The unending FDI debate in India Pharma

A few days ago the govt announced a 25% increase in FDI inflows into India due to some easing of the red tape by the Ministry of Commerce. While this may have eased the inflow of capital into the country, sectoral reforms are desperately needed to make sure that the return on that capital is guaranteed and stable.

If the pharma sector needs a boost, capital must flow in either from the government or through business corporations in the form of FDI. With PSU firms all but shut, it is unlikely that the govt will infuse capital into the sector. This leaves FDI as the only option.

Capital can thus flow either into existing companies (brownfield projects) or into new projects (greenfield projects). For money to find its way into greenfield projects, the govt must focus on sectoral reforms which range from smoothing out acquisition of land, getting the required environmental clearances, ease of hiring organized labour and so on and so forth.

Setting these things right are painful (since these are state subjects) and may even inhibit sector growth in the short term, which leads to the double whammy of the govt not attempting to set things right and the industry not showing disproportionate interest in investing in new projects.

This explains why FDI in greenfield projects in pharma which the govt allows 100% FDI through the automatic route shows little appeal to foreign investors. On the other hand brownfield projects which have often managed to cut through the maze of regulations and run profitable businesses appeal more to foreign corporations who would rather have quicker returns on their investments than have their money tied up in policy tangles.

While the Finance Ministry has understood this and is in all likelihood supporting the Commerce Ministry to ease regulations and get PM Modi’s “Make in India” vision to reality, the Parliamentary Panel that wants a ban on brownfield investments does so out of a misplaced sense of nationalism. Surprisingly for a country that recently prided itself for unshackling its economy and pushing pro-growth reforms, the Panel recommended a blanket ban on FDI in brownfield projects, which means it doesn’t want foreign pharmaceutical companies to invest in existing Indian ones.

This is surprising since it comes from a legitimate body that is mandated to think rationally and govern in the best interests of the Indian people. Tragically, the committee seemed more driven by public perception and chose to value Bollywood actor Aamir Khan’s judgement over those of veteran economists!

The central argument is that FDI poses a direct threat to the access and affordability of medicines and threatens to elbow out our domestic industry. This is somewhat difficult to digest. Nowhere in the world has this happened in the past.

There is no indication that foreign firms plan to acquire Indian generic companies to stop generic medicines. If anything, with blockbuster medicines going off-patent and govts around the world preferring generics to manage ballooning costs, pharmaceutical companies should increasingly integrate generic drugs into their portfolio of offerings. Also with the attractiveness of the Indian market, acquisition ofIndian companies – if at all – is more likely for their manufacturing strength in generics and their strong distribution capabilities in a complex land. Not to obliterate them.

The Panel’s concern that India’s domestic industry will die if foreign companies invest here is silly. On the one hand, why would anyone spend billions of dollars to acquire companies only to ‘kill’ them? And on the other, what stops Cipla or Lupin from gobbling up a few companies as they compete for the top spot with Sun-Ranbaxy?

Another argument (more moral than rational) is that FDI in the sector will hamper Indian medicine exports. Currently, India exports drugs to more than 200 countries and vaccines and bio-pharma products to about 151 countries. The export growth rate is around 10 percent per annum. And the major chunk of exports relate to generic drugs. Is it so difficult to imagine foreign companies exporting affordable generics from a land touted by our own leaders as “Pharmacy to the World”? That too when govts around the world have made their preference for generic medicine amply clear?

A third argument is that prices of medicines will rise in India due to FDI inflows. This despite a recent study by India’s own Department of Pharmaceuticals that found domestic drug prices to be immune to acquisitions. It is also pertinent to point out here that the largest critics of the recent Drugs Price Control Order (DPCO) were Indian companies through its lobby, the Indian Pharmaceutical Alliance (IPA). Even if the argument was logical, wouldn’t the stringent and ever-expanding DPCO drive foreign capital *out* of India? Then why bother to ban FDI at all?

The Parliamentary Panel also worried about a lack of compulsion on transfer of technology and similar other conditions expected to bring qualitative change to the domestic pharma industry. First of all, how does a ban on FDI ensure transfer of technology? If India needs technology then why does the govt want to compel things? Why not focus time and resources into creating market conditions that attract such investment into the country? Why would multi-billion dollar business corporations not want to transfer technology to India if cost of transferring it is low (tax laws), safety of the technology (IP laws) is assured and the return on investment is lucrative?

The interest that foreign firms take in India and its businesses will not increase disproportionately until the government makes it easy to operate in the country without letting regulations interfere. A govt voted in on a pro-business mandate must work to integrate India more into the global economy. And, if conditions are eased, market forces will decide whether domestic companies dominate the sector or fall prey to more efficient competition. Either way, the patient wins!

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