Karnataka pharmaceutical industry is passing through a tough time with lower sales, declining profitability and inventory pile up. This is seriously affecting the growth of a large number of units in the state. The two issues that have led the industry into this bad phase are Value Added Tax (VAT) and excise duty on MRP. In the case of contract manufacturing units, the scene is bleak and uncertain. The units are drawing out survival strategies to be able to sustain their sales.

Despite the pressure to move to the excise free zones of Baddi, Uttaranchal and Jammu & Kashmir, only Micro Labs and Bal Pharma have opted to set-up an additional facility to avail the excise duty benefit. While some companies plan to outsource their production from existing units at Baddi which would be more economical than setting up an own unit there, others are planning to invest at the SEZs to at least to protect their revenues.

The stagnant sales have impacted earnings from the state. In March 2004, the total sales of pharmaceuticals sector in the state accounted for only Rs. 2,000 crore with a growth rate of 10 to12 per cent as against the national growth rate of 12 to 14 per cent. Whatever improvement in sales recorded between April and December 2004 was nullified with the crisis of MRP based excise duty since January 2005 and the VAT issue thereafter. This has led to zero sales growth for many companies. The units are in a crisis and are worried about the future. Some of them are in a dilemma whether to invest for the domestic market or to concentrate only for international market.

The biggest deterrent for companies in Karnataka to opt for SEZ's is distance and associated infrastructure issues, stated Jatish N Seth, secretary, Karnataka Drugs and Pharmaceutical Association (KDPMA) and director Srushti Pharmaceuticals. In fact, it is cheaper to go to Dubai than Baddi voiced Seth who is now going to set up an additional facility at Jebelali a duty free zone in Dubai, to consolidate his presence in the export market which is proving out to be more lucrative than the domestic markets.

Another issue is manpower as the Union Government insists companies should ensure that 25 per cent of employees working at the units there should be locals. "This makes the scene even more tough as haggling for additional pay scales is becoming evident," stated Seth.

Before the government decided on three SEZs -Baddi, Uttaranchal and J&K- it was the north eastern states which offered the excise duty benefits. No company could even think of setting base because of the political uncertainty. Now with the 35 per cent on MRP, there was no option but move to any of the 3 SEZs. For companies located in the northern region, the new locations are ideal and convenient but for southern units it unviable and expensive, he explained.

According to Shailesh Siroya, Baddi has become over crowded with over 150 companies buying up land and despite its easy accessibility to Chandigarh, many companies are feeling Uttaranchal or J&K would be preferable because of additional tax incentives. In the case of J&K, the government is encouraging incentives with an offer to refund both MODVAT and the excise duty. "Hence, we are likely to select either Uttaranchal or J&K depending on the benefits," he stated.