The GST is expected to increase supply-side bottlenecks due to the inability of trade to fully transition to the new regime. A three-part series starting today looks at how three key constituents - farmers, consumers and patients/doctors - are dealing with the crunch.
A reduction in inventory ahead of the implementation of the goods and services tax (GST) on July 1 may result in a shortage in about 5-10% of brands at the retail level, pharmaceutical industry executives and experts Business Standard spoke to said.
Stockists are keeping inventories at a minimum level to reduce the impact of tax increases and to bring down complexities that will accompany changes in the tax regime. The current rate of tax on medicine works out to around nine%, while under GST most drugs will be taxed at 12%.
According to the All India Organisation of Chemists and Druggists (AIOCD), stockists were holding 24 days’ inventory on June 14, which is 16 days lower than their May-end stocks. On June 7, the inventory holding was of 27 days.
Industry preparedness for the switch-over to the GST regime is also sub-par. “Managing short-term disruptions due to the new tax regime will be challenging - 50-70% of stockists and chemists are not clear and have not initiated implementation of the GST in their businesses. Inventory rationalisation by stockists till July 1 might lead to short-term availability challenges,” health care services provider QuintilesIMS said in a report last week.
The AIOCD, however, has ruled out a shortage of medicines. “For most companies, the inventory is holding steady (at the trade level), which shows that the series of steps initiated by them to ensure adequate stocking is yielding positive results. With two weeks to go for the GST and more than three weeks of inventory at the distributor level (plus retail inventory of two to three weeks), the industry is in a positive situation and a drug shortage is unlikely at the consumer level,” said Ameesh Masurekar, director of the market research wing of the AIOCD.
Masurekar expects distributors to register on the GST Network portal by June-end and does not see this as a reason for supply disruptions.
AIOCD data reveals panic-buying of medicines due to fears of a drug shortage. “There seems to have been some advancing of purchases of medicines for cardiac ailments and diabetes. The inventory for these ailments therefore is lower compared to other therapies,” Masurekar said.
An executive with an Ahmedabad-based drug company said, “Some amount of overbuying is definitely happening among consumers. This is likely to deplete inventory faster.”
“Stockists generally keep inventory far in excess of requirement and I do not see any possibility of a shortage. Around 5-10% of brands may run out of stock in some retail stores, but these can be substituted easily,” said Shakti Chakraborty, former head of Lupin’s domestic business and chief executive officer (CEO) of Ergos Life Sciences.
Drugmakers, including Cipla, Alembic and Sun Pharma, are offering incentives of 6.5-8.5% on purchases by stockists to ensure they keep adequate inventory in June. Cipla and GSK Pharma are also offering additional credit period to stockists.
But these measures are yet to calm nerves. “Some companies have said they will not take back the unsold inventory of April-June except for quality issues. Also companies have asked us to manage distribution of incentives at the retail level. This will be a complex exercise,” said a Mumbai-based drug stockist.
Ranjit Kapadia, senior vice-president, Centrum Broking, felt there might be a drug shortage towards the end of June as stockists and retailers were apprehensive about holding inventory. “Many pharmaceutical companies have provided assurances that they will compensate for the losses,” he said. Kapadia added that retailers were advising patients to maintain buffer stocks of essential medicines.
Daara Patel, secretary-general of the Indian Drug Manufacturers Association, said there was no reason to panic. “As many as 15 companies have provided assurances to stockists and wholesalers that they will be compensated for any losses. The government, too, has decided to offer a 40% input-tax-credit refund on goods purchased before July 1,” he said.
“We are constantly in touch with our suppliers, who have assured us that supplies to our hospital will not be affected. We have taken adequate steps to ensure that patients are not inconvenienced due to the GST,” said Gautam Khanna, CEO of PD Hinduja Hospital, Mumbai.