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Centre's directive on excise duty Small pharma entrepreneurs at the crossroads

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P.T. Jyothi Datta

Mumbai, June 24

TWENTY-FIVE years after being in the business of making medicines, Mr P.K. Gupta, a medium-enterprise entrepreneur, is at the crossroads again. Does he shift his manufacturing unit from Haryana to Baddi in Himachal Pradesh - the latest Mecca for the pharma industry? What happens to the trail of unemployment that the shifting will leave behind?

Enquires from local pharma big guns have fallen silent and he is aware that interest to source manufacturing from small and medium-size entrepreneurs (SMEs) is on the decline. Mr Gupta is the head of Belco Pharma, but his dilemma is reflected in the desperation of several SMEs across the country.

Small manufacturers were in the process of investing in their manufacturing plants to meet the Good Manufacturing Practices (GMP) norm that comes into effect this July, when the Centre passed another directive that changed the dynamics for SMEs.

The January directive said that excise duty would be levied on the maximum retail price (MRP) of finished medicines and not on the ex-factory price. The directive was meant to fix big pharma companies taking the benefit from SMEs, observes an analyst.

But big pharma companies found it money-wise to set up plants in tax-havens such as Baddi instead of sourcing from SMEs in other States and pay tax on MRP, he added. Net result, the small entrepreneur is feeling the heat.

The January directive has triggered a shift of companies to tax-free regions and this is creating a disparity, says Mr Gupta, who also heads the Haryana Pharmaceutical Manufacturers' Association. According to him, of the 300 pharma units in Haryana, 100 have gone sick. Of the remaining 200, about 100 are planning to migrate and the rest are in a dilemma. About 10,000 people are employed by this sector, he says.

"I have not yet been impacted by this directive. But indirectly, I have been told by my customers to set up a small manufacturing unit at Baddi," says Mr Mehul Shah of Encube Ethicals. Mr Shah is a large contract manufacturer for three major pharma companies.

"On paper the odds are stacked against small entrepreneurs. The equation is simple, volumes are not growing more than 4 per cent and the capacity increase is 50 per cent. Since January, there has been no business enquiry," he points out.

As manufacturing commences in places such as Baddi and business dwindles in other regions, manufacturers will have to lay-off employees and contract labourers will be the first to go, he observes.

Mr S.R. Vaidya with the Indian Drug Manufacturers' Association (IDMA) says about Rs 7,500 crore worth of revenue will shift out of the Western pharma-strong states of Gujarat and Maharashtra. About 200 units have shifted out of Gujarat and about 6,000 people have been retrenched, adds Mr N.C. Dalal, Director of Sunij Pharma.

The Centre may have been trying to fix the large drug manufacturers, but "we have got caught in the cross-fire," laments Mr Sethuraman of the Federation of South Indian Pharmaceutical Manufacturers' Association.

Small manufacturers are now saddled with bank loans taken to meet the GMP norms. But with uncertainty written over their future, survival is at stake, adds Mr Veeramani of Fourrts India and Chairman of IDMA's SSI committee.

To be concluded

(This article was published in the Business Line print edition dated June 25, 2005)
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