Reduce customs duty on medical devices

The Make in India flight plan may require some tweaking but the trajectory can’t be faulted. When one comes to the field of medical devices, the main question to ask is not whether India should go for medical device manufacturing or not but, “what will attract manufacturing in medical devices to India? Protectionism or incentivisation?”

Protectionism surely has played a role in spurring manufacturing in some sectors in some countries. But it does not come without side effects. And it does not work for all sectors. “In the literature on India’s trade policy regime, it has been recognised that while protection has succeeded in creating a large and highly diversified industrial base, it has led to inefficiency in the use of resources. The inefficiencies have taken various forms: inefficient allocation of resources among industries, rent-seeking and lack of technological dynamism,” say Bishwanath Goldar and Hasheem N Saleem in Study of India’s Tariff Structure: Effect of Tariff Protection on Domestic Industries.

Protectionism works to urge manufacturing, only when the other conditions to enable manufacturing are in place. So it could work for those medical devices where a high level of imp­ort substitution of an acceptable quality has been obtained or can be obtained quickly by virtue of the technological and financial ecosystems being already in place, for example, in cannulae, IV sets, stop cocks, some IVDs.

Where import substitution is still far away, increasing import duties, the protectionist measure usually employed, is just taxing consumers to subsidise domestic production which is bad economics. Furthermore, in big ticket items such as MRI, where, since January 2016, custom duties have increased by even Rs 70 lakh per machine, it can hurt availability and access leading to hospitals deferring purchases for want of additional funds.

Additionally, since the custom duty regime in the neighbouring countries is now much lower than in India, the differential in duties created is likely to lead to the smuggling of many of the low-bulk-high-value devices. As that happens, not only will the government lose revenue but also the patient will be beset with products without adequate legal and service guarantees.

So, what needs to be done? The import duties on medical devices and equipment have already been increased almost across the board by 7.3%. Since most of the items affected were falling in the 11.6% range which has gone to 18.9%, it means an effective duty increase of 62.7%. A micro analysis of the sub sectors needs to be done. Wherever import substitution of an acceptable quality level is not on the anvil, a duty roll back to previous levels should be made.

Steep increase
Where such substitution can happen, duties can be kept at the levels where they are, since they have had a disproportionately steep hike this year, and these can be then gradually increased after a couple of years provided the duty level does not go way beyond what is there in neighbouring countries and quality deficient manufacture doesn’t find its way into the market. Else we will find mortality traps gaping at us.

If one was to study the examples of countries like Ireland, Switzerland, Puerto Rico, Great Britain, USA, Germany, Singapore and Israel, that have successfully attracted manufacturing in medical devices, one must note that almost all these countries have zero or very low import duties on finished products. This means the reasons for their success lie elsewhere. Countries like Ireland, Switzerland and Puerto Rico have strongly benefited from their taxation policy which guarantees minimal corporate tax.

Britain stands strong on work force whereas the US enjoys the privilege of having a large mark­et size. Germany is known for its heritage of well-developed technological eco systems along with a big market size and proxi­mity to other large mark­ets. Singapore on the other hand has advantageous geographical loc­ations along with highly develo­ped infrastructure and logistical capability, which helps the country emerge as distribution hub. And Israel has dedicated resea­rch and development facilities.

One deduces from these examples that it will bea process of incentivisation (including lowest possible tariffs on raw material and components), R&D, skill development, greater health expenditure or better insurance coverage, low regulatory costs, assurance of predictable policy, which will benefit the cause of Make in India rather than the custom duty increase. Through custom duty increases, which are almost all passed on to the patients, we will only tax the patients.

(The writer is Director General, Medical Technology Association of India)