Excise Free Zone - Myth or Reality

Navdeep Chawala, MD Psychotropics India.

Nobody could really imagine what kind of turbulence it will bring in the Indian pharmaceutical industry when under the new excise policy in the year 2004, Central Excise Duty on pharmaceutical products was levied on MRP. It virtually created a compulsion for many small and big pharmaceutical companies in the country to relocate their business in the excise free zones.

Initially it was welcomed with a doubt that if it was a temporary order and would be reversed later on. Two years prior to this the State FDA's had forced all units to comply with the new Schedule -M requirements. Majority of the units especially small scale had just finished renovations in their buildings, improved their quality assurance by adding equipment worth crores in their respective units. In fact majority of the law abiding & quality conscious small and medium units were already under lot of debt from the banks due to the increased cost of upgrading their units. Various forums assured the industry to get the MRP based excise duty reversed and had number of unsuccessful meetings with finance ministry officials. The result was that even if many companies wanted to shift to the Excise Free Zones but delayed their decisions expecting a reversal of the new MRP based excise levy and also lack of resources & manpower in family owned businesses was another crucial factor in not taking a decision to relocate their business.

Having exhausted all the means, the writing on the wall for small & medium industry was, either to shift or to perish. With great difficulty & courage the industry thought of discovering what was in store for them. It was the time when infrastructure in various excise free zones were coming up. Senior management of pharmaceutical companies were taking trips to different excise free zones. Many small companies, who were thriving on contract manufacturing had no choice, but to shift immediately to any suitable place in the excise free zones to keep their business intact. Another phenomenon which came to notice was that many entrepreneurs decided to enter into pharmaceutical manufacturing for the first time visualizing a great demand of contract manufacturing in these areas. Initially the cost of land was not too high compared to big industrial hubs. The benefits of the cost was considered a big advantage to set up the units in these zones. Almost three years have passed and the deadline for availing the Excise exemption was initially upto March 07 and it was again extended upto March 2010. After the announcement of last budget most of the confusion with regard to the reversal or reduction in Excise duty is now clear. If we evaluate the functioning of these new units from the excise free zones in the last three years there is lot of gap between the myth and realities.

Location issues

Considering the choices available in the northern region within the state of Uttrakhand, H.P. & J. & K there are many advantages as well as disadvantages which one can see now. Even the state industrial development corporations had not visualized such an influx of industry and were caught unaware, with very little land available in the developed industrial Estates. This resulted in price escalations and huge premiums on the initial cost. Having very limited number of plots in the planned industrial estates and many players intending to set up their units, the next choice was to look for a piece of agriculture land in the notified area, set up factory and start production. Lack of adequate infrastructure was coming in the way in most of these areas where entrepreneurs decided to set up their units in agricultural land. The cumbersome process of change of land use by the respective state governments and other mandatory clearances took a lot of time. Further in the absence of proper construction machinery and manpower coupled with the urgency of starting the units at the earliest resulted into lot of difficulty being faced from fly by night building contractors. The sudden demand from industry and poor availability of competent contractors with good infrastructure resulted into lot of confusion, delay and disputes due to overcharging and poor quality of construction. Failure to meet the deadlines further resulted into cost escalations. Even the availability of good construction material, furniture and fixtures, ancillary requirement, availability of consumables etc is creating lot of problems for the units in these areas.

It is hoped that in the times to come the infrastructure will improve, availability of support services will be better. Housing and hotels is another issue which does not seem to have any answers at this point of time. Cities like Baddi, Ponta Sahib, Selaqui, Kala-Amb, Haridwar and Rudarpur do not seem to have the right infrastructure for housing or hotels to accommodate the visiting population.

Business Environment and Opportunities

With the sudden influx of so many industrial enterprises, small or big in these areas has created lot of job opportunities in these regions, which was one of the goals of declaring these zones as excise free zones. The respective state governments, have also shown lot of professionalism in providing good comfort to the entrepreneurs who have opted to start their units in these areas. However this positive attitude and support is limited to bureaucracy and senior government officials alone. Down the line dealing with inspectors or field officials in these areas is all the same or rather difficult. All these states claim to be surplus in power, but are still far from providing adequate infrastructure for an uninterrupted power supply for 24 hours. Due to very large production base from these zones, the movement of raw materials and finished goods are facing lot of logistic problems due to poor connectivity. Therefore, for good logistic support one has to rely on established cargo movers like. The cost of transportation has increased manifold. Companies who have established their own sales and brands are benefited by relocating their production facility in these zones, but companies solely dependent on contract manufacturing are facing some difficulties to make profits, as with the each passing month the prices are coming down and input costs are increasing. This is putting lot of pressure on these companies who are only dependent on third party manufacturing and don't have their own sales. Many of the first time entrants into pharmaceutical manufacturing have left their projects in between or are up for sale because of low margins and lack of experience. Many bankers and financial institutions are playing very cautiously in funding such new units without proper background. Truly you can not ignore the old fundamental belief of walking on the roads you know well. It is believed that one third of the industry will either become unprofitable or go sick if one does not have strong fundamental knowledge and a strong pharma business background. For established players, it is a great opportunity to be more competitive by producing from excise free zones and many are diversifying into generic and OTC business. This needs a very careful planning and a good road map to achieve such goals.

Human Resourses Challenges

No one would have imagined that more than 50 percent of country's medicine requirement would come from these small sleepy towns, where the lands on which the industries have been set up were barren with little or no agricultural productivity, no housing infrastructure, lack of good educational institutions and entertainment avenues etc. All these units are now facing a great human resource challenge. Good companies need a very good hierarchy of managers, supervisors, technical staff as well as skilled workers. Most of the pharmaceutical industry whether small or big is concentrated in a small area and this has given an enormous opportunity for the employees to change jobs on one hand and a nightmare to the entrepreneurs on the other. Switching of jobs is a very common phenomenon resulting into sudden increase in the salary at all ranks. Due to poor educational facilities as well poor health care facility, many senior management staff is not shifting their families. This not only disturbs an individual psychologically but also results into loss of many man days because of their frequent visits to their respective families. The housing cost as discussed earlier are frightening and affecting the bottom line of all the companies. Small companies are under lot of pressure to retain their staff. As a smart entrepreneur one has to weigh the options of going in for maximum automation on the shop floor, thereby reducing the size of manpower and of course keeping in view the cost involved.

(The author Navdeep Chawla is Managing Director, Psychotropics India.)