Reduction of Foreign Direct Investment in Pharmaceutical Industry

Indian Pharmaceutical Sector is one of the top five sectors which is favored by overseas investors. The FDI policy has been liberalized relating to pharmaceutical industries since 1990. The drugs and pharmaceuticals sector in India received a Foreign direct investment equity inflow worth 414 million U.S. dollars as of December within the financial year 2019. This was a substantial increase compared to the previous fiscal year’s 266 million dollar FDI inflow. However, the highest foreign equity inflow to the pharmaceutical sector was in the fiscal year 2018 with almost 15 billion dollars. 

 

India’s large population and wide disease pattern make the country attractive for pharmaceutical firms. India has relatively cheap manpower and skilled labour because of the unemployment and population which attracts foreign investors. The English language is spoken by the majority which makes communication easy for the investors. The production of pharmaceuticals is also comparatively cheaper in India than abroad and there is a strong production base in the country which gives investors an additional advantage. It is easy to get good quality bulk drugs, which is attractive for foreign firms as they earn a high margin on the sale. Due to India’s focus on reverse engineering and the development of production processes, it has high technical competence in production in the pharmaceutical industry, which makes its industry attractive for foreign investors. The pharmaceutical industry is also very competitive among suppliers, which gives the MNCs a good bargaining position.

 

There was a 74% drop in FDI in the pharmaceutical sector in March 2019. Inconsistent policies, including the increasing grip and scope of price control, injected a high degree of uncertainty for investors interested in both the drugs and medical devices segments. 

The impacts of reducing FDI is as follows-

  1. Competition- The presence of MNC has a large impact on competition. As today the MNC and the domestic firms operate at the same levels. MNC stimulates domestic firms to upgrade their technology and investments in marketing. The competitive environment ensures that there is no monopoly and drugs are sold at an effective price. The domestic companies have adopted the MNCs’ marketing expertise and strategies to be able to compete with the other firms. Competition ensures research orientation, product portfolio, production capability, and marketing and distribution network. As it is stated by the Government of India in 2005 “If the industry is not competitive, development of products and firms is not likely to occur at the same speed as in a competitive environment.” 
  2. Imitation and Demonstration – Imitation of already existing products has led to the adoption and technological development for the local Indian companies. The Indian Pharmaceuticals would not have been developed as fast as if firms were not allowed to make copies of already existing molecules and drugs. Due to the reduction of FDI, the firms will not be able to copy the existing molecules and drugs and will have to incur high costs to develop new drugs. In the long run, however, it is argued that effective protection of IPR is necessary for the industry to grow further.
  3. Technology- Technology in the pharmaceutical industry is often very complex and its need for upgrading the technology is largely due to the rapid pace of new drug discovery and strict requirements of safety and efficiency. Foreign pharmaceutical affiliates in India receive up to date technology from their parent firm, both in managerial practices and in manufacturing facilities but if FDI is reduced the technology has to be manufactured in India which is very expensive as compared to outsourcing the technology. 
  4. Research and Development- R&D intensity in the Indian pharmaceutical industry is low as compared to overseas. India has started to increase its research and development. R&D centers in the Indian pharmaceutical industry have begun to emerge, which increases employment opportunities and also reverses the brain drain from India. 
  5. Industrial Management-Insufficient marketing infrastructure and lack of data affect Indian domestic pharmaceutical firms negatively in terms of export performance. skills forces. Indian firms were forced to produce for the domestic firm instead of expanding their market globally due to a lack of marketing skills.

Foreign Direct Investment (FDI) proposals are intended”to gain control over the local market and do not cater to the objective or the purpose for which FDI is allowed.”  If FDI is reduced the Human Development Index also reduces leading to poverty.FDI is necessary for a country like India to grow . Due to the cost of the drugs the small enterprises would not be able to compete with the other multinational companies.However, highly fragmented industry, substandard drugs & counterfeiting, corruption, low margins, high taxes, small Indian companies are among weaknesses of the country. Therefore the people should contribute together for the growth of Pharmaceutical Industries and for the development of the country. 

– Anshita Khandelwal