August 2009

Healthcare Budget: Expectations versus Allocations

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The Indian health care industry has witnessed consistent augmentation in the past few years in terms of size of the industry as well as research and development activities. Unfortunately, the economic slowdown  retarded this upward trend and the rejuvenation of this industry largely depended on the reforms provided in this year’s budget. The Government, with Union Budget 2009-10, has been able to tap upon some of the most important segments in the health care industry.


The health care sector in India is a key sector poised for substantial growth in the coming years. The Indian health care industry currently stands at USD 35 billion and has a future potential to reach over USD 75 billion by 2012 and an estimated USD 150 billion by 2017. With the increase in the spending power of the Indian middle class, the demand for quality health care is also seeing a surge. Further increase in the lifestyle-related and other diseases, and the growing elderly population are other factors  fueling demand for health care services. As a result, in spite of a steady growth in the supply of health care services, there remains an imbalance in the demand and supply that creates friction in the growth of this industry. Considering the huge demand for health care services in India, the sector expected tremendous support from the government in the Union Budget 2009-10.

With various met and unmet expectations, the announcement of budget 2009-10 brought an increase in the allocation for the health care industry by nearly Rs. 4,000 crore amounting to a total of Rs. 21,113.33 crore. A significant allocation has been an increase of Rs. 2,057 crore over the proposed Rs. 12,070 crore in the interim budget for National Rural Health Mission (NRHM), a flagship program of the UPA with a goal of health care for all, considering the importance of this program. The program’s main focus is on 18 states that comparatively have a weaker public health infrastructure. These states include: Arunachal Pradesh, Assam, Bihar, Chhattisgarh, Himachal Pradesh, Jharkhand, Jammu and Kashmir, Manipur, Mizoram, Meghalaya, Madhya Pradesh, Nagaland, Orissa, Rajasthan, Sikkim, Tripura, Uttarakhand and Uttar Pradesh.

The Rashtriya Swasthya Bima Yojana (RSBY), a scheme that aims at providing poor families with a freedom of choosing a desired health care service from a list of public as well as private hospitals, also received due recognition owing to its considerable importance in the rural sector. It has been allotted an increase of 40 per cent amounting to Rs. 350 crore. With the help of the provided budgetary allocation, the government aims to bring all BPL families under this scheme. Initiation of health insurance programs at the urban level as well as rural level is an important step towards promotion of delivery of affordable and quality health care. Out of the total health care spend in India, a meager 10 percent comes from insurance  while the rest 90 per cent comes from the pocket of the common man.

A budgetary allocation of Rs.1447.92 crore has been proposed towards development of All India Institute of Medical Sciences (AIIMS)-like institutions in the country as well as upgrading 13 existing medical colleges. With this move, the government plans to strengthen the tertiary sector. The plan outlay for setting up and upgrading medical colleges in India projects that the project will be completed this year while the institutions will become functional in 2010-11. The project aims at diminishing the regional imbalances in the availability of health care services in India with the development of the AIIMS prototypes in Patna (Bihar), Raipur (Chhatisgarh), Bhopal (Madhya Pradesh), Bhubaneshwar (Orissa), Jodhpur (Rajasthan), and Rishikesh (Uttarakhand). A program for starting medical and non-medical nursing and non-nursing courses under various institutions with a reservation of 27 per cent for the other backward classes (OBC) will also be kickstarted with a budgetary allocation of Rs. 100 crore.

Although the budget does not contain any particular proposals for the benefit of the pharma sector, yet the decrease in the customs duty of certain drugs and pharmaceutical products from 10 to 5 per cent has been appreciated and welcomed by the industry. These nine life saving drugs particularly include biologicals used for the treatment of cancer, HIV, hepatitis B and arthritis. In addition, this reduction will also apply to the bulk drugs used for the manufacture of these drugs. These drugs will also be totally exempted from excise duty and countervailing duty. Abolition of the fringe benefit tax (FBT) is another beneficial move for the pharmaceutical and biotech companies, as earlier they were spending about 5 per cent of their marketing expenses, amounting to 15 percent of their total turnover on FBT. Going further, with an aim to provide relief to oriented drug firms, the Finance Minister extended the tax holiday for export profits by a year to fiscal 2010-11. The scope of the current provision of weighted deduction of 150 per cent on expenditure incurred on in-house R&D to all manufacturing businesses (except for a small negative list) has been extended, and this is expected to promote local R&D initiatives.

In order to broaden the accessibility of various medical equipments, devices and consumables, the health care industry expected a complete removal or reduction of excise duty and VAT being charged on these. The Finance Minister was generous enough to exempt certain medical equipments from the increase in the excise duty from 4 to 8 per cent. On the other hand, the decrease in the custom duty on heart devices such as artificial heart and PDA/ASD occlusion from 7.5 to 5 per cent was highly appreciated. Another positive move has been the exemption from rise in excise duty from 4 per cent to 8 per cent for drugs and pharmaceutical products falling under chapter 3.

In its bid to develop, promote and make the Indian systems of medicines more scientific, the Department of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy (AYUSH) under the health ministry was allocated Rs.734 crore. Earlier known as the Department of Indian Systems of Medicine and Homeopathy (ISMH), the department was launched in March 1995 and renamed as AYUSH in December 2003. The main aim of the programme is to improve AYUSH educational standards, quality control and standardisation of drugs, availability of medicinal plant material, research and development, and awareness generation about the efficacy of the systems domestically and internationally.

“A positive move has been the exemption from rise in excise duty from 4 per cent to 8 percent for certain medical equipments, drugs and pharmaceutical products.”

An allocation of Rs.10 crore has also been proposed for the National Programme for Prevention and Control of Deafness (NPPCD). The pilot phase of this project is being launched in 25 districts over the next two years. NPPCD was launched with an aim to prevent avoidable hearing loss and ensure early identification, diagnosis and treatment of ear problems responsible for hearing loss and deafness. The programme was started considering that hearing loss is one of the most common sensory deficits in humans. India, itself, has a huge population suffering from ear problems as WHO estimates the prevalence of significant auditory impairment in approximately 6.3 per cent in the Indian population. Children, between ages 0 to 14, constitute a large percentage of this population. The NPPCD’s main objective is to prevent and control the major causes of hearing impairment and deafness, and reduce the total disease burden by 25 percent by the end of the eleventh five year plan.

Disappointment has been expressed by the health care industry, particularly the pharmaceutical sector, on the decision of the Finance Minister to increase the Minimum Alternate Tax (MAT) from 10 to 15 per cent on book profits. The general perception is that this move may have a direct negative effect on the research activities in this sector. In contraindication, the Finance Minister feels that this will enhance the equity in the taxation process of the corporate tax payers. However, in order to incentivise the corporate sector to undertake R&D activities, the extension of the weighted deduction of 150 per cent on expenditure incurred on in-house R&D may bring in some relief for companies undertaking these activities.

A long-standing demand of the health care industry has been to be granted the infrastructure status. This will facilitate hospitals to get funds for expansion. The fiscal benefits achieved thereafter can be used for promoting active participation of the private sector, which can play a pivotal role in bringing health care of international standards to India. As the infrastructure status usually comes with a tax holiday of five years, it can provide considerable benefits to the private hospitals which will then be able to generate cheaper long-term capital. In addition, the tax holiday that will come with the infrastructure status will be extremely beneficial for this industry. The commerce as well as health ministries have been in the favour of this move. Disappointing enough for the health care industry is that the infrastructure status has not been granted in this year’s budget also.

“A massive USD 80 billion investment is required to bring up the quality of health care in India as the current 1:1000 bed:population ratio stands nowhere as compared to the 7:1000 bed:population ratio in developed countries.”

The development of the healthcare sector in recent years has been spurred by the entry of several private players. This has provided the much needed impetus for the growth and development of Indian healthcare infrastructure, supplemented by the continual support provided by the government. Several new sectors within the health care industry have now emerged as important growth drivers and have enhanced the capability of this sector to grow at a much faster pace. Businessmen, equipment makers and service providers have abundant opportunities for investing in curative and preventive services. Further, investments in medical infrastructure and medical tourism are pouring in from all sides.

Yet, a massive USD 80 billion investment is required to bring up the quality of health care in India, as the current bed to population ratio (1:1000) stands nowhere as compared to bed to population ratio (7:1000) in developed countries.

A WHO survey has indicated that out of a list of 175 countries, India ranks 171st in terms of total GDP spend on health care, while the same survey suggests that in terms of private sector spending on health care, India ranked 17th. Expectations from the budget every year are hence very high, and although the government has been able to tap on a few of them with this year’s budget, yet there are other areas that still require government’s attention.

Budget 2009-10 Highlights

  • Increased allocation for National Rural Health Mission (NRHM)
  • Increased allocation for Rashtriya Swasthya Bima Yojana (RSBY)
  • Increase in deduction in respect of maintenance of a dependent, who is a person with severe disability
  • Decrease in customs duty and exemption from excise duty and countervailing duty on nine specified life saving drugs
  • Reduction in customs duty on specified heart devices
  • Exemption from rise in excise duty for certain medical equipments, drugs and pharmaceutical products
  • Allocation for National Program for Prevention and Control of Deafness (NPPCD)
  • Allocation for a program for starting medical and non-medical nursing and non-nursing courses under various institutions
  • Allocation for the department of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homeopathy (AYUSH)
  • Allocation for development of AIIMS-like institutions as well as upgrading 13 existing medical colleges
  • Extended tax holiday for export profits
  • Extension of weighted deduction on expenditure incurred on
    in-house R&D

Health Budget Update

Health care has the potential of creating a much healthier population and is definitely one of the key industries with significant scope of growth in the country. Every new bed creates employment for 5 personnel directly and about 25 personnel indirectly. There is a huge requirement for health care workforce in the country, as the existing number is pretty much insufficient. This  will not only help the domestic sector, but also outside the country by increasing the size of rich Indian diaspora around the world, thus, helping the country by additional remittances.

This year’s budget is just an extension of same policies with marginally higher spend”

This year’s budget has not taken any new stance which can stimulate all such opportunities. It is just an extension of same policies with marginally higher spend. We need policy stimulus to enhance spend in medical education, health care infrastructure and indigenous production of medical equipments by providing the right financing mechanisms and environment for investment. Infrastructure status is what the industry has been seeking since long.

The GoI has taken some concrete steps with Rashtriya Swasthya Bima Yojana (RSBY) scheme and is taking it through different states one by one. Other directional steps that the GoI needs to look at in terms of medical insurance should include the enhancement of retail medical insurance plans and distribution. The GoI also needs to address the health care insurance companies’ call for enforcing minimum standard guidelines on medical establishment across the country and thus promoting quality health care provision.
This of course must be done in collaboration with the health care industry leaders in the private sector.

Budget Focusing on Health Infrastructure

Do you identify health care as one of the key industries in India with significant scope of growth? Will this year’s budgetary allocations have a positive effect on the growth of the health care industry?

Yes, we see health care as one of the key industries with significant growth prospects in India. This year’s budget is focused on improving health care infrastructure and its accessibility.

There has been a significant increase in outlay for health care sector schemes like NRHM, JNNURM, and RSBY. This will improve the quality of primary health care services for the rural population, which is a major step towards improving health care services in India.

How do you think the abolition of fringe benefit tax (FBT) would impact the health care industry?

Yes, the abolition of FBT will cause some changes. This will result in increased savings for the pharma sector and will also have an impact on hospitals and other organisations. Pharma companies spend about 5 per cent of the marketing expenses on FBT, which constitutes 15 per cent of their turnover. Abolition of FBT is expected to benefit the pharma companies but it will be, to some extent, neutralised by the increase of Minimum Alternate Tax (MAT) from 10 to 15 per cent.

This year, there hasn’t been a specific initiative for promoting medical insurance in India at the urban level even though the sector has tremendous potential for growth. What initiatives are needed from the government to enhance growth through this sector?

A budget of Rs. 350 crore  has been allocated to cover all BPL families under Rashtriya Swasthya Bima Yojana (RSBY). The budgetary allocation has been increased by 40 per cent over previous year’s allocation. Biometric cards issued under this scheme empower poor families, providing them freedom  of choice for using any health care facility from an extensive list of both government and private hospitals. When health insurance coverage in India is depriving a large population from availing quality health care facilities because of affordability, such schemes with increased investment are expected to make health care facilities available to the bottom of the pyramid.

There is another big segment just above BPL, or more or less same as BPL, which has been always left out in such schemes. With the cost of health care going up, the government should look at increasing the BPL limit as well.

There has been a pressing demand from the health care industry to be granted infrastructure status. What are your views on this?

The government will take a few more years to grant infrastructure status to the health care industry.  In my view, all positive and negative aspects of this should be analysed thoroughly before granting this status.
  

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