Majorfels24

Host-Country Analysis - India

India’s geographical area is divided into four main regions: the great mountain zone, plains of

the Ganga and the Indus, the desert region, and the southern peninsula. Their natural resources

include coal, natural gas, limestone, phosphorite, fluorite, and arable land (India in Business

2016). Raw materials are required in the preparation of pharmaceutical products, which

includes medication, vaccines and emulsions (Medimoon 2014). The presence of raw materials

in India entices investors to invest in India.

Figure 1

Source: The Global Economy 2015

As shown from Figure 1, India’s political stability has been improving since 2011, to an all-time

low of -0.96 (The Global Economy 2015). Even though India is politically unstable, it has

significantly strengthened as compared to the previous few years. The political stability of a

country is interrelated to its economic growth. This can be seen by the surge of FDI after 2013,

which increases the amount of FDI inflows into the country.

However, one of the political issues that the Indian government faces, is the intention to

minimise opportunity costs that may be incurred due to structural reforms. These costs include

temporary losses and conflicts from the opposition parties. The government have to take

certain steps in order to encourage global infrastructure projects that have been put on-hold

for years (The Economist Intelligence Unit Limited 2016).

The Indian government legalises and favours FDI. In July 2015, the government mentioned that

a composite cap, instead of a sectoral cap, will be implemented on the FDI for majority of the

industries. This ensures that investments are broken down and does not limit direct and

portfolio investors. FDI in the pensions sector has also been raised 49% in April 2015. Also, the

FDI cap in insurance has been increased from 26% to 49% in March 2015. The parliament has

also authorised the required legislation, the “Insurance Laws (Amendment) Act 2015” (Country

Commerce India 2015). According to the Indian Express (2015), the government has removed

barriers to entry and exit, which further allows investors to invest in a project, with the

requirement of a lock-in cost of three years.

The aim of Indian leaders today, is to transform India into the Manufacturing Hub of the world.

They are focused on expanding the economy by attracting foreign direct investments (FDI). The

increase in FDI is shown in the surge of FDI between October 2014 and May 2015. Net

investments by foreign institutions totalled up to a sum of $40.92 billion in the fiscal year ended

31 March 2015. Additionally, growth in investments can be seen in India’s rising average of

2.7% in the industrial production numbers (Wheebox 2016). India is moving towards the goal of

becoming Asia’s third-largest economy by turning into a manufacturing powerhouse.

Focusing on the pharmaceutical industry, India has procured high technical competence in the

generation of pharmaceuticals. This industry comprises of various ventures such as research

and development (R&D), laboratory testing, clinical research and the manufacturing of generic

and branded drugs (Tewathia 2014). In particular, India’s focal point would be on the

engineering and R&D of pharmaceuticals. Moreover, the Indian Department of Pharmaceuticals

has envisioned India to be the preeminent scene of pharmaceutics by engaging “Pharma Vision

2020” with a state financed investment aiming to enhance the pharmaceutical infrastructure

(PWC 2016). This allows India to remain in an attractive position, primarily for pharmaceutical

organizations in pursuit of low cost of production.

The pharmaceutical organisations will also be able to benefit from India’s competitive

advantage of a vast labour resource. The world will see India’s largest and youngest workforce

in the near future as India’s population pyramid is anticipated to bulge across the 15-59 age

group over the next 10 years (World Bank 2016). India has a leverage on the “demographic

dividend”, which can be rapidly developed to build a skilled workforce (Wheebox 2016). The

vision of the national policy on Skill Development and Entrepreneurship 2015 is to fulfill the

challenge of skilling at an extent with speed and quality (Pathak & Saraswathy 2015). The

National Skill Development Corporation (NSDC) is taking action by providing funds to support

the upgrade of skills of the workforce. For instance, NSDC provides skill development subsidies,

either as loans or equity, and supports private institutes to improve financial sustainability

through tax reductions. Furthermore, this policy will align skills development to enhanced

employability and productivity by coordinating programs with the demands of institutions

(Wheebox 2016).

1. Industry Analysis - Pharmaceutical Industry

Over the past forty years, the Indian pharmaceutical sector has seen an expeditious surge and

transformation as shown in Figure 2 (Mazumdar 2003, Indian Mirror 2015); and by 2020, it is

expected to be the third largest global market in terms of incremental growth. India is said to

be the largest provider of generic drugs internationally, accounting for twenty percent of global

exports in terms of volume. Between 2015 to 2020, the Indian pharmaceutical industry is

expected to grow over fifteen percent per annum and will outgrow the global pharmaceutical

industry (India Brand Equity Foundation 2015).

Figure 2

According to industry projections, the pharmaceutical sector holds a sizable potential for

growth opportunities and is estimated to expand at a Compound Growth Rate of 15.92 percent

to US$ 55 billion by 2020 from US$ 30 billion in 2015 (Figure 3, India Brand Equity Foundation

2016). With 7.2 percent market share, India is forecasted to be the third largest global generic

Active Pharmaceutical Ingredient (API) merchant market by 2016, with a competitive edge of

low cost of production as compared to that of US (India Brand Equity Foundation 2015).

Figure 3

Exporting Pharmaceutical Indian pharma companies are capitalizing on export opportunities as 100 percent foreign direct

investment (FDI) has been highly recommended under the automatic route in India. India is

seen exporting to more than 200 countries in the world, with its exports accounting for 20

percent of global exports in generics (India Brand Equity Foundation 2015), and the Ministry of

Commerce targets to export US $25 billion worth of pharmaceuticals in 2016.

Fortes India’s pharma companies spend 8-11 percent of their total turnover on Research and

Development and this expenditure is likely to increase due to the introduction of product

patents, with the increased incentives to domestic firms to conduct R&D (India Brand Equity

Foundation 2015), with an equally abundant supply of skilled personnels. Moreover, as an

emerging global hub for pharma products, the industry can be seen to be on a growth

trajectory.

Figure 4

India’s low cost of production and state of the art R&D certainly acts as a highly viewed

advantage of cost efficiency (Figure 4) for promising investors. India’s labour costs are 50-55

percent cheaper than in the western countries. In order to compete with global players in

pharmaceutical industries, India’s shorter time of approval process for drugs certainly adds on

its competitive edge (India Brand Equity Foundation 2015).

Opportunities There is a rising demand for generics globally as the population with sitting lifestyle are

increasing rapidly. This has encouraged an increase in medical tourism and an expansion of the

pharmaceutical market. As population and purchasing power increases, demand for better

quality drugs is likely to rise. The increase in demand of better quality drugs could amount to

USD8 billion which initiates more market openings in drug production (India Brand Equity

Foundation 2015).

Creating a regional distribution network in India is uncomplicated as the capital requirement is

much lower than developed countries. India is also one of the top leaders in the clinical trials

market, this is because they have an abundance of skilled professionals and a genetically

diverse population which ultimately has the advantage and probability to attract significant

amount of foreign direct investments (FDIs) into their clinical trial market (India Brand Equity

Foundation 2015).

Challenges In India, 70 percent of healthcare expenses are paid by consumers themselves. The government

and its judiciary has to take necessary precautions to ensure that prices of crucial drugs remain

affordable. Regulations and new patent rules need to be in place to prevent the manipulation

of drug prices by pharmaceutical companies.

Additionally, India faces competition against countries such as China which has greater labour

resources and lower costings. India may encounter the threat of insufficient investments when

companies decide to direct their invest to other countries. The lack of funds would mean a lack

of support in the advancement of the R&D sector of the pharmaceutical industry.

India also faces several environmental issues, such as water pollution, which originates from

raw sewage and the presence of agricultural pesticides, as well as tap water which is not

potable among the whole of India (The World Factbook 2015).

Recommendations for investors As the industry is at a mature stage, it is highly recommended that investors should enter the

market via joint ventures. Existing firms have transited from manufacturing generic drugs to

various type of pharma activities which includes R&D, manufacturing of high quality generic

drugs and manufacturing active pharmaceutical ingredients and laboratory tests. This enables

them to have prior knowledge about the industry and practices. Starting a venture can save

costs for investors to startup R&D as well as infrastructures; relying on the capability of local

companies and ensuring optimal assurance on their investments.

The Indian government has also been supportive about the Pharmaceutical industry -

introducing numerous policies and plans to boost the industry. Pharma Vision 2020 aims to

reduce time of approval for new facilities and drugs (price control) orders; and the National

Pharmaceutical Pricing Authority (NPPA) has been formed to address the affordability and

availability of medicines. The government also allows 100 percent FDI for the pharmaceutical

industry, which make it easier for investors to enter the market.

2. References

● Chittor R & Ray S 2007, 'Internationalization paths of Indian pharmaceutical firms - A strategic group analysis', Journal of International Management, vol. 13, pp. 338-355, ScienceDirect, viewed 20th March 2016, <http://ac.els- cdn.com/S107542530700052X/1-s2.0-S107542530700052X-main.pdf?_tid=08049d4a- f430-11e5-8900- 00000aab0f27&acdnat=1459092463_f7f55cd6860f4de18fd245d9f70c5c3b>.

● Country Commerce India 2015, Country Commerce India - Research and Markets,

Country Commerce India, India, viewed 20th March 2016,

<http://www.researchandmarkets.com/reports/2139290/country_commerce_india>.

● India Brand Equity Foundation 2015, Indian Pharmaceutical Industry, India Brand Equity Foundation, India, viewed 20th March 2016, <http://www.ibef.org/download/Pharmaceuticals-March-2015.pdf>.

● Indian Mirror 2015, Pharmaceutical Industry India, Indian Mirror, India, viewed 19th March 2016, <http://www.indianmirror.com/indian-industries/pharmaceutical.html>.

● India Brand Equity Foundation 2016, Indian Pharmaceutical Industry, India Brand Equity Foundation, India, viewed 20th March 2016, <http://www.ibef.org/industry/pharmaceutical-india.aspx>.

● India in Business 2016, India At a Glance, India in Business, India, viewed 20th March 2016, <http://indiainbusiness.nic.in/newdesign/index.php?param=indiaataglance/147>.

● Mazumdar, M 2013, ‘Performance of Pharmaceutical Companies in India’, Contributions to Economics, pp. 17-44, viewed 19th March 2016.

● Medimoon 2014, List Of Some Reowned Pharmaceutical Raw Material Providers in

Pakistan, Medimoon, Pakistan, viewed 20th March 2016,

<http://medimoon.com/2014/04/list-of-some-renowned-pharmaceutical-raw-material-

providers-in-pakistan/>.

● Pathak, K & Saraswathy, K 2015, “Skilling India 2.0: Challenges aplenty”, Mumbai,

Viewed 29 March 2016, <http://www.business-standard.com/article/economy-

policy/skilling-india-2-0-challenges-aplenty-115071401318_1.html>.

● PWC 2016, Pharma 2020: The vision, PWC, United States, viewed 29th March 2016,

<http://www.pwc.com/gx/en/industries/pharmaceuticals-life-sciences/pharma-

2020/pharma-2020-vision-path.html>.

● Tewathia, N. 2014, Foreign direct investment in Indian pharmaceutical industry: an

assessment, International journal of social science and humanities research, Vol. 2, Iss 3,

Pp 20-26, University of Delhi, India, viewed 29th March 2016,

<http://www.researchpublish.com/download.php?file=Foreign%20Direct%20Investmen

t%20in%20Indian%20Pharmaceutical%20Industry-378.pdf&act=book>.

● The Economist Intelligence Unit Limited 2016, Fact Sheet, The Economist Intelligence Unit Limited, London, viewed 20th March 2016, <http://country.eiu.com/article.aspx?articleid=383930422&Country=India&topic=Summ

ary&subtopic=Fact+sheet>. ● The Global Economy 2015, India Political stability - data, chart, The Global Economy,

United States, viewed 19th March 2016,

<http://www.theglobaleconomy.com/India/wb_political_stability>.

● The Indian Express 2015, Govt eases FDI norms in 15 major sectors, including defence,

civil aviation, The Indian Express, New Delhi, viewed 21st March 2016,

<http://indianexpress.com/article/india/india-news-india/govt-eases-fdi-norms-fipb-

limit-raised-from-rs-3000-crore-to-rs-5000-crore/>.

● The World Factbook 2015, India - CIA World Factbook, The World Factbook, United States, viewed 18th March 2016, < http://www.ciaworldfactbook.us/asia/india.html>.

● Wheebox 2016, “India skills report”, Gugaon, Haryana, View 29 March 2016,

<https://wheebox.com/logo/ISR-2016-small.pdf>.