Much before the Union Budget was unveiled, Indian pharmaceutical and medical device manufacturers were granted significant competitive privileges over their foreign counterparts. To begin with, in January 2016, the Union ministry of finance increased the rate of basic customs duty (BCD) on specified medical/surgical apparatus from 5% to 7.5%. The exemption from special additional customs duty (SAD) on medical devices was also withdrawn—which is actually sad.
Further, to boost domestic manufacturing of medical/surgical equipment, BCD on raw materials, parts and accessories was reduced to 2.5%, and full exemption from SAD was provided. Next, the finance ministry withdrew the customs duty exemption on more than 70 lifesaving medicines, used mainly for treating cancers, cardiovascular diseases, diabetes, HIV, and renal and neurological disorders.
While the aforementioned strategies are apparently in line with the government’s Make-in-India campaign, these may contribute only minimally to making healthcare affordable for Indian citizens. This seems likely for a number of reasons.
One, the imposition of import duties on active pharmaceutical ingredients (API)—which are vital for manufacturing essential medicines locally—is expected to raise manufacturing costs of locally-produced medicines as well. Since medicines constitute as much as 46% of non-communicable diseases-related out-of-pocket health expenses of households, the implication of levying customs duty on internationally-manufactured essential medicines/ingredients is likely to deter certain households from accessing affordable treatment for serious chronic illnesses.
Two, since medical device industry in India is still at its nascent stage and is largely import-dependent, raising customs duty on imported medical devices might only exacerbate the issue of late diagnosis for Indian patients due to affordability concerns—Indian medical equipment manufacturers are likely to observe an excess demand (due to import restrictions) which is expected to lead to a surge in purchase prices for Indian diagnostic companies. While Indian pharmaceutical manufacturers are apparently contended with the recent move favouring their industry, the Association of Indian Medical Device Industry (AIMED) has expressed disappointment post the Budget release, for it anticipated greater budgetary and regulatory support for a sector which is essentially in its infancy.
An analysis of effective tax rates for a sample of companies across a cross-section of industries does reflect the extent to which healthcare has actually been industrialised in the country. While effective tax rates for nursing homes, specialty hospitals, and drugs and pharmaceuticals were roughly 33%, 30% and 20%, respectively, for the financial year 2015-16, those for tobacco and steel were 27% and 12%, respectively. These figures unambiguously highlight the intense rate of healthcare industrialisation vis-a-vis other sectors, the brunt of which is borne by Indian patients in the form of inflated in-patient and medical bills.
On the other hand, the estimated customs revenue forgone by the Centre on account of importing gold and diamonds was R61,126 crore—the highest across all sectors. The estimated revenue impact of excise duty incentives on motor vehicles stood at R18,260 crore. Needless to emphasise, these forgone revenues are essentially lost on account of import/manufacture of luxurious goods, and hold insignificant relevance in terms of improving healthcare affordability for the masses.
To top it all, low detection rate of chronic diseases is leading to the deaths of close to 7 million Indian citizens a year. Do we give priority, by all means, to the survival and health of citizens, or to Indian manufacturing? In other words, would we prefer ‘Make for India’ vis-a-vis ‘Make in India’?
The argument for protecting domestic industries from foreign competition is justified as far as promoting industrial development is concerned. The case of healthcare is, however, different. While the Centre should adopt measures to strengthen domestic manufacturing capacity of Indian drug and medical device industry, the impact of such interventions, even in the short run, should not be borne by patients. Healthcare affordability should be central to all policy decisions impacting the sector.
For developing countries such as India where public allocations to healthcare are inadequate and insurance coverage for healthcare is limited (18% for urban and 14% for rural Indians), the case of making healthcare affordable and accessible should be prioritised over promoting healthcare industrialisation in the country.
Divya Chaudhry & Ali Mehdi
Chaudhry is research assistant and Mehdi is fellow with the Health Policy Initiative at ICRIER, New Delhi