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Government to Curb Pharma Imports from China, Including APIs

Jul 2, 2020 11:06 AM 5 min read

Following a military standoff at the border, the Indian Government has moved in recent days to cut its economic dependence on China. Orders were given to ports and airports to screen all goods coming from China, tariff hikes and strict quality rules on major Chinese imports are being considered, and 59 Chinese apps were banned.

Indian Pharma and China

Amidst all this frantic activity, reports surfaced that cargo ships from China were held up at the Chennai and Vizag ports so that their goods could be screened. The catch was that these ships also carried Active Pharmaceutical Ingredients (APIs), which India’s pharma industry is heavily reliant on. Withholding their supply could have drastic consequences for pharma companies, causing shortages and increasing costs. 

After industry representatives rang the alarm bells, the Government immediately exempted APIs from the 100% inspection rule.

This recent episode sheds light on not only APIs’ importance for the pharma industry but also on how India’s dependence on China for these critical products could come back to haunt it in the event of a larger trade conflict with China.


But Isn’t Indian Pharma All-Powerful?

Being told that Indian pharma has an Achilles’ heel might come as surprising. After all, India’s pharmaceutical industry is the third largest in the world in terms of volume and thirteenth largest in terms of value, and its share of global generic drug exports is over 20% in terms of volume.

The sector is also slated to experience robust growth, from nearly $34.3bn in 2020 to more than $45bn by 2025.

But India’s premier position in the pharma market is restricted to finished drugs. When it comes to the process of manufacturing these drugs, India is heavily reliant on other countries for ingredients. And this is where China comes into the picture.


What are APIs?

Usually, medicinal drugs have two main components - the APIs and the Excipients. 

Excipients are chemically inactive substances that help deliver the medication.

As for APIs, they are biologically active ingredients in any drug that induce the intended effects of the drug. Drugs may have one API or multiple APIs, depending on their usage. And they are critical components in any drug (capsules, tablets, injectables, orals, liquids etc.).


How Reliant is India on Chinese APIs?

A lot. Statistics vary but anywhere between 60-85% of APIs the Indian pharmaceutical industry uses is sourced from China. India is also heavily dependent on China for intermediates and key starting materials (KSMs) for making drugs.

Obviously, this is not ideal from an economic viewpoint given the effects of raw material supply chain disruptions and price volatility, especially considering the ongoing pandemic. This is also dangerous from a geopolitical viewpoint. Sino-Indian relations have never been cordial per se, and in recent weeks the situation jumped out of the frying pan into the fire.

As for the aforementioned point on price volatility - since 2015, Beijing instituted a widespread crackdown on environmental pollution, something its API industry was guilty of. This led to the closure of several manufacturing units. API exports duly became more costly and this bill had to be footed by Indian manufacturers.

In the near future, if India and China were to launch a full-scale trade war, the Chinese government could very well increase API costs or even cut their exports, and this would be devastating for Indian pharma.


Rise and Fall

To be fair, the unenviable position Indian pharma is in today is not because of lack of trying or lack of talent but because of a years-long policy paralysis. 

It’s an all-too-familiar tale of great expectations and missed opportunities.

In the 1990s, India was actually a net exporter of APIs. Over the years, however, due to stringent regulation and red tape, the industry suffered a prolonged slowdown and lost its competitive edge.

Meanwhile, China boosted its own API industry with considerable state support - “by getting almost no land cost, negligible financial cost, cheap electricity, water and labour” - and soon it began exporting APIs to India.

As India’s dependence on Chinese APIs grew, people began to take notice. In 2013, the Government formed a committee on this issue; a report was submitted in 2015; a draft policy was conjured in 2017; a task force was formed in 2018; and a ₹7,000cr ($930.6m) scheme to revive the industry was announced in 2020.

Sure, things move slowly in a democracy but eight years for a critical plan is surely a little too long, no? Especially given that none other than the National Security Advisor warned six years ago that the country’s Chinese API dependency was a “national security threat”.

Now in 2020 as India scrambles to respond to an ever-more-aggressive China and considers its options, the API factor is a shortcoming it can do without. Sadly, the chickens have come home to roost.


What are the Problems Faced by the Indian API Industry?

According to a report by the Ministry of Commerce, the dependence on Chinese imports is largely due to China’s huge built up capacities and significant bank support in the form of loans at negligible interest rates. Indeed, as we’ve already seen, the reason China’s API industry grew so quickly and strongly was because of a conducive and state-supported business environment.

As for Indian pharma in particular, the biggest impediment is low capacity utilisation. (FYI: capacity utilisation is the extent to which a company or country uses installed productive capabilities to manufacture the products). The Indian drug manufacturing sector has an average utilisation rate of 75%, but most API production units run at 30-40% capacity. For comparison, Chinese API units have around 70% utilisation rate.

Broader problems like land acquisition, labour problems, red tape, outdated regulation and limited investment are also to blame for the API industry’s stagnation.


What Can Be Done to Boost Domestic APIs?

A report by the Confederation of Indian Industry recommends API manufacturing reform formulated around four key pillars - providing ease of doing business, incentives and subsidies, infrastructure development and innovation and technical capability development.

These can aid the local API industry to a great extent. As for the systemic challenges we talked about earlier, fixing them would require systemic reforms.

In February, the Government formed a high-level committee to suggest measures to ensure raw material security for the pharma industry. Following this, several measures were announced to increase API self-sufficiency. This urgent need was accelerated by the supply chain disruptions of the coronavirus pandemic, border tensions with China, and a shift towards boosting domestic industry vis-a-vis Atma Nirbhar Bharat.

It was announced that three bulk drug parks with a minimum area of 1,000 acres would be established where the Centre will provide grant-in-aid to the tune of ₹1,000cr ($133m).

Furthermore, the Production-Linked Incentive (PLI) scheme for bulk drug parks aims at giving incentive on an incremental basis. (Details on this scheme here.)

The outcomes that can be expected, should these measures proceed as planned, include:

  • drug security through self-sufficiency in manufacturing of 53 critical APIs,
  • ensure the availability of various essential drugs at affordable prices,
  • cumulative reduction in imports by around ₹46,400cr ($6bn) in next eight years,
  • 7,000 direct employment and 14,000 indirect jobs.

You know what they say. When life gives you lemons…make APIs.


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