Curing FDI fears

Written by Santosh Tiwari | Updated: Oct 29 2013, 10:45am hrs
Apprehensions that pharma FDI will hurt domestic industry are misplaced, the government should go with the finance ministry view of retaining the current policy for at least two years

Despite the fact that India needs a strong dose of foreign direct investment (FDI), the policy domain is still replete with those prophesying apocalypse for the domestic industry if FDI is allowed in a particular sector. There is no evidence yet of FDI ruining the domestic industry but the argument continues. The attention is now on the pharma sector and the government is slated to take a final call soon on whether the existing pharma FDI policy should bring in restrictions to protect the domestic industry and keep prices in check (the reason being cited by those supporting changes).

The finance ministry, however, has a different take, and rightly so, as the foreign investor sentiments have already taken a severe beating because of the policy flip-flops in retail and other areas. The ministry is against any change in the pharma FDI policy for brownfield projects (existing projects) before at least December 2014. It is also not in favour of the ministry of health and family welfare being made the deciding authority on the fate of such projects.

The logic is simple: any policy needs to be tested properly before making any changes and the current pharma FDI framework is not even a year old. And then, there has to be consistency also. In its opinion on the cabinet note floated by the department of industrial policy and promotion (DIPP), the ministry has said that the existing pharma FDI policy has been introduced only in December 2012, and at least two years should be given for a realistic analysis of the policy before making any changes.

The DIPP now wants the FDI in brownfield projects to be restricted in critical verticals like oncology, injectables, and vaccines. It is also pushing for the ministry of health and family affairs to be in-charge of deciding which are the cases to be allowed. Finance ministry officials feel this will unnecessarily create confusion and delays, and that the FIPB should be deciding on which case should be approved, not the health ministry. Then there is not much clarity on what constitutes critical vertical and this would lead to subjectivity, which should be avoided. The reality is, even now, there is case-by-case approval required for the brownfield projects.

According to the current policy, put in place in December 2012, 100% FDI is permitted for both brownfield and greenfield projects (new projects). However, while it is under the automatic route for the greenfield ones, FIPB clearance has to be obtained for brownfield projects on a case to case basis. The safeguard mechanism is already there for the brownfield projects with each case to be given clearance separately. So, the new norms will only add to the complexities.

The commerce and industry ministry, obviously, doesn't think it will and is strongly pushing for the changes to be incorporated quickly. In fact, the concern over foreign companies acquiring Indian pharma companies and adversely impacting the prices and availability of drugs in the domestic market is behind the commerce and industry ministry's current move. In reality though, the apprehensions seem to have more to do with competition fears of the domestic industry than any real threat to either them or the consumers. With additional safeguards, a reduction in the 100% FDI limit is also under consideration.

The interesting part here is the setting in which this intense battle between FDI promoters and the worriers, has shaped up. Between 2006 to 2010, 6 major Indian pharma companies were bought by the multinational companies (MNCs)Matrix Labs (by Mylan, US for $736 million); DaburPharma (Fresenius Kabi, Germany for $219 million) Ranbaxy Labs (Daiichi Sankyo, Japan for $4.6 billion), Shanta Biotech (Sanofi Aventis, France for $783 million), Orchid Chemicals (Hospira, US for $400 million) and Piramal Healthcare (Abbott, US for $3.72 billion).

The recent cabinet note was moved after Prime Minister Manmohan Singh chaired a high-level meeting to discuss the concerns raised by the domestic industry. The Prime Minster asked the commerce ministry to initiate inter-ministerial consultation for making the required changes. The projected idea is to address issues like foreign companies not willing to invest in R&D in the country and the existing policy not serving the objective of making available cheap drugs to the people.

With the consultation process having the backing of the Prime Minister himself, the balance appears to be tilted towards the cabinet clearing the changes in the policy. The finance ministrys view is to let the safeguards in the existing policy be tested first and then look for fine-tuning it. It will be a good idea to go with the

finance ministry in this case.

In any case, the FDI policy will be up for review when the new government takes charge at the Centre next year.