The Indian pharmaceutical industry finds itself in a Catch-22 situation. It is elated about the government’s higher spend on healthcare in Budget 2021, but realises that some of its demands such as restoration of weighted average deduction on research and design (R&D) extension of production linked scheme to formulations, and a new plan of export incentives, have not been met.
Finance Minister Nirmala Sitharaman announced an outlay of Rs 223,846 crore for health and wellbeing in Budget 2021. This was an increase of 137 percent compared to 2020, when the outlay on healthcare stood at Rs 94,452 crore. The rise was primarily led by Rs 35,000 crore allotment for COVID-19 vaccines.
The finance minister also announced a new scheme called the PM Atmanirbhar Swasth Bharat Yojana for boosting the primary, secondary, and tertiary healthcare, with a budgetary outlay of Rs 64,180 crore spread over six years.
This funding would be used to develop capacities of health care systems, develop institutions for detection and cure of new and emerging diseases.
To be sure, the pharma industry sees increase in healthcare spending as positive, due to the cascading effect it will have on the industry.
"India has been witnessing a growing demand for healthcare beyond metros, and the Budget’s provisions towards creating infrastructure through integrated public health labs in districts, rural and urban health and wellness centres, in addition to block public health units, will help drive deeper healthcare penetration in Tier 2-6 cities," said Umang Vohra, MD & Global CEO, Cipla.
He added: "Citizens will also significantly benefit from the country’s COVID-19 vaccination drive with Rs 35,000 crore being earmarked for the same. Overall, we are pleased to see solid budgetary allocations towards healthcare.”
Sudarshan Jain, Secretary General, Indian Pharmaceutical Alliance, concurred. "The initiatives are pointers to increased investment in healthcare infrastructure and will strengthen the sector going forward."
Satish Reddy, Chairman of Dr Reddy’s Laboratories appeared more circumspect. He welcomed the Budget proposals but said the success would depend on execution.
"As with all Budgets, there are concrete proposals that are encouraging but it is the execution that finally matters and I hope this time the government gets it right," he said.
Expectations not met
There are several other areas, however, where Budget 2021 hasn't met the industry’s expectations.
"While the increased budgetary allocations are re-assuring, there are no tax proposals specific to this sector. Direct tax incentives would have further encouraged the private sector to invest and engage in R&D and help position India as an innovation hub. Also, rationalising GST rates on critical/lifesaving drugs and healthcare services would have made them more affordable," consulting firm Deloitte said.
Pharmaceutical manufacturers, who were anticipating the extension of production-linked incentive (PLI) to formulations, like the one given to active pharmaceutical ingredients and intermediates, were also left disappointed.
The pharmaceutical sector has come under sharp focus in FY21, due to the COVID-19 pandemic. Coronavirus has exposed the vulnerability of the Indian drug industry’s over-reliance on Chinese raw materials, sometimes as high as 80 percent, exposing it to the vagaries of price hikes and shortages. The government is also worried about drug security, especially antibiotics in cases of emergencies like natural calamities and wars.
Given this backdrop, the government made 53 bulk drugs eligible for a production-linked incentive worth Rs 6,940 crore. In addition, the government also announced Rs 3,000 crore funding to set up two bulk drug parks and one intermediate park to boost local manufacturing.
Demand to restore tax benefit offered on R&D expenditure
The government had introduced a weighted tax deduction of 200 percent on company expenditure on in-house R&D in the 2010 Budget, to boost innovation in the country. In weighted tax deduction, double the amount spent on R&D is deducted from the profit of the company providing them additional cash to invest further in research and development.
While the tax incentive isn't specific to the pharma industry, its companies have been major beneficiaries as they have increased their average R&D spend from 5.3 percent of revenue in FY12 to 8.5 percent in FY20.
However, the 200 percent weighted deduction on R&D was short-lived, with the government in the 2016 Budget cutting it to 150 percent from 2017 onwards and to 100 percent from 2020 onwards.
The industry, which was expecting the announcement of a new scheme of export incentives or subsidies in place of the now scrapped Merchandise Exports from India Scheme (MEIS) to promote pharmaceutical exports, was also left in lurch.
Under MEIS, the government provides duty benefits at different rates depending on product and country. The government had to scrap MEIS, as it wasn't compliant with WTO regulations. Pharma companies were major beneficiaries of the scheme. India's pharmaceutical exports rose 9.5 percent to $20.58 billion in FY20.