The government is not ready to give concessions to even the entry level organizations and is also levying entry tax. As the tax benefits were applicable for only a period of just 10 years, the governments in these states is in no mood to extend the benefits as they fear huge loss to the exchequer in the long run.
Among all northern states, Himachal Pradesh (HP) and Uttarakhand are regarded as the fastest growing regions in the pharma and biotechnology sectors. This growth is primarily driven by the incentives announced by the state government in its Industrial Policy, 2004. Many pharma companies in these states had set up their plants to avail of excise duty benefits, which ended in March 2010. The incentives had helped small scale contract manufacturers and small- and medium-scale manufactures to flourish.
Ever since the migration of pharma units to excise free zones started in 2004, there was a big question as to what was in store for these entrepreneurs. There were even many fresh investor/entrepreneurs who had entered the fray. Presently HP has around 300 pharma companies. These include pharma majors such as Cipla, Dr Reddy's Laboratories, Morepen, Torrent, Zydus Cadila, Mankind and Indoco. Similarly, Uttarakhand has around 60 small pharma companies located near Dehradun.
Baddi and Paonta sahib in Himachal Pradesh are the two tax free zones for the pharma industry. The HP government had proposed a biotechnology park and nanotechnology park in the Solan district. Recently, the government approved SEZs in Kangra and Solan as multi-products SEZ, whereas in case of Uttarakhand, the Pharma City has been established in Salequi near Dehradun.
Tax exemptions have also been given to integrated industrial estates established at Haridwar and Pantanagar. Another growth centre is located in Dehradun which is also a tax free special economic zone for the pharma industry in North India.
Many companies have shifted from southern regions like Andhra Pradesh and Maharashtra to avail of the opportunity. Most of the companies had selectively chosen particular locations for starting their new ventures in these special economic zones. But most of them started utilizing the capacities created by a large number of small and medium scale factories due to the cost advantage. However with a large number of units entering the pharma business for the first time, many of them succumbed to the pressure of competition. Eventually some of the bigger players took over the smaller ones to overcome the competition and increase their capacity .
The HP government came up with some new initiatives to focus on developing new technologies in the areas of biotechnology for agriculture, animal husbandry and healthcare. These initiatives include: Upgradation of infrastructural support to R&D institutions for skill development in biotechnology; intensification of R&D work in potential areas of biotechnology including agriculture, animal husbandry and human health; conservation and commercial exploitation of the bio-resources of the state for sustainable development ; attracting entrepreneurs to set up of biotechnology-based industries and providing a suitable institutional framework to achieve objectives.
Govt. investment in industrial infrastructure
During the past 3-4 years, the Himachal government had made huge investments in the development of industrial infrastructure. In 2008-09, the government added an outlay of Rs. 330 crores ($66 million) for road development and related activities. There are three airports at Simla, Kangra and Kullu and a proposed airport of international quality at Sundernagar.
Likewise Uttarakhand is also well connected by roads. The National Highway and State Highway covers around 3500 kilometres. The state has two airports - at Dehradun and Pant Nagar. In order to encourage the industry, the state government has granted the pharma companies 100 per cent exemption from central excise for 10 years; 100 per cent income tax exemption for first five years and 30 per cent for next five years; CST at the rate of one per cent for five years; capital investment subsidy at the rate of 15 per cent. Industrial units located in the state are reimbursed 75 per cent of the cost of transportation of their raw materials/finished goods to and from the location of their units anywhere in the state to the nearest specified broad gauge rail head under the Central Transport Subsidy Scheme. This subsidy is available for a period of five years from the date of commencement of production.
“Earlier there used to be lot of issues of logistics in both the states but with the help of both the governments, logistics has improved a lot over the years. There still remains a lot to be done,” opined an industry analyst.
However, the problems relating to better connectivity still persist and causing concern to the industry units. The rail network is yet to be put in place as there is almost negligible industrial rail network in HP. Moreover , the roads leading to Baddi and Poanta, the two major industrial towns in the state, are in poor and shabby condition and full of potholes.
These excise free zones gave a big boost to the generic business in India and suddenly a large number of factories sprang up manufacturing a smörgasbord of generic products for a large number of companies. There was an open price war in the market and new marketing strategies were adopted by generic dealers/distributors, offering expensive white goods and free holidays abroad.
Incentives lure Andhra cos
Attracted by the incentives offered by the northern states, some of the well established pharma firms in Andhra had shifted their small subsidiaries to Baddi in Himachal Pradesh. Out of 800 companies, near to about 60 formulation companies had migrated to HP and to Uttarakhand. But however these companies are now slowly returning back as Andhra Pradesh has a lot of unexplored potential.
Why companies are shifting back?
The main reason for the companies to shift back from north to other destinations is to avoid the cut throat competition. The intense competition gradually chipped away business ethics and eventually quality of medicines suffered.
Even the pricing policy regime of the central government was another concern for the companies. There is a lot of confusion amongst small-scale manufacturers regarding SSI exemption from prior price approvals. As per Drug Policy 1994 and DPCO 1995, small-scale units are exempted from certain provisions of DPCO.
The industry leaders feel that NPPA (National pricing policy) is not clear and requires clarification. Since most of the units are contract manufacturers and manufacture for other marketers, price violation and over-charging of drugs is not rampant. So, in no way, keeping high MRPs going to benefit manufacturing units as they are selling their products at cost plus a nominal margin only, they opine.
The inconsistent policies of the state governments in the north is impacting the prospects of SSI units, feel entrepreneurs. Due to unstable policies of the government , many of the units are directionless and are left high and dry without knowing what future holds for them.
On the one hand owing to surplus production capacity, there is stiff competition; on the other while the production costs have increased significantly, profit margins have come down substantially.
Their survival now depends on a paradigm shift in business outlook which is operating on meagre margins while keeping the quality factor in mind.