Why is Indian Pharma Businesses Dependant on China?

India’s pharmaceutical industry is the third-largest in the world in terms of volume and the thirteenth in terms of value. However, despite being a major player in the global pharmaceutical market, the industry is heavily dependent on China for raw materials and key ingredients.

According to a recent report by the Ministry of Commerce and Industry, China is the largest supplier of active pharmaceutical ingredients (APIs) to India, accounting for nearly 70% of India's total API imports. The report further reveals that India imported API worth $3.5 billion from China in the last financial year. However, Trade Promotion Council, a government-supported organisation, estimates the dependence on China is about 85%.

The dependence on China for APIs has been a long-standing issue for the Indian pharmaceutical industry, and the COVID-19 pandemic has further highlighted the need for India to reduce its dependence on China. The disruption in the supply chain caused by the pandemic led to a shortage of APIs, resulting in many drug manufacturers being unable to produce essential medicines.

Policy Hurdles

Apart from the dependence on China for APIs, there are other policy hurdles and challenges that the Indian pharmaceutical industry faces in becoming self-reliant. One of the main challenges is the high cost of production due to stringent regulations and high compliance costs.

According to a report by the Indian Pharmaceutical Alliance (IPA), the Indian pharmaceutical industry has to spend an average of 9.8% of its revenue on compliance costs, which is significantly higher than other industries. The report further states that India's compliance cost is four times higher than that of other countries such as China and Mexico.

Moreover, the government's policy of price control has also been a major challenge for the Indian pharmaceutical industry. The government regulates the prices of essential medicines through the National Pharmaceutical Pricing Authority (NPPA), which has resulted in lower profit margins for drug manufacturers.

The NPPA has fixed the prices of around 850 essential medicines, which account for nearly 40% of the total pharmaceutical market in India. While the policy has made essential medicines affordable for the masses, it has also led to a decline in investment in research and development (R&D) and innovation.

Lack of Research and Development

Another challenge the Indian pharmaceutical industry faces is the lack of a conducive ecosystem for innovation, and R&D. India spends only 0.7% of its GDP on R&D, which is significantly lower than other countries such as the US, China, and Israel.

According to a report by the Federation of Indian Chambers of Commerce and Industry (FICCI), the lack of a conducive ecosystem for innovation and R&D has resulted in a decline in the number of new drug discoveries in India. The report further states that only 6% of the new drugs approved globally between 2011 and 2016 were discovered by Indian pharmaceutical companies.

The lack of a robust ecosystem for innovation and R&D has also resulted in a decline in the number of patents filed by Indian pharmaceutical companies. According to a report by the Indian Brand Equity Foundation (IBEF), Indian companies filed only 1,323 patents in 2019, which is significantly lower than other countries, such as China and South Korea.

Government Initiatives

To address these challenges and reduce the dependence on China for APIs, the Indian government has launched various initiatives, such as the Production Linked Incentive (PLI) scheme, which aims to promote domestic manufacturing of APIs and key starting materials (KSMs). Under the scheme, the government has allocated Rs 6,940 crore for the pharmaceutical sector.

Moreover, the government has also launched the Pharma Vision 2020, which aims to make India self-reliant in the pharmaceutical sector by increasing R&D investments, improving the regulatory framework, and promoting innovation and entrepreneurship.

Some experts suggest that these measures are unlikely to yield results in the short term and that the government needs to do more to address the structural issues facing the industry. For instance, there is a need to streamline the regulatory processes, provide access to affordable financing, and create an enabling environment for innovation and technology upgradation.

Private Sector’s Innovation

Despite the challenges, some Indian companies have managed to reduce their dependence on China, by investing in backward integration and developing their own APIs and intermediates. For instance, Mumbai-based Sun Pharma has invested in its own API manufacturing facilities, while Hyderabad-based Dr. Reddy's Laboratories has set up a dedicated R&D center to develop new drug molecules.

However, such efforts require significant investment and a long-term vision, which may not be possible for all companies. Moreover, the challenges facing the industry are not limited to the pharma sector alone but also extend to other sectors, such as electronics, textiles, and chemicals, which are also heavily dependent on imports from China.