Budget Allocation to Indian Health Sector Up 15% for FY 2008/09

Budget Provisions

Indian finance minister Palaniappan Chidambarm has unveiled the Union Budget for FY 2008/09. The main allocations affecting the pharmaceutical and biotechnology industries are as follows:

• A reduction in excise duty on all goods produced in the pharmaceutical sector from 16% to 8%.
• A 125% weighted deduction on expenditure for outsourced research.
• Exemption of excise duty and a 5% reduction in customs duty on life-saving drugs and bulk drugs used in manufacture of HIV/AIDS drug atazanavir.
• Five-year tax holiday period beginning from 1 April 2008 to 31 March 2013 for all new hospitals being set up anywhere in the country, except specified metro areas.

From the Economic Survey 2007/08:

• The value of pharmaceutical output grew more than tenfold from 50 billion rupees in 1990 to over 650 billion rupees in FY 2006/07.
• Exports between FY 2002/03 and FY 2006/07 reported a compound annual growth rate (CAGR) of 23.4%. Imports on drug and pharmaceuticals were higher at a CAGR of 29.7%. During FY 2006/07, exports were at 393 billion rupees and imports at 29.14 billion rupees.

Expenditure and New Provisions

For FY 2008/09, the Indian government has proposed a 15% year-on-year (y/y) increase in health sector provisions to 165 billion rupees. The National Rural Health Mission, a programme designed to increase the accessibility of health facilities in rural areas, will see allocations increased to 120.5 billion rupees. The government has said that 323 district hospitals were upgraded under the scheme. The main agency for HIV/AIDS programmes, the National AIDS Control Programme (NACO), which also takes up free drug dispensation under the scheme, has garnered 9.93 billion rupees in allocations. The polio programme is allocated with 10.42 billion rupees with a fresh mandate to focus on high-risk districts in Uttar Pradesh and Bihar, where a recurrence of polio incidences have been reported in recent years. The medical insurance scheme for workers in the unorganised sector and people living below the poverty line will receive 2.05 billion rupees, with further launches expected in states such as Haryana, Rajasthan, and the capital, New Delhi.

Outlook and Implications

The tax and duty exemptions would provide for a potential drop in drug prices in line with the populist tone of the budget. With excise duty reduced by half for all pharma products, prices are expected to decline by about 5% in the domestic pharma space. The announcement is taken in the context of pressures faced by exporters due to a rising rupee against the U.S. dollar. This could also have a bearing in reducing costs and subsequently reflect in drug prices. The weighted deduction for outsourced research expenditure is a welcome boost for contract manufacturers, but it is not as much as the 150% for drug research. Although the above measures would provide a slant towards exporters' interest, far-reaching policies to help pharma exporters have not been outlined. Additionally, R&D incentives for innovative drug research have also not received much attention from the government.

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