India：Pharma Investments Returns To Gujarat As Tax Sops Fade

Pharma firms have started to flock back to Gujarat for expansion and new investments activities as benefits of tax sops given by north Indian states fade in the post GST era.

According to an analysis by Business Standard newspaper, Gujarat Food and Drug Control Administration (FDCA) is now handling 30-40 applications for setting up greenfield pharmaceutical plants and brownfield expansions per week as compared to around 10-12 such applications per week before the indirect tax regime was rolled out. The FDCA grants licences to manufacturing units and all new investment proposals in the state are routed through them.

FDCA Commissioner Mr. Hemant Koshia was quoted as saying that around 121 fresh investment proposals were received between June 2017 and February 2018. Apart from these, another 200 proposals for brownfield projects were received. The total investment intention is estimated to be around Rs. 36-bn. The bulk of these proposals is from small- and medium-sized players, primarily contract manufacturers. Some big names, too, have shown interest in setting up manufacturing units in Gujarat.

Established hub

Mr. Shah, Chairman, Indian Drug Manufacturers Association (IDMA)-Gujarat State Board, said Gujarat contributed 32 per cent to national pharmaceutical production and this share was expected to increase to 42 per cent in three to five years.

“A decade ago, the skewed tax structure had pushed pharmaceutical manufacturing units out of Gujarat to states that offered tax incentives. From a 42 per cent share of national production, the state’s share had fallen to 28 per cent in 2012-13. The GST has now created a level playing field and, therefore, there is a renewed interest in the state, which is an established hub for pharmaceutical production with trained manpower and a vibrant ecosystem,” Mr. Shah added.

The GST was imposed on July 1 and has largely reduced the attractiveness of setting up industries in hill states. There will be budgetary support in the GST regime for eligible industrial units in Jammu and Kashmir, Uttarakhand, Himachal Pradesh and northeastern states, including Sikkim till 2027. This applies to existing units and involves a refund mechanism. owever, when it comes to greenfield units, these states lose their competitive advantage vis-à-vis established pharmaceutical manufacturing hubs such as Gujarat.

Losing sheen

In the pre-GST era, industrial towns such as Baddi in Himachal Pradesh had attracted several pharmaceutical units after a subsidy scheme was announced in 2003. Around 360 pharmaceutical units had set up shop in the state because of tax incentives. At least 50-60 mid-sized and big pharmaceutical firms had moved out of Gujarat to Himachal Pradesh, Uttarakhand and Sikkim to avail of these incentives.

Pharmaceutical firms had set up manufacturing units in hill states lured by tax incentives. Many faced issues with manpower, among other things. “Lack of skilled manpower, unwillingness of employees to relocate, and frequent power cuts have been glaring issues for pharmaceutical firms that operate out of hill states. With the tax incentives gone, no fresh investment is likely to go that way,” a senior executive with a firm that has a unit in one such state was quoted as saying in the news report.

Though Gujarat has gained fresh investment proposals after implementation of the GST, this is not true for Maharashtra. Industry observers attributed this to the prohibitive land costs in the state. “Setting up a manufacturing unit is cheaper in Gujarat and for SMEs and mid-sized contract manufacturers, cost is a major driver,” said an industry expert.