Drug pricing is certainly not the issue in growing dependence on China

An introspection into the evolution of drug price control policy of India and API dependence shows that there is no evidence suggesting that price controls have led to growing dependence on China

By Reji K Joseph

The department of pharmaceuticals (DoP) has recently notified the production-linked incentive (PLI) scheme to encourage domestic production of 41 active pharmaceutical ingredients (APIs), key starting materials (KSMs) and drug intermediaries (DIs). These products are critical inputs into the production of 53 APIs for which India is excessively dependent on China. A Drug Security Committee constituted by the DoP had identified those APIs for which India’s China dependence is extremely high.

Some discussions dependence attribute the dependence to drug price control policy. An article published in this paper (bit.ly/2PkGbnj) opines that it was this bad policy that led to India’s dependence on China. However, an introspection into the evolution of drug price control policy of India and API dependence shows that no evidence of this.

India was self-reliant on APIs until the mid-1990s when liberalisation in import restrictions led to a gradual influx of APIs from China. India had a more stringent price control policy before the 1990s. A cost-based price control system that existed until 2013 regulated the prices of both APIs and formulations. DPCO of 1979 regulated the prices of 347 APIs and their formulations, covering 80–90% of the market. Subsequent DPCOs reduced the number of APIs covered. The 1995 DPCO covered only 74 bulk drugs and formulations, covering only 25–30% of the pharmaceutical market. If price control system were the culprit, India would not have been self-sufficient in APIs until the mid-1990s.

The approach to price control shifted from a cost-based to a market-based one since 2013. Now, prices of formulations are fixed based on the price of top-selling brands. Unlike other sectors, in pharmaceuticals, top-selling brands often are also the highest priced ones. Therefore, although the new price control system sets a cap on the sale price, it is on the higher side. Most importantly, the new price control policy does not regulate the price of APIs; it regulates the prices of formulations of those APIs, which figure in the National List of Essential Medicines (NLEM). Hence, only around 18% of the market comes under purview.

Even though India now has a less stringent drug price control policy, the dependence on Chinese imports has been growing. The share of China in India’s total import of APIs has increased from 61% in 2011 to 69% in 2019, as captured by the APIs in chapter 29 of the Harmonised Commodity Description and Coding System, which constitutes more than two-thirds of total APIs imported.

It should be noted, 16 out of the 41 products that are subjected to the PLI scheme are not under the price control system as they do not figure in the NLEM. There are many APIs which do not fall under DPCO but are still imported in a significant way from China.

The experience in India was that firms would tend to rely on imported APIs if they have an option. Governments during the immediate post-independent India adopted various measures to reduce dependence on imports for medicines (APIs and formulations). However, the indigenous industry focused only on the production of formulations, based on imported APIs.The Hathi Committee (1975), which had looked into why Indian firms were not engaging in the production of APIs, found that the capital invested to turnover ratio of APIs was much lower as compared to formulations. This ratio was 1:1 for APIs at best and 1:2.6 for formulations on average, and in some cases, as high as 1:7.2.

Subsequently, various measures were adopted, such as assigning a leadership role to the PSEs for the acquisition, development and dissemination of suitable technologies and entrusting CSIR laboratories with the task of development of appropriate process technologies required by the industry. The ‘ratio parameter’ mandatorily required the producers of formulations to produce a certain quantity of APIs. It was the government interventions to overcome the market failure that resulted in India attaining self-sufficiency in APIs. An enquiry into the causes of dependence on China needs to go much beyond price control policy and look into whether the state continued to play a proactive role during the post-1991 period to maintain an ecosystem to enhance the competence of Indian API industry. Pro-active state interventions in China led to the emergence of a thriving API industry in China.

The author is Associate Professor, Institute for Studies in Industrial Development. Views are personal