Pharma exports grew at just 1.2 per cent in FY 2014. Can the latest Foreign Trade Policy galvanise creation of better infrastructure to boost the growth rate? By Usha Sharma
The Narendra Modi-led NDA government is aggressively working to enhance infrastructure across the country. As part of this mission, the government is building up a system to improve connectivity between remote areas to developed cities and metros for better engagement. To accomplish this, the Department of Commerce, Ministry of Commerce and Industry had included provisions in the recently released Foreign Trade Policy (FTP) 2015-2020, aimed at helping companies set up manufacturing facilities in Jammu and Kashmir, and the Northeastern states.
Learnings from Baddi
The new FTP 2015-2020 will give double weightage to one-star export houses, especially for manufacturing units under micro, small and medium enterprises (MSMEs) to promote Jammu and Kashmir, and the Northeastern states. The move indicates that the government is encouraging companies to explore these zones. But as industry experts point out, this strategy could be flawed. As an example they refer to Baddi in Himachal Pradesh, which has a similar terrain, but did not become a success story inspite of similar ‘free zone’ incentives.
Talking about the issues in Baddi, Amol Yelgaonkar, Head – Corporate Quality, Bliss GVS Pharma informs, “Baddi has been experiencing a big problem of zero infrastructure (roads, hotels, restaurants, housing) since the inception of this zone. It was only in the last two to three years of its tax holiday period that the new road from Chandigarh to Baddi via Saswan Dam was built. This should have been done in the first place. Even today, 90 per cent of employees working in pharma companies in Baddi stay either in Chandigarh or Panchkula and spend lot of time in travelling, leading to a high cost of living.”
In 2002, the then Prime Minister, Dr Manmohan Singh, during his visit to Baddi, had announced a tax holiday and central excise concessions to attract investments to Baddi, Himachal Pradesh. He offered 100 per cent outright excise duty exemption for a period of 10 years from the date of commencement of commercial production. And, towards the end of 2003, the central government had announced 10 years’ excise and income tax holiday for Himachal Pradesh, Uttarakhand and Jammu & Kashmir. To leverage the opportunities offered, many big pharma companies as well as allied industries set up their manufacturing facilities in Baddi. However, in the later years, the announcement looked unrealistic and ill-informed to both pharma as well as allied industries.
Elaborating on the reasons for Baddi’s failure to become a manufacturing hub, Dr SB Rijhwani, Manufacturer and President IPA MP State Branch, Indore explains, “Over capacities created in Himachal Pradesh and Uttarakhand areas resulted in competition and the benefits to be enjoyed by MSMEs were passed on to the buyer. As a result, many units had to close down their manufacturing operations, thus there are many sick units present in these areas.”
Pharma companies are reluctant to consider these zones as preferred destinations for fresh investments. So, why is the government encouraging companies to set up manufacturing facilities in Jammu & Kashmir, and the Northeastern states, which have almost similar constraints? What have been our learnings from Baddi and what more needs to ensure that we do not emulate Baddi’s failure?
SR Vaidya, Director, Bliss GVS Pharma suggests, “The Government should envisage an atmosphere which encourages harmony in these areas. (It should be done) by providing voice to the participants to build a cohesive roadmap around them.”
There are other issues as well which contribute to the delay in the progress of these states and require special attention from both the State as well as Central government bodies. Yelgaonkar informs, “Infrastructural issues associated with Sikkim and J&K would be the terrain and the geographical location. Second most important factor in J&K will be safety of people as it is still not free from terrorist attacks. Overcoming these will be the responsibility of the State and Central government by providing adequate and good roads, transport and housing including assurance of security.”
In need of a dedicated approach
The tax exemption offered in 2003 was restricted to 10 years, from the time approval was given by the governing authority. It was also specified that further extension for any delay in setting up and commencing operations would not be considered. However, due to the lack of talent and infrastructure, companies started facing problems in setting up new manufacturing facilities in Baddi. It is quite possible that history may repeat itself in the case of J&K and the Northeastern states if concrete steps to avoid such an occurrence are not implemented on a priority basis. Rijhwani highlights, “The Government had declared incentives for Sikkim, Guwahati, Jammu, Himachal Pradesh and Uttarakhand in 2005 for 10 years, but due to logistic reasons and fear for the safety of employees, manufacturers are still not going to Guwahati, Sikkim and Jammu areas, especially MSMEs and new entrepreneurs.”
Highlighting the critical issues that these industries might face in these locations, TS Jaishankar, Managing Director, Quest Life Sciences avers, “The government have encouraged units in J&K, North East states and Sikkim with attractive incentives, but the major hurdles are very poor infrastructure, lack of trained manpower and accessibility.”
Lack of infrastructure support from the state and the central government have forced companies to move out. As a result of bad connectivity, many pharma companies have opted keep their facilities idle or turn it into a warehouse facility. Rijhwani informs, “One good thing that’s happened is that most of the big companies have put up distribution godowns and many transport companies have their offices. Also many raw material suppliers have opened their godowns and packing material manufacturers have also put up their plants in Himachal Pradesh and Uttarakhand.
Speaking on the support required from the State governments to tackle the challenges, Vinay Pinto, Executive Director of Wallace Pharmaceuticals says, “Land, labour and power are the three components that local states have to provide easy access to. The local government should bundle tracts of land, set land rates and communicate the same to industry bodies like IDMA for easy industry selection and decision. From our experience, trained manpower has gradually improved through the development of local pharmacy colleges, technical colleges, etc. Power distribution is often an issue and has to be developed systematically along with development of land.”
Recalling his own experience, Pinto divulges, “Even though power is exported from Himachal Pradesh, we received government power about five months after commissioning our plant in 2007 due to an inadequate power distribution infrastructure. Local transport unions caused some initial challenges. But our experience has been generally good.”
Pinto further elaborates, “For better planning, longer time windows for incentives are always preferred. If the objective of the mid policy review is to extend the time period it is good. But if any other terms are changed mid policy, then companies get affected as the expected returns cannot be met as per calculations on which the initial investment decision was made. For instance, most companies invested in Himachal Pradesh and J&K when excise was 16 per cent. Thereafter excise rates have changed several times.”
Unless these problems are resolved, giving renewed focus to these areas would not have the desired impact.
Taking cognizance of this fact, the government has been taking initiatives to improve the scenario. At iPhex 2015, a pharma event held in Mumbai, a government official revealed that the Government is ready to offer different schemes to boost Indian pharma exports. He informed that the existing SEZs account for around 40,000 hectares of land which is lying vacant. The government is trying to revive the sick/non-performing SEZs and the companies within them. The government is putting efforts to
revive floundering SEZs as well. It has extended its export inventive schemes for both goods and services to units within SEZs as well. It has also been decided that instead of an annual exercise, the government will conduct a mid-policy review after two and a half years.
However, not everyone is convinced about the effectiveness of these measures. Jaishankar feels, “For export purpose there is hardly any difference between units outside SEZ and inside SEZ. All the benefits of exports are available more or less in the same manner for units outside, such as excise exemption, sales tax, VAT are in any case exempted; but in the case of units in SEZ it takes a minimum of three to five years to register their products in global regulatory markets. Till such time they should be permitted to market in the domestic market without customs duty for a minimum period of three to five years without insisting on net foreign exchange arranging to be positive.”
Jaishankar also suggests, “Primarily the Government should set up training institutes in IT, diploma in mechanical engineering and skills related to our industry.” He shares few examples of schemes by Tata Institute of Social Sciences (TISS), School of Vocational Education to recruit people in the local areas of J&k, Sikkim, etc. Through this scheme, TISS would undertake training and the workforce recruited would be able to obtain a diploma in vocational education after completing three years of work in their respective factories. This will certainly enhance assured employees for three years and their skill is monitored by weekend training by TISS.”
Thus, the latest FTP attempts to improve exports in pharma, and create manufacturing hubs within the country. However, unless core issues such as lack of adequate training and poor infrastructural facilities are addressed effectively, the desired impact and progress would continue to elude us.
If the Government really intends to propel growth in pharma exports then it’s high time to identify and fill the gaps that are impeding progress with timely measures.