Indian It And Pharma Sectors At The Crossroads

Among the twenty drug makers named in the case are Indian generic drug makers including Sun Pharma, Aurobindo, Lupin, Zydus, and Glenmark

by N.S.Venkataraman-2019-05-16

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The performance and achievements of Indian IT and pharma sector during the last two decades have been hailed and appreciated both by the Government of India and people. Certainly, both these sectors have been important prime movers of Indian economy and also job generators. Due to their exposure to developed countries in the day to day functions ,both these sectors have reasonably modernized themselves and are meeting the global standards and expectations to a large extent, as of now.

Both these sectors largely depend on the US market for their sustenance and profitability. While the performance and growth of Indian IT and pharma sectors, during the last two decades have been impressive, it appears that they are now reaching saturation level.

As the US market is becoming more competitive with the entry of players from several other countries and in view of the “America first” policy of the USA government , it is doubtful whether the same tempo of growth can be maintained by the Indian units in the coming years.

If the IT and pharma sector were not to change the strategies and would fail to enter new areas of growth in tune with the global trend, their growth profile is likely to suffer

IT sector at the crossroads

Indian IT companies have no option but to cough up more expense for H-1B visas, if the US government would continue to rise the visa application fee. While the additional costs for Indian IT companies will impact their margins, they have no alternative because the US is, after all, their biggest market.

What is worrying is that Indian companies may not get the number of visas they are looking for in future .In April 2019, the United States Citizenship and Immigration Services (USCIS) said that it had received enough applications for fiscal 2019 which starts in October, reflecting the enormous demand for these permits. This was the seventh year in a row in which the visa cap was reached in the first five business days.

Last year, USCIS received 190,000 cap-subjected H-1B petitions, 199,000 in 2018 and 236,000 in 2017.The rejection rate for H1B visas for Indian IT companies has been rising in the last few years. The scrutiny too has increased.

Data released by USCIS shows that request for further evidence’ (RFE) for H-1B applications from Indians increased to 72.4% in Q4CY17 from 18.2% in Q1CY17.

The denial rate for H-1B applications increased to 23.6% in Q4CY17 from 18.3% in Q1CY17, possibly due to the US government’s order issued in April 2017 that more Amercians be hired. The higher rate of denials and RFE for skilled visas continued in CY18. The H-1B approval rate was approximately 75% in Q1FY19 against the five-year average of around 90%, while the approval rate for L1 (A/B) dropped to about 74% in Q1FY9 against five-year average of ~82%—a trend similar to that seen for H-1B visas.

Export of software services from India in FY18 were $77.3 billion, not much higher than the $74.3 billion in FY17.

The new rules in USA give preference to professionals with a post-graduate degree from US educational institutions; such professionals would get an opportunity in the 65,000 general category and, if they fail, in the 20,000 advanced degree pool.

The largest market namely USA is likely to maintain “American first” policy due to its popularity amongst US citizens and pressure of public opinion in USA. India’s IT sector is certainly at the cross roads.While demand should pick up over the long term,Indian IT companies have to be well-positioned to cater for the growth in demand in emerging new avenues.

Indian firms have to focus on the emerging areas such as AI, analytics, automation and cloud.

While challenges facing the Indian IT sector are obvious, one is not sure whether Indian IT companies are adequately preparing themselves to meet the requirements of the tasks ahead. It is not easy, as large pool of manpower have to be trained in emerging areas for which support from academic institutions are very much needed.

While some of the large IT companies in India may be preparing themselves for such challenging conditions, most of the IT companies in India are carrying out routine functions and as of now are functioning more as “body shoppers” (selling man power).It is common to read about the IT professionals sitting on bench in USA, awaiting work opportunities. While role of such small IT companies can not be ignored and they are also playing vital role , the question is whether they have the wherewithal to equip themselves with updated skills and have investment capability to do so.

Pharma sector at the crossroads

Indian pharma companies are focused on export market to a considerable extent, not only to USA but also to several other countries. However, focus of export of Indian pharma companies are more on formulations such as tablets, capsules, syrup etc and not on APIs or development of new drugs. Most of the pharma exports are formulated products.

R&D efforts and initiatives in Indian pharma sector is certainly not globally competitive and lags far behind the developed countries.

In recent time, we increasingly hear about Indian pharma companies being subjected to rigorous inspections by regulatory authorities from USA and quiet a number of Indian units have been getting warnings and a few of them have received ban orders for export to USA.

It is seen that the Indian pharma industry is becoming import dependent due to increasing import of APIs(Active pharma ingredients) from several countries, particularly from China. In the case of domestic production of API, it is also seen that the most production is made from penultimate stage by importing the intermediate chemicals and not from the basic stage.This condition certainly weakens the basics of the Indian pharma industry.

Generic drug makers in India took a hit as details of a case filed by 44 US states on alleged drug price manipulation emerged.

Generic drugs are chemically similar versions of innovative drugs and are marketed in the US, once the patent protection period has expired on the innovative drug. The entry of generics results in price erosion of over 90 per cent on the originator’s drug. Generics are often favoured by policymakers to bring down healthcare costs. The allegations of price collusion hurt the Indian generic drug industry.

In the US District Court in Connecticut,it was said that the drug companies were engaged in numerous illegal conspiracies in order to unreasonably restrain trade, artificially inflate and manipulate prices and reduce competition.” The price inflation and manipulation was reported across products and treatments.

Some Indian companies have been caught in the net as investigations threw up communications between different company officials, though sales revealed no excessive behaviour.

Among the twenty drug makers named in the case are Indian generic drug makers including Sun Pharma, Aurobindo, Lupin, Zydus, and Glenmark

The latest development on the generic drug front in USA brings more bad news for the Indian generic drugs industry.

Indian generic drug producers say that the allegations made in these lawsuits are without merit and they would vigorously defend against them.It remains to be seen as to what extent they can succeed

With the US government training its guns on drug companies and escalating prices, the last word is yet to be heard on this legal battle.

What strategies for Indian IT and pharma sector ?

Obviously, the Indian IT and pharma sector have to re invent themselves to meet the challenges and demand of consumers and users.They have to necessarily focus on building up capabilities in emerging areas of technology and reduce their dependence and exposure to traditional technologies.

Further, special and more efforts have to be taken to re skill the employees with regard to emerging technology practices to meet the demand and expectations. Obviously, it implies re assessment of skills that are required, which have to be improved. There is also need to improve the productivity at lower cost in delivering services.

Globally, IBM has set up an example to “re-invent” themselves and meet changing needs of customers. IBM sacked nearly 300 employees from its service division. A majority of these employees were in software services roles. They were let go as IBM focuses on emerging technology capabilities and reduces exposure to traditional services.

Obviously, it is not clear to what extent Indian IT and pharma sectors can meet the challenges ahead by re inventing themselves, which is a time consuming and investment oriented exercise. However, given the compulsions, where they have no alternative, it is well possible that Indian IT and pharma sector may rise upto the level of expectation and needs. One has to keep the fingers crossed