Advantage MSMEs

To promote industrial growth, the government, supporting ‘Atmanirbhar Bharat’ and ‘Make in India’, has come up with several policy initiatives in recent years. The objective has been to make the manufacturing sector the catalyst of India’s economic growth story.

The Finance Minister in the Union Budget 2021 announced an outlay of ₹1.97 lakh crore for the Production-Linked Incentive (PLI) Schemes for 13 thrust sectors. PLI Schemes operate on a value addition concept and incentivise eligible manufacturers for the incremental sales they achieve, over a base year. These schemes are key to making India a $5 trillion economy.

Under the PLI scheme, the pharmaceutcal sector is a focus sector given its crucial role in the post pandemic world. According to the Indian Economic Survey 2021, the domestic market of pharmaceutical industry is expected to grow 3x in the next decade.

The government announced first PLI Scheme for pharmaceutical sector on July 21, 2020. It covered identified Active Pharmaceutical Ingredients/Key Starting Materials/Drug Intermediates and had a financial outlay of ₹6,940 crore.

To further encourage the industry to grow and scale using cutting-edge technology, diversify the product mix to complex generics, patented drugs, and thereby penetrate the global value chains in pharmaceutical goods, another PLI scheme was notified by the government on March 3, 2021 and its operational guidelines were announced on June 1, 2021.

The Scheme is more extensive in its coverage and grants a total incentive of ₹15,000 crore to select applicants manufacturing specified drugs/in-vitro diagnostic devices and committing to fresh investments.

Incentive under the Scheme ranging from 3-10 per cent is offered on the incremental sales of eligible products over a period of 6 years (from FY 2022-23 to FY 2027-28), with FY 2019-20 marked as the base year for computation of incremental sales.

To ensure wider applicability of the Scheme across the pharmaceutical industry, the applicants are grouped based on their Global Manufacturing Revenue (GMR) of pharmaceutical goods.

An applicant is required to commit to invest an amount over the prescribed threshold (over a period of years, from FY 2021-22 to FY 2025-26) and should have a threshold turnover in FY 2022-23. Further, for subsequent years (FY 2023-24 onwards), the applicant will have to achieve a 7 per cent growth in sale over the previous FY. The maximum cap of incentive per applicant has been fixed in such a manner that the entire investment can be recouped in 6 years.

The earlier deadline of July 31, 2021, for submitting application has now been extended to August 15, 2021, through a Corrigendum dated July 22, 2021.

Upon filing of the applicants, the selection shall be done on a ‘ranking based’ evaluation system. Such ranking is based upon several parameters as defined under the Scheme.

Interestingly, through the said Corrigendum, the Department of Pharmaceuticals have modified the selection parameter for MSME applicants. Earlier the selection parameter had 50 per cent weightage to the committed investment under the Scheme, which is now replaced with GMR in FY 2019-20.

This reveals the government’s intent to incentivise increase in production. It also curbs applicants from committing to huge investments, which may seem overblown given their current books.

While the change could hit newcomers focussing on investment as a selection basis, the government wishes to play safe on PLI Scheme and one’s who have better track record merit the benefits therein.

The change in parameter also benefits MSMEs who do not have significant investment plans but have unutilised/under-utilised plant capacity. These companies with a nominal capital commitment, can now focus on optimising their existing capacity utilisation and increasing the revenue.

The extension of the application window and change in parameter is expected to keep the pharma companies board room busy in revaluating their expansion plans and growth strategies, and if possible, align it with the PLI Scheme to reap the maximum benefits.

Hans is Partner, Jain and Ashpnani are Principal, Dhruva Advisors LLP

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