India needs Minister of Finance Arun Jaitley to deliver a path-breaking Union Budget, a bold statement that is visionary in scope yet granular in its objectives. It’s what is required to jumpstart an Indian economy that’s growing at nearly the slowest pace in a decade. While there are signs of a recovery on the back of favourable global macroeconomic developments, the GDP growth momentum remains weak as investments are yet to revive.
For a government that has come to power on the promise of revolutionising governance and pushing the economy towards recovery, this is an opportunity to take some long-pending, brave decisions. Investors are waiting for the Modi government to articulate second-generation economic reforms, give a thrust to the creation of world-class infrastructure, usher in overdue tax-, labour- and regulatory reforms and unveil business-friendly policies. Jaitley’s last budget was largely directional; this year’s will have to be about decisive action and a time-bound roadmap for economic revival.
Expectations are that the budget will provide more specifics on Prime Minister Modi’s ‘Make in India’ campaign. If successful, the PM’s global campaign to encourage investment and manufacturing in India can transform the country into an equitable and inclusive economic superpower.
Strengthening the Pharmaceutical Industry
As the largest and lowest-cost producer of generic drugs in the world, the Indian pharmaceutical industry has a crucial role to play in the government’s ‘Make in India’ initiative. The Indian pharma industry has earned the proud label of being the ‘Pharmacy of the World’ by creating a global scale manufacturing base, which has made our country an indispensable and integral part of global health care. It is imperative that we build and strengthen this sector so that it can assume an even greater position in global health care.
The budget needs to give the pharma industry a shot in the arm by ensuring the following:
Support to capital investment: Over the last decade, the top 20 Indian pharmaceutical companies have invested over Rs 25,000 crore in setting up global scale manufacturing facilities. These facilities need to be further augmented through exponential capital investment in the next 10 years. Many of these past investments have been done through high-interest domestic and overseas borrowings.
Foreign currency borrowings have resulted in huge liabilities on account of sharp rupee devaluation that has hurt the balance sheets of several of these companies. Low-interest borrowings need to be made available for future investments to be made by the pharmaceutical industry.
Incentives to ‘Innovate in India’: For India to retain its global leadership, investment in research and development (R&D) and innovation is paramount. The 200 percent weighted tax deduction on R&D costs allowed to pharmaceutical companies does not permit the inclusion of international patenting and overseas drug development expenses. This tax exemption should be allowed, urgently.
Rational approach to drug pricing: The computation of drug price ceilings should be based on an equitable formula, which ensures like-for-like comparisons and factors in the quantum of investments by pharma companies in creating world-class infrastructure. If pharmaceutical companies are prevented from deriving reasonable return on investments (RoIs), a draconian pricing policy will erode huge value for this all-important sector and make business unviable.
Incentives for Manufacturing: Unlike other sectors, the pharmaceutical industry needs international regulatory approvals before it can export drugs and drug ingredients.
The approval process takes an average of two years, denying all pharmaceutical units in SEZs the benefit of a tax holiday in that period. To address this anomaly, pharma SEZs should be allowed to avail of the tax holiday only after obtaining the required regulatory approvals. Additionally, the government should also consider the exemption of duties and taxes on domestic sales of essential drugs.
Increase in health care spending: This budget also provides an opportunity for the government to signal its commitment to universal health coverage. India needs to urgently raise public health care spending to at least 2.5 percent of the GDP from only about one percent currently. It also needs to create a highly effective, sustainable, technology-based universal health care system that emphasises individual responsibility for health supported by enabling state policy.
In conclusion, it’s worth noting that the prospect of a reforms-oriented budget has already started reflecting in market sentiments with the Sensex hitting record highs. To live up to investor expectations, the new government needs to introduce enabling policies as well as build the necessary infrastructure that supports the development agenda for the country across sectors.
This budget is a golden opportunity for the government to usher in the promised “achhe din [good days]” which will attest to the reformist credentials of the Narendra Modi-led government.
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(This story appears in the 06 March, 2015 issue of Forbes India. To visit our Archives, click here.)