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Monday, 08 July 2013 00:00
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Govt needs to let go of the 1970s mindset on FDI


The commerce and industry ministry’s opposition to foreign firms taking over existing Indian pharmaceuticals firms gets more curious by the day since, in an FDI-starved nation, you’d think getting precious foreign exchange would be a top priority—last week, the FIPB yet again deferred the $1.6 billion buyout of Strides Arcolab’s injectables business by US major Mylan. Initially, the commerce and industry ministry’s opposition was based on the argument that, when foreign firms take over Indian ones, production of critical drugs can be reduced and their prices raised. While this doesn’t apply to Strides which has a negligible presence in the Indian market, data shows Indian units that have been taken over by MNCs have actually raised their production. And even if they didn’t, with laws that control price hikes of nearly a fourth of industry’s production, and an average of 60 firms producing drugs on the National List of Essential Medicines, there is little scope for price increases.

The ministry’s latest salvo, reported in FE last week, is even more curious. In a letter to the Prime Minister, the commerce minister has divided takeovers into various types. The good ones that don’t ignore the local market while exporting at the same time, those engaged in ‘only sourcing from India to service more lucrative overseas markets’ which ‘have deprived the country of some rare facilities’—which means the pharma industry that contributed $14.7 billion of exports in FY13 is better focused on local sales—and those which are really just buying brands so that they can import products and sell them under these brands. This last category, the ministry reckons, ‘would have a sizeable impact on the current account deficit in the long run’. Some data is given. For seven companies, the ministry says, the outflow of forex was R9,500 crore over seven years. Given that pharma exports in FY13 alone were R80,000 crore, that does seem like small change. Pharma is also the seventh largest source of FDI flows into the country—between April 2000 and March 2013, FDI flows in the sector were as high as R49,000 crore.

Apart from the fact that the data—either on production being curtailed and prices rising or on forex flows rising as a result of FDI – doesn’t support the ministry’s contention, surely India cannot be clearing individual FDI projects on grounds of whether they are forex-positive or forex-negative? If India is to become an R&D hub or a manufacturing centre, as the ministry wants it to, there will always be some projects that are forex earners and some that are forex spenders. If, as the ministry fears, MNCs are buying Indian brands so as to replace them with imports of high-priced products, there must be a market for it—if imports rise too much, the rupee will collapse and import-substitution will take place as it does in other products. The pharma industry is too large, too diversified and too export-oriented—about half of pharma production is exported—for India to go back to the pre-1970 era when, as the ministry fears, India was a net importer of medicines.


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