by Rakesh Mohan
2000: A New Millennium and the Advent of Bio-clusters
Recognizing the transformational power of biotechnology, several Indian states in the new millennium took strong initiatives to develop bio-clusters based on intrinsic academic and entrepreneurial strengths. These bio-clusters received fiscal incentives from the DBT and state governments, and featured biotech incubators, biotech parks and centres of academic excellence focused on biosciences.
The Hyderabad Bio-cluster
In 1999, the Government of Andhra Pradesh established a dedicated biotechnology hub near Hyderabad, christened the Genome Valley, which saw a number of midsized companies (like Bharat Biotech) take root. A few years later, in 2002, the government, in collaboration with ICICI, set up a Knowledge Park at Genome Valley, now referred to as IKP. In time, Hyderabad emerged as an important bio-cluster with an academic backbone supported by institutions like CCMB, the International Crops Research Institute for the Semi-Arid Tropics (ICRISAT), Osmania University and the Indian School of Business, and with an industry network created by companies like Shantha Biotechnics, Bharat Biotech, Biological E and Dr Reddy’s Laboratories. The presence of a large pharmaceutical industry in Hyderabad caused this bio-cluster to focus largely on vaccines and bio-therapeutics.
The Bangalore Bio-cluster
Bangalore grew to become the country’s largest diversified bio-cluster thanks to active encouragement from the state government, which set up a Vision Group on Biotechnology in 2000 as a public–private partnership (PPP) in order to evolve a pragmatic biotechnology policy for the state. Another key catalyst was the Astra Research Centre, a PPP between Astra, the Swedish pharmaceutical major, and the IISc in Bangalore. This centre spun off two important biotech start-ups promoted by scientist entrepreneurs. First off the block was Bangalore Genei, which was set up to develop and market restriction enzymes critical to recombinant DNA technology. The next was XCyton, a diagnostic company focused on developing recombinant DNA kits for HIV and infectious diseases. The business model was one of import substitution and this localization marked the start of a new phase for the Indian biotechnology sector, speeding up its growth.
At the start of the millennium, Bangalore became a bustling biotech hub populated with a number of large and small biotech companies. These included Biocon, which is today Asia’s largest biotech enterprise; Strand Genomics, a bioinformatics company started by a research scientist at IISc; GangaGen, a phage-based antibiotic company; ReaMetrix, a whole blood-based diagnostics instrumentation company; Syngene and Jubilant Biosys, which spearheaded research services; bio-IT companies like Genotypic Technology, BigTec and Molecular Connections. The evolving biotech cluster in Bangalore spurred the growth of ancillary biotech companies like Sartorius, a German bioengineering company that started fabricating bioreactors, and Biozeen, which started a business based on good manufacturing practice (GMP) and good laboratory practice (GLP) training modules.
Funding for Innovation
It was becoming evident that biotechnology was a research-led business with long gestational timelines which required infusion of seed funding that could be perceived to be in the realm of risk capital. Between 2005 and 2008, the DBT responded to signals from the nascent biotech industry and initiated two flagship funding schemes—the Small Business Innovation Research Initiative (SBIRI) and Biotechnology Industry Partnership Programme (BIPP)—aimed to provide capital in the form of soft loans and grants for biotech innovation that had crossed the proof-of-concept stage. These two flagship schemes helped ignite the R & D appetite of the Indian biotech industry.
Earlier in 2001, the Council of Scientific and Industrial Research (CSIR) had initiated the New Millennium Innovation Technology Leadership Initiative (NMITLI) programme, which led to several industry–academia research partnerships and also created the right framework to enable scientists to pursue their entrepreneurial aspirations. Apart from these, various state governments, especially those of Andhra Pradesh and Karnataka, established innovation funds to address the needs of biotech companies.
In 2012, the Government of India took a landmark decision to create a unique organization, the Biotechnology Industry Research Assistance Council (BIRAC), which would consolidate all industry funding schemes.
BIRAC was a first-of-its-kind initiative with a mandate to strengthen and empower the innovation capacities of biotech entrepreneurs and provide an enabling ecosystem. The mandate given to BIRAC was to focus on a wide range of impact initiatives that straddled risk capital, targeted funding, technology transfer, IP management and other handholding schemes aimed at business scaling. Central to the objectives of BIRAC is to ensure excellence in innovation in biotech companies and make them globally competitive.
The Advent of EOUs
The realization that export promotion could be a key driver of economic growth led India to introduce the Export Oriented Units (EOUs) scheme in the early 1980s. The key objectives were to attract investment for exports, augment production capacity and raise employment. The EOUs enjoyed various duty exemptions on the import of capital goods, raw materials and consumables. However, the biggest attraction of the scheme was the complete income tax exemption on export earnings. These benefits attracted robust investor response and the number of EOUs rose steadily from over 1500 in 2001 to almost 2600 in 2010. Consequently, exports from EOUs rose over fivefold from about Rs 16,000 crore ($3 billion) in FY 2001 to Rs 84,000 crore ($16.5 billion) in FY 2010. The gradual phasing out of the EOUs started in 2011 when critical income tax benefits were withdrawn.7
SEZs Give Exports a Boost
Over time, it was recognized that the EOU model had to be re-engineered in order to address a number of inadequacies linked to the multiplicity of controls and clearances, the absence of world-class infrastructure and an unstable fiscal regime. At the turn of the millennium, the government announced the Special Economic Zones (SEZs) policy in April 2000. The policy aimed to attract foreign investment, boost exports and create new jobs. Central to this was an attractive fiscal package that included phased tax holidays, duty exemptions and minimum regulations. The scheme was launched under the provisions of the Foreign Trade Policy between 2000 and 2006, and fiscal incentives were made effective through relevant statutes.
A comprehensive Special Economic Zones Act came into effect in 2005. This further simplified procedures and provided for a single-window clearance on matters relating to central as well as state government regulations.
A number of tax sops were offered under the SEZ scheme in order to make it a profitable proposition for investment. Given the Indian pharmaceutical industry’s strong focus on exports, several leading pharmaceutical and biotech players like Ranbaxy, Wockhardt, Dr Reddy’s Laboratories, Lupin, Jubilant Life Sciences, Biocon, Divi’s Laboratories, Zydus Cadila and Piramal Healthcare came forward to invest in the setting up of SEZs. The establishment of SEZs enabled both pharmaceutical and biopharmaceutical companies of India to invest in large-scale manufacturing, which, in turn, made the country’s pharmaceutical and biopharmaceutical exports globally competitive and also boosted exports.
As of date, the SEZ policy has witnessed the establishment of over 360 SEZs across the country. The SEZ policy has delivered on its stated objectives by having a multiplier effect in terms of generating employment and exports. In FY15, investors in SEZs availed themselves of approximately Rs 20,000 crore ($3 billion) of tax breaks. In lieu of this, SEZs generated exports worth Rs 5,00,000 crore ($75 billion) in FY15 and the sector collectively employed approximately 1.5 million people.8
Unfinished Reforms Plaguing the Biotech Sector
Whilst economic reforms have indeed unleashed the pent-up economic energy in manufacturing and services across sectors, the biotechnology industry continues to be challenged with the draconian Biological Diversity Act encompassing archaic policies that deter entrepreneurs from engaging in any economic activity which involves genetic derivatives of India’s ecological resources. A number of large and lucrati
ve value-added manufacturing opportunities are present that can leverage India’s biodiversity-based natural resources. However, until the Act is rewritten, this potential will remain trapped in bureaucratic mire. Likewise, regulatory reforms are urgently needed to help realize the true potential of agri-biotechnology. Apart from Bt cotton, which was approved in 2004, not a single GM agricultural crop has been approved in the country. Unwarranted public outcry fuelled by unscientific propaganda spread by anti-GM lobbies has denied India the benefits of new technologies that aim to provide food security to a country that will have the largest population on the planet to feed.
Conclusion
Biocon entered the realm of biopharmaceuticals post the advent of the reforms process of 1991 with the ambition to prove that drug innovation coming out of India was as transformational as that from any other part of the world. There was one crucial difference: our endeavour was to pursue high-end innovation while keeping it affordable and accessible. We have challenged the Western pharmaceutical model of creating monopolistic markets that delivered high margins at low volumes. As a first-generation entrepreneur from the developing world, I was driven by the belief that the pharmaceutical industry has a humanitarian responsibility to provide patients in need with affordable access to essential drugs and to do so with the power of innovation. I wanted to challenge the deplorable reality where only the affluent had access to the best-in-class medicines whereas the rest were deprived of medicines due to lack of financial resources. I remain committed to the democratization of life-saving drugs.
The last twenty-five years have been transformational for Biocon, mirroring India’s own rapidly advancing economy and improving infrastructure. Our global competitive edge is being built on a strategy of leveraging India’s lower-cost base to deliver high-value but affordable products and services. We have consciously adopted a strategy of being profitably smart and socially good, which have led us to make long-term investments in creating complex, best-in-class biologics and manufacturing capabilities. We have commissioned operations in locations where we can use the advantages of cost, scale and knowledge. Over time, we have successfully developed biotech drugs that are complex and expensive, and previously available only in the West. In doing so, we have brought advanced biopharmaceuticals for chronic diseases to patients in India and other developing countries at price points that make them affordable and thus accessible.
We see ourselves as a biopharmaceutical company capable of offering the world’s most affordable insulin and immune therapies to diabetic and cancer patients across the world. We also aim to be an innovator from the developing world, addressing unmet medical needs through research and manufacturing excellence that will build global leadership in the course of time.
I have always believed that innovation should go hand in hand with affordability—it is only when the benefits of research reaches the person on the lowest rung of the economic ladder that it can be considered to deliver true value. That is why my endeavour is to develop blockbuster drugs that are not about a billion dollars but about a billion patients who benefit from them.
32
The Impact of the 1991 Economic Reforms on Indian Businesses
Narayana Murthy
Post-reforms, businesses are much more in control of their own destiny than before. Thanks to the competition introduced by the entry of MNCs, Indian businesses have stepped up to the plate and demonstrated that they can compete with these world-class MNCs in customer, employee and investor focus.
I will describe in this essay three major and two relatively minor policy changes brought in by the 1991 economic reforms. These changes had arguably the biggest impact on businesses in India. The examples I will use to describe the hurdles these policy changes removed are hilarious. These examples demonstrate how unfriendly India was to businesses prior to the reforms. They vividly describe our former command-and-control economy at its most stifling, outdated, negative, fatalistic and suspicious. These policy changes were not easy to push through. They were anathema to most Indian politicians and bureaucrats who were brought up on the belief that poverty was a virtue, businessmen were crooks, making profit was a sin, and the government was the solution to every problem. These policy changes also took away most of their power and the opportunities to seek rent. Forget about foreigners, even young Indians today do not believe me when I tell them about the bureaucratic red-tape horror stories we went through until 1991.
It was sometime in December 1989. My friend, who was then the CEO of a small, fledgling software company, was distraught. He had been issued a show-cause notice by the Chennai branch of the Reserve Bank of India (RBI). Those days, there was no current-account convertibility in India. Every time an Indian businessman had to travel abroad, the person had to apply to the RBI for release of foreign exchange. My friend had applied for permission to spend two days in Paris and one day in Frankfurt to meet his company’s prospects. When he reached Paris, his prospect asked him if they could meet in Frankfurt instead. The result was a swap in my friend’s calendar. Being an honest fellow, he wrote about this change in his tour report (in those days, we had to submit tour reports after every trip abroad to justify the way we’d spent hard currency released by the RBI!). In return, the RBI promptly sent him a show-cause notice to explain why action should not be taken against him for spending one day in Paris and two days in Frankfurt, while the RBI approval was for the other way round!
In 1981, we decided to start Infosys and applied for a licence to import a DG MV/8000 computer to start a data centre for software export. In a misguided attempt to encourage a low-end, outdated, unusably small computer manufactured by the Electronics Corporation of India, import of more powerful and modern computers was severely controlled those days. Every component of every computer imported by a corporation or by a software-export company was to be approved—down to the model number and the last byte—by a committee of mandarins and professors, neither of whom had much understanding of modern business needs. Generally, these mandarins would haggle on every kilobyte of memory. (Remember that today’s smartphones have 128 gigabytes of memory: one gigabyte is equal to 1 million kilobytes!) It would generally take about twenty visits to Delhi and about two years to obtain the licence, if you were lucky. Of course, once in a while, there would be some rent-seeking by a small section of the bureaucracy. Technology in the US (from where these computers were imported) those days was improving every three months. Our efforts to change the licence to the new model would start the day the licence was given. Of course, trying to change the model number of any component at the time the mandarins were deliberating on the licence application was simply frowned upon. There was fear amongst us that any such request for change may result in our request being rejected. Generally, approval of any such change took about nine months (on the rare occasion when such requests were indeed accepted). The joke was that India was always three generations behind the US in computer technology. In fact, in our case, the entire approval process and modification of the licence to accommodate a new model of disk drives took about fifty visits to Delhi and about three years. Each visit cost us about $1000. So, even before the licence was given, we would have paid a ‘red-tape’ surcharge of $50,000 on a $1,50,000 computer we were supposed to import. Add to this the 150 per cent duty the government imposed on such imports, it was making the import of modern computers three times their cost in the US and, therefore, unviable for any Indian business.
Since we did not have any computers in India suited to software development, I decided that my six younger colleagues would take up development for our customers in the US itself. There was the question of sending our customers the maintenance allowance every month. The RBI opined that the only way it was possible was if we brought in the foreign exchange first and only then would they release 50 per cent of that amount towards the maintenance allowance! Our argument against this absurdity and insanity fell on deaf years. The result was that I would get the payment from our custom
er every month, make an application for the maintenance allowance for the next month, and wait in the corridors of RBI for ten days to get 50 per cent of what Infosys had already earned, forget about opening any offices and hiring salespeople abroad to improve sales.
When we started our operations in Bangalore, we needed a telephone connection for me to be in touch with my colleagues and our customers abroad. Those days, it took five to seven years for a business to get a telephone connection. The joke used to be that half of the urban middle class in India was waiting for a telephone while the other half was waiting for a dial tone! The ultimate insult was the higher priority accorded to a retired government officer for telephone allotment than to an exporting company. No wonder, we did poorly in exports and had hardly two weeks of foreign exchange in 1991.
This seems absurd today. But that was the state of affairs prior to 1991 when Prime Minister Narasimha Rao decided to unleash the reforms and tasked Dr Manmohan Singh (his finance minister) and P. Chidambaram (his commerce minister) to implement them. The reforms of 1991 brought five fundamental changes that have transformed the country:
Introduction of current-account convertibility removed the hurdles for businesses in travelling abroad, opening offices abroad, installing technology abroad, bidding for end-to-end projects, including installation of third-party hardware and software; subscriptions to knowledge services and databases abroad; buying tools and technology for both Indian offices and branches abroad; hiring employees abroad; and hiring consultants from abroad for improving quality, productivity and brand. It meant we were free to acquire companies abroad, enter new markets, get listed on the world’s best stock exchanges and offer hard currency-based employee stock-option plans. In fact, today, there is absolutely no restriction on any current-account transactions. Even in the area of capital-account convertibility, we hardly have any restrictions for corporations. Indian companies have been acquiring companies abroad like never before in the economic history of India. In other words, free access to hard currency for global operational activities helped us to operate as globalized corporations.
