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 41 products are critical inputs into the production of 53 APIs for which India is excessively dependent on China for imports. A Drug Security Committee constituted by the DoP had identified those APIs for which India’s dependence is extremely high on China.
Some of the discussions around the dependence tend to attribute it to the drug price control policy of India. India has a system for the regulation of prices of medicines since 1962. But an introspection into the evolution of drug price control policy of India and it’s API dependence shows that there is no evidence suggesting that the price control policy has made the country import dependent on APIs.
India was self-reliant on APIs till the mid-1990s, when the liberalisation of 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 their formulations. The Drug Price Control Order (DPCO) of 1979 regulated the prices of 347 APIs and their formulations, covering 80–90 per cent of the pharmaceutical market in the country. Subsequent DPCOs reduced the number of APIs covered and thus reducing the coverage of drugs under price control. The 1995 DPCO covered only 74 APIs and their formulations, covering only 25–30 per cent of the pharmaceutical market of the country. 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 one to a market-based one in 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 at a higher side. And most importantly, the new price control policy does not regulate the price of APIs; it regulates the prices of only formulations of those APIs which figure in the National List of Essential Medicines (NLEM). Now, only around 18 per cent of the Indian pharmaceutical market come under the purview of the price control policy.
Even though India now has a less stringent drug price control policy that does not regulate APIs, the dependence on China for imports has been growing. The share of China in India’s total import of APIs has increased from 61per cent in 2011 to 69 per cent in 2019, as captured by the APIs in chapter 29 of the Harmonised Commodity Description and Coding System (HS Classification), which constitutes more than two-thirds of total APIs imported by India.
It should be noted in this context that 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. This clearly shows that there are many APIs which do not fall under the purview of DPCO but still imported in a major way from China. (Some details of the products subjected to the PLI Scheme – whether they figure in NLEM, therapeutic area and broad technology category for production, is available here)
It is not that India only imports APIs. It performs extremely well in the export of certain APIs. Many APIs are categorised under Chapter 29.42 (other organic compounds) of the HS Classification, which also includes a few APIs which figure in NLEM. Last year, export from India accounted for 71% of global exports in the category of other organic compounds. Export of some of the APIs, which come under the purview of price control, has increased over the years. For example, export of Cefadroxil increased form $15 million in 2014-15 to $19 million in 2019-20. Similarly, export of Nifedipine increased from $1million to $4 million in the same period. This shows that despite the price control policy, firms continue to produce and export APIs, at least in some cases. Thus, there is no evidence to attribute India’s API dependence to the drug price control policy of India.
The experience in India was that firms will 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 public sector enterprises 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. Even if the price control policy has adversely affected certain APIs, there is no ground for generalising it and attributing India’s API dependence on China to the price control policy. 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 the proactive role during the post-1991 period to maintain an ecosystem that enhanced the competence of Indian API industry.
(An earlier version of this blog is published by Financial Express Drug pricing is certainly not the issue in growing dependence on China on 6 August 2020)