The COVID-19 pandemic has been a “stress test” for the Indian pharma industry, and exposed its high dependence on imported raw materials and “surprisingly low” research and development efforts, a paper in RBI’s July bulletin said.

“The high import dependency and surprisingly low R&D intensity of exports in the Indian pharma sector call for timely diversification of source countries for importing raw materials so as to mitigate potential supply-side bottlenecks,” the paper by Shibanjan Dutta and Dhirendra Gajbhiye said.

It said the country is the third-largest pharma manufacturer in the world by volume and fourteenth by value, and the sector contributes 2 per cent of Indian GDP and 8 per cent of the total merchandise exports.

The pandemic has perhaps been the “greatest stress test” for the pharma industry in the current century but the country’s exports rose 21 per cent.

Apart from securing own supply chain, the country can also use the pandemic to elevate the sector’s position in the global supply chain by standing as a reliable exporter of pharmaceuticals, it said.

The focus on finished formulations in the last two decades had resulted in negligence of in-house manufacture of APIs. This led to an increased reliance on China in particular, with estimates of API imports reaching as high as 85 per cent, it said.

“The upsurge in imports from China point towards China’s large capacities (which are built up by the government and managed by private industry) and India’s liberal approach in approving registrations for Chinese products,” it said, citing a 2018 paper.

The paper said empirical results using panel data estimation of 42 pharmaceutical firms over the period 2007 to 2019 suggests that import intensity and research and development (R&D) expenditure are the two key determinants of export intensity.

“A strategy to diversify sources of imported inputs and incentivising R&D expenditure may be necessary to boost India”s exports competitiveness further,” it said.