The solution to every problem can be found only if the problem is first decoded till the first principle. India’s economic slowdown should be treated and decoded the same way. The first thing that needs to be identified is whether the current slowdown in the economy is a cyclical slowdown or a structural slowdown. Cyclical slowdown is one that is characterized as a part of the business cycle, going through a trough which will eventually be followed by a recovery and peak. In gist, it is a short-term problem which can be solved through government’s fiscal and monetary policy. However, what the country is witnessing today is a structural slowdown and in order to garner a remedy for the situation, there needs to be a better understanding of the problem and there after damage control.

India’s growth story has always been driven by consumption. In terms of the components of GDP- government expenditure has been whooping for the economy, however government expenditure forms only around 10% of the GDP. Additionally, the fiscal deficit of the government raises concerns about what extent can the government afford to stretch the deficit to, especially with staggering tax collections. The current fiscal deficit stands at 7.5%, which is a notch higher than all the developing countries, barring Pakistan. Investments have been stalling, even after the corporate tax rate cuts. The reason is that if there is a weak consumption demand, why will the businesses invest even despite the incentives? The consumption demand, which is the most worrying concern, ironically forms around 60% or more of the GDP today. In such a situation, any policies, incentives or break throughs will not revive the economy until and unless there is a boost or rather revival of the consumption story of India. The current situation is worse than the 1991 fiasco, as during that time even though the government lacked the forex reserves, the consumption demand was strong. Today the government has ample forex reserves, but the main growth driver of the country has taken a backseat.

The demand can be broken down into urban demand and rural demand. FMCG sector of India, which is generally known for being the resilient and safe sector for the economy has been under trouble, which clearly highlights the gravity of the situation. There were times when the rural segment used to contribute 1.5times the urban segment for this sector. However, during the past few quarters the rural contribution has fallen to the level of urban contribution, and has dipped even more. Currently, the rural FMCG sales is growing by 5.2% and the urban sales is growing by 7.4%

One of the reasons for the above being, India is divided into an organized and unorganized sector. While the organized sector contributes two-third of the GDP, the unorganized sector contributes the rest, and certainly cannot be avoided. The informal sector is responsible for more than 80% of the job creation in the country, according to economists. The implementation of GST was done with the intent of formalizing the country. There has been interestingly a pattern observed, big firms in the industry that competed with a large portion of informal firms benefitted immediately after implementation of GST. The informal firms bore the compliance costs, many informal firms either shut down or witnessed a large drop in market share. The same firms which benefitted post GST, have now witnessed a decline in sales-reasons being slump in demand arising out of losses of job and high level of unemployment in the informal sector. For instance, biggies like Britannia, Marico first witnessed a plunge post demonetization. They again picked up post GST, due to the lessening of rivalry by their informal counterparts and now again a slowdown, due to their stressed counterparts.  

Additionally, there is an anomaly in the consumption behaviour of Indian consumers. According to the Consumption Expenditure Survey (CES), the expenditure compared between FY 12 and FY 19 indicates that the spending on durables, clothing, footwear, health, travel, entertainment and other miscellaneous good & services has actually increased. However, sectors like automobile and housing have witnessed a haunting slowdown. The anomaly is due to the lack of customer confidence. Customers do not want to spend on items requiring long term commitment in terms of maintenance and payments as they are not confident about their future income and revival of the economy. Hence, segments especially like travel and entertainment have seen robust growth figures as they are one-time expenditures for the customers. Additionally, events like big billion days witnessed e-tailors booking revenues worth $ 3 billion, plus 50% increase in terms of new customers for giants like Flipkart (mainly tier 2 and tier 3 cities). Major retail lending retail products, such as personal loans and credit cards continue to witness strong growth, though the pace may have decelerated. This brings us to the fact that slowdown does not necessarily showcase the lack of disposable income in the hands of urban middle class. These indicators highlight that there is sentiment issue, customers are still spending a robust amount of income in certain segments-segments which require one-time short-term low-ticket size expenditure, however not on those segments which are required to boost the economy.  RBI’s consumer confidence survey for November booked the lowest figure since its implementation back in 2010. The index stood at 85.7, which is even lower than the number observed in September 2013, where the country faced a BOP crisis. A reading below 100 denotes pessimism in the economy.

Budget 2020. The budget 2020 is imperative to bring the country out of a turmoil. There is a consensus view that the budget is likely to bring reforms which will stimulate demand and confidence of revival in the mind of Indian consumers:

With the corporate tax down to 25%, the next expected move of the government is a reduction in the income tax slab to leave more money in the hands of consumer. The current exemption of no tax for income up Rs. 2.5 lakh is expected to be increased to Rs. 5 lakhs. Slab of 5-10 lakh subject to a tax rate of 10% (20% currently), 10-20 lakh subject to a tax rate of 20% (30% currently) and above 20 lakhs subject to a tax rate of 30%. Next is increasing the deduction limit under section 80C from current Rs. 150000 to Rs. 250000. In order to revive investment and promote the housing sector, deduction for housing loan interest for self-occupied property is expected to increase from current Rs. 2,00,000 to Rs. 3,00,000. The rural economy needs to be given a priority; hence the budget should be focusing on bolstering the NREGA programme and funding rural road construction.

While all this may or may not work for the country, certain imperative deep-rooted measures need to be addressed to bring a long-term solution the country. One of the main forces believed to be positively linked to the consumption in an economy is the demographic dividend. India is believed to be the fastest growing country and unanimously agreed that it will reap the benefits of a “large working-class population” in the coming years. While there is no doubt of authenticity in the statement, what we fail to realize is that the above statement will materialize only when the current young population is provided with an environment of quality education and up scaling of skills. India is much behind this aim. Reforms in education and healthcare will pave the path for economic development in India. Successful Asian economies like China, Japan, South Korea, first focused on bringing reforms in the agriculture sector by promoting full-scale efficiency. Similarly, India should focus on reforms in agriculture in terms of access to seeds, technology, power and finance. They should look for ways to improve connectivity and facilitate easier leasing of land. Focus on such areas would not only solve the current problems but also cater to the problems the country has been facing for years but have been left unaddressed.

Beggars Are Not Choosers

“The rich get richer”- This is a statement that we come across very often. But have you ever wondered why this is true? How the socioeconomic unfairness leads to this is something we will talk about in this article.

There are different types of goods available for every income group. But what is the difference between these commodities and why do they cost different? What impact does it have on the short term and long-term income and saving stream of the consumer?

An observation that lead to a theory gave answers to most of these questions was given by a person named Samuel Vimes. He studied and observed closely the spending habits of the rich and the poor. It was noticed that if two people, a rich person and a relatively poorer person with a lesser disposable income require boots, they would spend on different quality of boots. The richer person who has a higher disposable income would spend it on good quality boots that costs, say Rs.3000; whereas the relatively poorer person with a lesser disposable income would spend a lesser amount for the same commodity, say Rs.200

Although they both get the same commodity, the quality of the boots would differ. The Rs.200 boots would get worn off very easily and would become un wearable very fast due to wear and tear of the low-quality material used. This would arise the requirement to buy boots again for the person with the lesser amount of disposable income. Within a month, the poorer person would have to spend Rs.200 to buy boots again. All this while, the richer person spent Rs.3000 on boots once and they would stay intact for years.

This observation gave rise to the argument that the rich get richer because they spend less over time by making better decisions because they have access to capital. Higher capital and a higher disposable income help the rich to make better decisions, whereas the poor cannot exercise this option due to less capital access.

This was known as the “Boots Theory”

The same can be applied to any commodity. Say a second-hand car that has been repaired without a good warranty and gives a bad mileage as compared to a new car that relatively costs higher will eventually cost less over a longer period as it will give a good mileage (less variable cost) and also is less likely to break down.

Economics believes all consumers are rational consumers and take the best decisions. But these decisions can only be taken with access to capital or effective access and use of credit. This would result in savings overtime and eventually lead in less spending over a longer period of time.

— By Harsimran Kaur Chawla , PGDM, TAPMI

US Elections and Indian Economy- A New View

A global pandemic, economic slump, unprecedented times; some of the trends you must have come across in 2020. The trend list got its latest addition in the form of US Presidential election. The democratic nation was all prepared to turn around the tables as they split between democrats and republicans. On one hand, where Donald Trump represented Republicans, the Democrats had Joe Biden as its face for the president’s position in the fierce battle. Leading up to an intense turn out of political events the United States had its new president elected in a close battle of states with Joe Biden crossing the magical figure of 270 electoral votes. The entire election was as closely watched by the rest of the world as America did. India, being an important international participant in transactions with the USA was also impacted by the entire election. The effects were visible evidently on the share market and stock indices as well with fluctuations on the basis of future expectations and market conditions in the coming times. To gain a more magnified and micro-level view, this article would take you through the special aspects that can be associated with the change in occupants in the white house.
US Elections and the Indian economy: The investments
There has been an influx of investments in the market which is clearly illustrated through the surprising performance of stock market indices and their closing figures on every passing day. This was an expected trend replicated from the US markets itself. The Sensex and Nifty touched record high numbers in the last few days as well. The investment attitude reflects the expectations of change in trade impacting economic activity in the country with higher FII. A sense of optimism prevails within analysts as emerging markets including India would continue to attract capital flows as long as global central banks regulate the smooth monetary policy to support growth amid COVID run blockages. In terms of yield spread, India stands as one of the top countries for yield spread and hence could experience a higher level of capital flow.
US Elections and the Indian Economy: Immigrant Policies
Immigrants contribute to a major share in the entire build-up to achieving a specified level of economic performance. With Joe Biden coming into the picture of the USA administration, there is a sentiment prevailing on ease out of immigrant policies reflected from the patterns and ideologies of Democrats as a whole. The immigrant policy alterations can be a propelling factor in shaping the prospects of Indian youth as well. There is an expectation for changes in the resident permit policies and relief among the H1B and F-1 visa holders with the favourable policies of Biden.
US Elections and the Indian Economy: US-China trade relations
The COVID virus has brought into the picture an intense relationship between the US and China for trade activities. These may contribute to the opportunity that India as a nation can seize by acting as a credible alternative to China and also providing uninterrupted supplies. The relationship of trade is further expected to substantiate in the form of benefits that pharma firms may gain with a higher level of government spending. The elections are expected to have a positive impact on the market with positive inflows in Asia Pacific markets. With an emerging consensus on having a China+1 model in order to mitigate risk and avoid massive supply chain disruptions as experienced in the early months of the pandemic, this can be helpful for the Indian economy to grow.
US Elections and the Indian Economy: The Iran aspect of trade
During the campaign for the 2020 presidential elections, Biden commented on how he would like to renegotiate the terms in reviving the US Iran nuclear deal. This can lead us to assumptions that the new administration may be in the direction of lifting some sanctions imposed on Iran. India can look towards a positive direction for benefitting from this situation. Iran being one of the biggest oil exporters to India in the past, faced a hard stop post the sanctions imposed by the US. This was followed by China stepping into the picture and taking advantage of the vacuum by investing heavily in Iran. China has also decided to build a new port in Iran. Hence a new deal can be beneficial for the US as well as India followed up with resumption of infrastructural activities if sanctions are lifted.
US Elections and the Indian Economy: The Paris accord
One of the main aspects of Joe Biden’s campaign was the highlight of his stand to join back the climate change agreements in the Paris accord. India has actively supported the agreements at the Paris on climate change but a bigger challenge Biden may face can be in the form of resuming the funding of the World Health Organization (WHO) which was halted by the Trump administration. This is a challenge since it requires the approval of the Senate which is controlled by the Republican legislators.
US Elections and the Indian Economy: The Kamala Harris effect
A prime highlight of this year’s elections was the victory of Kamala Harris as an Indian origin vice president. This is the first time an American with a backdrop of India holds a leadership position at this level. As a symbol of the representation of diversity and the progressive attitude of America, the leadership can help in gaining trust and making it easier to gain positive negotiations. The ties of both countries are guided by the convergence of their strategic interests in security, trade, and technology but the election of Kamala Harris has enthused people in Indian especially women paving a path of positive expectations in the future from both sides.
The presidential elections did have a lot of stake for India and its international ties but a
convergent trajectory of common interests is what would guide the two countries and its bilateral decisions that can be reflected from the stance of the two countries on various topics.

The disconnect between the stock markets and the Indian economy

Let’s say a friend of yours, has INR 50,000 and wants to own a business, hoping to make a lot of money over a period. He observed that with COVID 19, many companies offered work from home to their employees and therefore the need for laptops has increased. Now here, for someone to start a new company in this industry, they need government permissions, plant, property and equipment, raw materials, and hundreds of other resources. Not to mention, their investment of INR 50,000 is not enough to fetch them anything. So, they choose to invest the same in some other company which has already secured all the expertise and resources to manufacture the same. Now, this is where the stock market comes into the picture where one can choose to buy partial ownership of any company from the ones listed there. Due to the rising cases of COVID 19 cases, the whole world shifted to online platform to carry on with their work and thus, the demand of better computers and laptops increased. Manufacturing companies boosted their productions to meet the demand and earn profits from this opportunity. They employed more laborers, bought more raw materials, and invested in their research facilities to improve their process and increase their supply. In very simple terms, this is how the economy grows, as with increasing demand, the supply also started increasing. Businesses start making more profits and as a result, they invest more and hire more employees to expand. As employment increases, the buying capacity also improves. With more money in hand, consumers spend more to buy different comodities which creates more demand and this cycle goes on. This demand is capitalized by businesses and now their stock prices also rise.

So, here we might start thinking that, there is some relationship between the economy and the stock market. But whatever we understood till now, is just a partial truth or only the half picture. The rise and fall of stock markets is not just dependent on the economic position of the country. There are hundreds of other factors as well which play a very important role in it. Government policies, political scenarios, market sentiments, which unlike other factors, are purely emotional, etc are few major contributors to fluctuations of stock markets. Markets in the short term, are irrational and only in long term they are efficient and reflect true economic progress as measured by GDP growth over long periods. Try holding this thought for a while, as by the time we conclude this, everything will automatically start making more sense.

To understand the previous idea in a better way, let’s observe the performance of the Indian stock market from the beginning of 2020. Here we have a graph showing the NIFTY50 market index figures from January 2020.

Exhibit published on TradingView.com, October 31, 2020.

With the first case of COVID-19 in India, reported on 30th January 2020, the stock markets began to fall. As the country went into lockdown, the economic activities also reduced to a bare minimum. The GDP growth of the country contracted by 23.9% by the end of the first quarter. Around 41 lakh job losses were marked which increased the unemployment level to 27.1% by the end of April 2020. Both the stock market and the country’s economy took a hit and witnessed a steep fall.

But the stock market started to recover soon, as few companies emerged as Corona warriors for them. Starting with Reliance Industries Limited, the Adani Groups, Sun Pharma, Bharti Airtel, Vedanta Ltd., the Shiv Nadar Group, the Aditya Birla Groups, and the Radhakishan Damani Groups, clocked substantial market gains. Each company had a different reason for the sharp rise in their share prices. A few of the contributing factors were aggressive and successful fund-raising programs, the rally in pharmaceutical sectors amid the COVID pandemic, increase in data usage with the work from home policies of the companies, increase in the demand for health care products, increase in the usage of logistic services, etc.

At this point, the markets showed positive signs of recovery and started rising but the economic growth was still suffering. The GDP growth reported in the first quarter was 5% and in the second quarter it further slowed down to 4.5%. The MSME sector which contributed to more than 30% of the total GDP was still under great stress. Moreover, the India-China standoff situations at the borders added to its loss. The government banned imports from China and motivated the citizens to boycott all Chinese products. Mr. Nitin Gadkari Minister of Shipping and the Minister of Micro, Small and Medium Enterprises raised his concerns regarding the losses that the local businessmen who had already paid for the goods and raw materials, will have to bear. Not to mention the increase in the cost of production as we imported cheaper machinery, electrical, chemicals, and other raw materials from China, also impacted the supply and demand of many products thus impacting the economy.

Since all the international trade declined, therefore it became very difficult for the industries to maintain a low cost of goods sold. Also, all the capital-intensive sectors such as construction sectors and manufacturing sectors were still unable to recover, due to the huge shortage of laborers to carry out the operations. An increase in the job losses decreased the spending capacity of the majority populations which led to a decline in the demand. The sudden change in the spending behaviour of the masses also led to a huge liquidity crisis for the industries making it more challenging for them to continue their daily operations. Our banking sector is still trying to recover from the huge NPAs accumulated over the period.

So with all things said, it is very clear that contrary to popular belief, the economy and the stock market are two different things. Markets, many times, ignore the economic reality and works in their ways, which are not in sync with the economic principles, we know. Since the Great depression of 1929, stock markets have repeatedly shown that it has no link with economies or with business fundamentals. In one of the most famous books, ’The General Theory of Employment, Interest, and Money’, by economist John Maynard Keynes, the author talks about markets being governed by wild forces, whereas the economic growth being derived from the real productivity of the country. Probably this is the only way we can understand, how Nifty50 closed the calendar year 2019 with gains of about 12.0% whereas our GDP only grew by 5.024%.

– Shobhit Jain, Editor, TAPMI Journal of Economics and Finance

TJEF Volume 4 Issue 2

The current recession faced by global economy is considered to be more destructive than the Global Financial Crisis, 2007-with a baseline forecast of 5.2% sis, contraction in global GDP in 2020. With US elections around the corner, a weakening dollar, chaos around the UAE Israel deal, Fed’s new plans of lifting inflation, disruptions in the worldwide supply chain- the global scenario is sturdily uncertain and predicting the road ahead is getting even more challenging.

The current state has revealed the structural problems pre-existing in the structural Indian economy. Whilst the current scenario demands an increased focus on health infrastructure, India’s health care infrastructure, expenditure as a % of GDP is abysmally low. The economy is expected to grow at 1.5% to 2% for FY 21, as per IMF and World Bank estimates. In the tepid demand scenario, the inflation is skyrocketing at 6.9% in the month of July. India has also been only one of the few economies facing PMI shrinkage in July, compared to a month ago. age

The sectors, which have gained out of the new normal, constitute of technology, pharmaceuticals, agriculture and FMCG catering to essentials. Financial institutions will bear the longest grunt of the crisis, with shadow banking crisis only worsening. The current scenario reveals a rather weak correlation between the stock markets and the economy-with Nifty reaching the overbought zone during the crisis.

Hence, in the next volume of the issue, we tried to cover various facets of the banking sector, the dire state of corruption in India and the inefficiency of the stock markets. TJEF has always aimed at presenting well-curated content from a bunch of ing enthusiasts possessing the right acumen for our reader base.

I would like to take this opportunity to appreciate the efforts put in by all the students to write for the journal.

Keep reading and keep the curiosity flowing!

Please find the link to the PDF version of the journal


Anjali Agarwal, TJEF Editor

The Increasing Difference

Do you have any idea how much an average Indian farmer earns? Or what an average Indian earns? Okay let us divide the economy of India into major sectors- Agriculture, Industry and Services. If we divide our $3.2 trillion nominal GDP ($11.2 trillion by Purchasing Power Parity) in these segments we will find Agriculture contributes about 15%. It is okay – even agriculture contributes only 1% of US GDP. But in India this sector employs 50% of the adult workforce. Just to reiterate- half of the India’s families are dependent on agriculture but they have only 15% share in the country’s annual income.

1950 to the second decade of 21st Century – One Sector has always been failing

Now coming to the question, how much exactly an average farmer earns? It is approximately ₹100,000/annually per household. Considering an average family has 5 people it is ₹20,000 per person and it only converts to less than a couple thousand rupees per month per person.

Maybe a brief idea about the growth rate of different Indian sectors might help us understand the vulnerable state of this agriculture sector. The agriculture sector which employs nearly 50% of Indian population grew at less than 2% whereas the Services sector grew at about 10% to make the aggregate to grow at 6-7% for the last 2 decades.

So fundamentally we will have to understand when we say a nation is growing at a certain rate, how uniform is that growth, who all are contributing to the growth, who are the outliers and who are out of the race? The GDP per capita (Nominal or PPP) can yet not define the real central tendency being highly influenced by the outliers. The median income level can somewhat account for the overall development along with certain other parameters including Mass Literacy or Infant Mortality Rate (basic hospital infrastructure and ordinary citizen’s access to the same).

Talking about the outliers –the promoters of Nifty 50 and top companies in the countries. But isn’t it obvious that they should have majority wealth to say- they only provide majority of jobs in the country and serve as real assets to the country? Isn’t it same for almost all rich to poor countries? The simple answer is “Yes”. But there’s a very big ‘but’. Is this at all a healthy growth? In capitalism it is. I mean how can Mukesh Ambani help own approximately 50% of RIL from the very start and RIL is today valued at $200b not by him but by the people of the world. The same goes for Jeff Bezos or Bill Gates – it’s the people of the world who value the businesses at more than $1.5 trillion.

But if the top billionaires literally add hundreds of billions of dollars to their total wealth in this horrible performing year of 2020 as Bernie Sanders complain about, what exactly does this mean? We are moving towards more financial extremism. If in 2010 someone said the total wealth of top 10 billionaires is equivalent to the bottom half of world population wealth; in 2030 it can a single person! Or even another way of thinking it – if Amazon’s annual median pay ($29,000) is equivalent to its CEO’s 9 seconds worth of income by 2030 it could actually be a second or two!

                                Source: Fast Company

Ensuring uniformity of growth is no one’s responsibility and when you have the large tech giants as publicly listed companies wherein no in is stopping a poor person to buy into their portfolio, why is it even a concern? Why and how should the government interfere? No one literally stopped a poor farmer to invest in Reliance Industries IPO on BSE and grow at almost the same rate as Ambani. It is he – who chose to invest in this own farming business and obviously lost to the growth race to the billionaires.  In all fairness many of these self-made billionaires have created such a humongous wealth they themselves never could’ve imagined in making so!

But is there actually any way that can help to keep a balance? Maybe a wealth tax for inheritance? Of course, many of these billionaires do pledge to give away a part of their wealth in charity and involve in several philanthropic activities like Facebook founder and CEO Zuckerberg pledging to give away 99% of his wealth or Bill Gates over a period of his life (Bill and Melinda Gates foundation) has given away $100b+. In Indian context we have Wipro’s Azim Premji, the MP Birla foundation, Tatas, Ambanis and Adanis amongst many others. The biggest concern in this context is absorption of the wealth in the society and if that one-time transfer can be capitalized to make a full-time employment opportunity.

                                The Philanthropy that matters

The only thing in this context is connection. A big business in any country not only provides job opportunities for thousands but enable thousands of other businesses to thrive amongst others. Think about an IT corridor- OMR in Chennai. Is it only the IT employees that benefit? What about the hundreds of snacks shop, hundreds of PGs, the huge demand in the local transportation, poll tax by government – and the list goes on and on. To see closely it is only a few tech giants indirectly employing so many. But what if a group of people is repeatedly cut off from this growth trajectory through generations? This is very important for us to understand – even if I agree a very small snacks shop is a beneficiary of TCS (his small shop beside the office); not everyone is having the opportunity to make that small shop also. If anyway the small businesses can somehow connect with the giant conglomerates it’ll be a great thing – but somehow a very good proportion of people stay out of the race permanently and neither is there any opportunity to connect in foreseeable future.

There is nothing wrong in capitalism if that capitalism can influence and benefit a good proportion of people in a particular geography. If it cannot do so – it will account for growth in GDP figures but that’s not “development”. And that “Increasing Mismatch” can be fixed with sustainable development and not only growth – not to mention growth is a huge component in the developmental process!    

From Debjit Pal : Editor – TAPMI Journal of Economics and Finance

The Story of Indian Pharmaceutical Industry

During the 1970s, the Indian Pharmaceutical market was nowhere on the map. But is now one of the emerging world leaders. Infact, it is called “the Pharmacy of the World”. Generic drugs comprise the largest segment nearly 71%, over the counter and patented drugs account for the remaining 21 and 9%, respectively. The Indian Pharmaceutical industry brings in a revenue of 38 million USD annually, making it the third largest in the world by volume and the eleventh by value. There is a total of around 3000 pharma companies and 10500 manufacturing units that are currently operational in India. The transition has been gradual but not without its pitfalls. There have been several factors that have influenced the evolution of the Indian Pharma industry.

Since the advent of the first pharmaceutical company in the early 1900s in Calcutta, there have been four periods for evolution for the Indian Pharma sector.

  • The 1900s were still dominated by the foreign players, post 1970 era saw a few changes in patent acts, it focused more on process patents and did not cover the products. This led to many players in the market take the opportunity to reverse engineer the drugs without having to pay royalty to the patent holders. This period saw a 10-fold rise in number of pharma companies in the country. Accompanied by the exodus of foreign players, the domestic generic pharma industry had an increased market share in generic drugs.
  • The early 2000s, saw these companies expanding their capacity even globally. The export market received many Indian entrants. The pharma export growth gained momentum, with the liberalization of the Indian economy that opened gates for privatization and globalization.
  • 2005 however saw a minor upheaval in the sector due to a change in the patents act that abolished process patenting and started product patents. This forced the pharma companies to shift focus from generics to R&D for new drugs components or API and other Biopharmaceutical products.

 The key segments in the pharmaceutical business in 2019 were:

  • API
  • Formulation manufacturers
  • Biotechnology sector
  • Contract Research and Manufacturing Services.

Figure 2: The Indian pharma industry YoY sales growth

The industry has seen a steep decline from 2007 due to increasing market volatility and even though there have been good phases, the growth still continues to remain volatile even to this day.

There are several reasons that contribute to the market volatility.

  • Emerging competition in the generic drug market from other countries have caused a substantial price erosion for generics and thus have caused significant drops in the pharma revenue.
  • Strict regulatory guidelines for manufacturing, quality control measures. There has been a substantial growth in the number of warning letters that the USFDA has given out to companies in the past few years.
  • The 2017 GST regime caused higher production costs and reduced profit margins.
  • Domestic price caps introduced by NPPA on drugs have caused these companies to reduce their production by considerable margins.
  • Increase in API costs have caused formulation prices to go up. India currently imports about 60% API from other countries for drug manufacturing and the increases prices have thus caused a steep decline in the profit margins.

But the industry has also started changing its outlook and have taken steps to combat the hurdles that lie ahead. Generic drug manufacturers are exiting non-profitable portfolios and looking for alternatives and new innovation strategies.

  • Focusing on differentiated complex generics because they are difficult to develop, face lesser competition and thus yield higher profit margins than normal generics. Regulatory bodies are also likely to prefer complex generics over old-school generics.
  • Specialty drugs are high on pharma launch agendas. They are high value drugs that aid in the treatment of chronic, complex of rare diseases. There is a 50% predicted growth in the market spend for specialty drugs.
  • One of the major focus areas in the current market are APIs. In-house API manufacturing is gaining momentum. Indian API exports have increased by 11% in 2019 and the global API market is predicted to reach USD 245 billion by 2024.
  • All the above shifts in the trends for pharma manufacturing has led to steep rise in R and D investments.

The companies are strategizing for long term value creation, focussing on effective cost optimization and building a robust culture of quality and excellence in regulatory compliance. These are key aspects to sustainable growth in the sector. All strategies are focussed on growth, which is a long-term goal. They aim at steady increase in the global footprint of the industry.

From Deyasmriti Nandi : Editor – TAPMI Journal of Economics and Finance