Indian Small-Scale Manufacturers Feel Budget Pinch

While criticism of government drug sector policy has come from across the industry, India's smaller players have been particularly vocal, vehemently opposing last year's government price-cutting measures. The lack of international interests is likely to be a major factor behind complaints from the smaller producers, which cannot rely on high-margin overseas operations to ease local market problems. The voice of these small-scale companies, which account for approximately 60% of India's drug output, is likely to grow louder over the next few months as World Trade Organization membership adds to their problems. Many will also struggle to meet other new regulations, such as those concerning patent protection and good manufacturing practice certification.

India's latest budget appears to be a case in point, with much of the industry complaining that the government has ignored its calls to lower the tax burden on drugs. Industry groups also note that although import duties are to be reduced from 20% to 15%, a 16% export tax will remain in place. Further, a budget provision extending a 150% weighted deduction on drug industry R&D spending to the end of the 2006/2007 financial year appears unlikely to benefit companies conducting long-term discovery work, a major new growth area for many Indian drug firms.

Apparently as a favour to the smaller manufacturers, the new budget also raises the tax-free threshold on turnover, but observers suggest the move is more likely to be of much greater benefit to larger drugmakers with higher margins. It appears that India's new operating environment, characterised by tougher patent laws and stiff price competition, has been created without smaller companies in mind.