Pharma & Biotech Sector Must Get Its Due This Budget

Courtesy: The Hindu

Finance Minister Arun Jaitley has a challenging task at hand to present a Budget for FY17 that spurs India’s growth at a time when the economic scenario appears challenging, both externally and internally. The global economy is expected to slow down further in 2016 pulled down by weakness in major emerging economies like China, Brazil and Russia. These global trends as well as weak investment sentiments at home are likely to impact India's GDP for FY16 and growth prospects for FY17.

Mr Jaitley’s last two Budgets belied hopes of ‘Big Bang’ reforms. Instead, he opted a path of gradual reforms aimed at addressing both the corporate and social sectors. This time there are expectations that the Budget will provide more specifics on Prime Minister Modi’s ‘Make in India’ campaign. Given that biotechnology is one of the key sectors identified by the government as part of ‘Make in India,’ it is imperative that the upcoming Budget provides an enabling and facilitating framework for preparing the Indian biotech industry to meet its aspirational target of US$100 billion by 2025.

The recently unveiled National Biotechnology Development Strategy has provided a strategic roadmap for India’s emergence as a global biotech innovation hub. However, the tactical elements needed for achieving this distinction will have to come from the Budget document. Access to capital, quality infrastructure, high-end talent are some of the immediate needs of the sector which need to be addressed by the Finance Minister in his Budget.

If India is to build global leadership as a knowledge economy, research and innovation must be its foundation. It is therefore vital that we focus on fiscal incentives that foster research, innovation and education in enabling technologies that will propel us into the future.

In this context, it needs to be pointed out that the proposed removal of tax breaks, specifically the weighted deduction for expenditure incurred on scientific research, could blunt the India pharma and biotech industry’s ‘innovation’ edge and put it at a competitive disadvantage to its peers.

In FY15, the weighted tax deductions on R&D amounted to Rs 8,100 crore (US$1.4 billion), which is a mere 8% of the total Rs 98,400 crore (US$16.4 billion) in tax incentives availed by corporate tax payers in different sectors. However, the impact made by the pharma sector is in sharp contrast with the concessions it has availed. In FY15 alone, pharma exports stood at US$15 Billion. Similarly the pharma sector has brought in over US$13 billion in FDI in the past 15 years starting 2000. It has also provided employment to over 10 million people.

The Indian pharma industry is today recognized as the ‘Pharmacy to the World’ as it is one of the lowest-cost producers of essential medicines globally, catering to nearly 30% of the demand for generics drugs worldwide.

The discontinuation of these special tax incentives will also adversely impact Special Economic Zones (SEZs), which were set up to create new engines of growth and to make India’s exports globally competitive through quality infrastructure backed by attractive fiscal incentives and minimum regulations.

The tax breaks availed by investors in SEZs in FY15 were approximately Rs 20,000 crore (US$3 billion). However, the exports from these SEZs amounted to almost Rs 500,000 crore (US$75 Billion) in FY15 and the sector collectively employed approximately 1.5 million people.

While tax exemptions given to SEZs and R&D have delivered on their stated objectives and must be further augmented to drive investment, growth and employment, it would be prudent to examine other tax sops.

Whilst phasing out tax concessions in order to bring down corporate tax rate is critical, it is also important for the finance ministry to evaluate the socio-economic impact made by the sectors that enjoy these special incentives. If the quantum of the tax revenue foregone is not substantial and yet it has resulted in tremendous socio-economic gain it must continue.

India accounted for nearly 70% of all new offshore R&D centers established in 2015, making it the No. 1 choice for global technology-led R&D, according to consulting firm Zinnov. Furthermore, US$12.3 billion or 40% of global engineering and R&D investments in 2015 flowed into India versus US$9.7 billion into China. This is a formidable position which must be augmented and not weakened by any policy change. 

More importantly, the government will need to walk the talk on the issue of universal health coverage.  As a first step, Mr Jaitley could raise the budgetary allocation for pharma and healthcare such that public health spending in India is recalibrated to at least 2.5% of GDP from only about 1% currently.

A Budget that puts PM Modi’s ambitious socio-economic initiatives into action would go a long way in pulling the nation out of its current state of despondence by pushing the development agenda for India with increased vigour and scripting a new economic growth story. 

This piece was first published in the Print Version of The Hindu newspaper on February 05, 2016