Financial Aspect: Manufacturing Medical Device in India
The medical device sector is a sunrise sector in India. It is currently valued at $11 billion and has the potential to grow at 28% annually to reach $50 billion by 2030. There are over 700 domestic medical device manufacturers, with an average investment of $2.3 million to $2.7 million and an average turnover of $6.2 million to $6.9 million. With schemes like Production Linked Incentive Scheme (PLI), India has the potential to become the manufacturing hub of the world for medical devices.
In this article, we shall explore the factors that are responsible for the high cost of finance, what can be done about it, and we shall also have a look at the investment scenario in India for medical devices.
High Cost of Finance
The high cost of finance in the medical device sector is on account of high cost of production, including tariffs and taxes. In the past few years, effects of COVID-19 lockdowns and the Russia-Ukraine war have sent prices of all goods and services skyrocketing.
The costs for production and distribution of medical devices have increased over the last two years at an unprecedented rate. It has been estimated that the prices of key raw materials involved in the manufacturing of medical devices, like metals and plastics, have increased by over 50% in the past two years alone. This is a global scenario.
Since over 80% of India’s medical device needs are met by imports, with the addition of transportation costs, customs duties and other such taxes, the final price of medical devices in the domestic market increases.
High duties make it difficult for the sector to continue offering technologies at reasonable prices and ensuring access to cutting-edge technology. Moreover, large amounts of money are spent on research and development in the sector. This is one of the prime reasons for high cost of production. Additionally, another major issue is that of Goods and Service Tax (GST). Medical devices are taxed under all slabs of GST. However, GST of 18% is applicable on majority of medical devices. This 18% GST on medical devices further increases cost of production.
While data on cost of production, at the global and well as national level is poorly documented. It is interesting to note that even with a high cost of production, compared to global markets, the cost of indigenously manufactured medical devices is just one-third or one-fourth the cost of their imported counterparts.
Addressing the faculty and students of Sree Chitra Tirunal Institute of Medical Sciences and Technology in Thiruvananthapuram, Union Minister, Shri Jitendra Singh said, “We are now among the five countries of the world which have the richest resource of these (medical) devices. The other countries are the USA, Japan, Brazil, and China. But our tools are more cost-effective, our cost is just one-third or one-fourth of the cost of those in other countries.”
An example of this was seen during the pandemic, when the average cost of ventilators, which were mostly imported, was approximately Rs. 15 lakhs. With a boost in domestic manufacturing, the average cost now ranges between Rs. 2 lakhs to Rs. 10 lakhs. This indicates that India’s cost of production for medical devices is relatively lower than that of the global market, albeit it is still a contributing factor to high cost of finance.
Thus, the question that arises here is, how can this high cost of production be reduced?
The answer to this lies in the Schemes for Promotion of Medical Device Parks and Assistance to Medical Device industry for Common Facility Centre. These schemes allow for creation of infrastructure in “parks” which house manufacturing units of different manufacturers. With different units having access to this infrastructure will help in significant cost reductions in the manufacturing process. Industry estimates suggest that the cost of production will be reduced by 40% – 50% with the implementation of these schemes.
Further, to provide India with a competitive edge, organisations associated with the sector have been asking the Central Government to increase import tariffs from 0 – 7.5% to 15%, while reducing 18% GST to 12% GST flat on all medical devices. This will protect domestic manufacturers as well as incentivise them to boost manufacturing.
Let us now have a look at the investment scenario in India related to medical devices.
Investments in Medical Devices
In recent years, India has posed itself as an attractive investment destination. According to data published by the Department for Promotion of Industry and Internal Trade, between April 2000 and December 2020, India received a total foreign direct investment (FDI) of $521.58 billion. Of this, medical devices received an FDI of $2.17 billion, representing about 0.42% of the total FDI.
Various attempts have been made by the government to attract investments in this sector. In late 2014, the government allowed 100% FDI under the automatic route. This implies that to make any investments in the sector, government permission is not necessary. As a result of this, between 2015 and 2020, India received $600 million with key investments from countries such as Singapore, United States, Europe and Japan. Medical device segments like consumables and implants have received the most FDI.
Furthermore, it was observed that the sector received investments from 32 venture capital and private equity firms and angel investors to the amount of $432 million between 2010 to 2015.
With respect to domestic investments in the industry, under the PLI scheme, a cumulative of 21 applicants have committed an investment of Rs. 1,059.33 crores, while generating employment for about 6,411 persons.
Moreover, it has been reported that the government has approved nine projects by companies like Siemens Healthcare Private Limited and Wipro GE Healthcare Private Limited. These projects are expected to lead investments of approximately Rs. 729.63 crores and generate around 2,304 jobs.
Additionally, in December 2021, seven domestic manufacturing firms set up their factories at the medical devices park in Hyderabad, Telangana, with an aggregate investment of Rs. 265 crores. As of today, over 50 manufacturing and research and development units have been set up in the park, with a cumulative investment of Rs. 1,424 crores, providing employment to around 7000 persons.
It has also been observed that nearly all of the financing in medical devices is through venture capital or private equity. Point to be noted here is that the government support is provided through numerous schemes and subsidies under different ministries to support medical devices manufacturing in India.
From the above discussion, it is clear that for the medical device sector to be competitive in global markets, the manufacturing disability of 12% to 15% needs to be tackled. This issue can be solved with investments in innovation that will improve production processes, thereby reducing cost of production. Furthermore, investments in infrastructure are also necessary to aid manufacturers in manufacturing devices that are of good quality, affordable and available in the market. Moreover, regulatory modifications are required. This will help in reducing import dependence by protecting domestic manufacturers and promoting indigenously made devices.
Ms. Purvi Patil is a Research Assistant at Tatvita. She has pursued her graduation from the Liberal Arts Department of Savitribai Phule Pune University. Her areas of interest include International Relations, Data Protection and Privacy, and Sustainability.