#224 A New Prescription
How to make an industrial policy. Compulsory generics.
India Policy Watch #1: Learning What it Takes to Execute an Industrial Policy
Insights on current policy issues in India
— Pranay Kotasthane
On August 9, the US CHIPS and Science Act completed one year as a law. So, in an article for The Hindu, we proposed four lessons for India's semiconductor strategy (from a nuts and bolts perspective). Implementation is key to industrial policy, and the US experience has some lessons for our policymakers. What follows is the first draft of that article.
— Vishwanath Madhugiri & Pranay Kotasthane
The United States’ Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (CHIPS Act) will complete one year as a law on August 9. The Act authorises $52.7 billion over five years to boost American competitiveness, innovation, and national security in semiconductors.
While the jury is still out on the long-term effectiveness of the Act, the industry body Semiconductor Industry Association claims that the Act has spurred announcements of over $210 billion in private investments announced across 20 American states and over 50 new ecosystem projects, including fabs.
What’s more important from an Indian perspective is to observe and learn from the implementation details of the Act. As industrial policy has become a default policy for choice for nation-states, the Act provides a clear window into the capabilities and structures needed to execute such policies. Behind the flashy headlines, the US is bringing to bear the full force of its mighty state capacity on semiconductors through the CHIPS Act. While it may neither be possible nor desirable to replicate specific provisions, we outline four lessons to help India execute its semiconductor strategy better.
A Truly Whole-of-Government Approach
The Act involves cooperation and coordination between several arms of the government. Four separate funds have been created for the execution of the Act. The Department of Commerce is the lead agency, administering the $50bn CHIPS for America Fund for accelerating semiconductor manufacturing and research. But there are also allocations for the Department of Defense ($2bn) for defence-unique technologies, the Department of State ($0.5bn) to coordinate with foreign partners on semiconductor supply chain security, and the National Science Foundation ($0.2bn) to promote the growth of the semiconductor workforce. This structure highlights the priority accorded to semiconductors.
On the other hand, India’s semiconductor industrial policy is being managed mainly by the Ministry of Electronics and Information Technology (MeitY). The schemes for manufacturing, assembly, displays, and compound semiconductors have been assigned to an independent division called India Semiconductor Mission (ISM) within a non-profit company set up by MeitY. The policy for chip design is being administered by C-DAC, an R&D organisation again under the MeitY. The ISM Committee comprises largely MeitY bureaucrats. Only the Advisory Committee reflects a broader representation from the government's technology, defence, and security arms. While the ISM is a good beginning, ensuring that the semiconductor strategy survives beyond government terms requires a whole-of-government approach along the lines of the CHIPS Act.
Workforce Development as a Vital Focus Area
Companies seeking funding under the CHIPS Act are required to submit workforce development plans. A nodal agency, the National Semiconductor Technology Center (NSTC), has been created to “collaborate with industry, educational institutions, government agencies, and government-funded research institutions to identify and scale gold-standard education models, experiential learning, and training programs that consistently meet industry needs”.
This must become a focus area for India as well. A competent semiconductor engineering workforce is India’s quickest route to gaining disproportionate leverage in the semiconductor industry. Keeping this in mind, MeitY has begun a Chips2 Startup (C2S) programme, collaborating with over 100 universities and colleges. Like the NSTC, C2S aims to scale up workforce expansion by supporting existing quality training programs. In the Indian case, however, many private training centres prepare chip designers outside the conventional university system. Hence, it’s important for C2S to focus on certifying good programmes of universities or private training institutes rather than running them.
Measures for Transparency in Decision-making
The US is establishing clear and transparent guidelines to assess the financial viability of the semiconductor project, as well as the applicant's technical competency, financial strength and track record.
The CHIPS Act has created a CHIPS Program Office(CPO) to lay down the guidelines for assessing the financial viability of a project. For example, the assessment would include the financial strength of the project and the applicant, a firm private investment commitment, and whether the funding request under the Act is reasonable. The applicants should also qualify for a state or local government incentive and have a signed term sheet. The CPO is hiring Investment Principals and Financial Structuring Directors to structure and catalyse private sector investments that complement the financing of those companies that have been awarded a contract, to support various components of the semiconductor industry. From the technology angle, the CPO has created an R&D Leadership Team that will design and oversee R&D programs that will help sustain a robust R&D ecosystem.
To ensure environmental sustainability requirements are adhered to, applicants must meet the provisions of the National Environmental Policy Act(NEPA). Further, for improving the sustainability of semiconductor manufacturing, several options are being explored to maximise equipment and process efficiency while minimising the usage of power, chemicals, water, and waste.
While India also has guidelines for assessing the viability of proposals, a lot remains to be done concerning transparency. For example, it is still unclear why some firms that showed interest in starting chip fabrication plants could not receive ISM approvals or consortia, such as Foxconn-Vedanta, could not bring technology partners on board, despite the fanfare associated with these projects. India needs to build the capacity to vet proposals. The government needs to put out regular monthly progress reports on its semiconductor programme. This will help manage expectations and instil reassurance in India’s plans.
Planning for the Future
The CHIPS Act is not just about bringing semiconductor manufacturing back to the US. The Department of Commerce also invests $11bn focused on future research. For example, the strategy acknowledges that advanced packaging is a leverage point to excel in semiconductors over the next decade. Hence, it envisages a National Advanced Packaging Manufacturing Program (NAPMP) to help the US gain a disproportionate competitive advantage in the future. Packaging was considered a labour-intensive and low-margin component of the supply chain only a few years ago. However, as downscaling transistors becomes difficult, researchers have zoomed in on advanced packaging techniques that combine multiple semiconductors in a multi-dimensional arrangement on a single substrate, all in one package.
In India’s semiconductor strategy, advanced manufacturing and packaging research are not priority areas of focus. This makes sense to the extent that India is currently nowhere in the picture in high-volume chip manufacturing. However, the lesson from the CHIPS Act is that India’s strategy needs to identify and invest in research on future technologies.
In sum, the CHIPS and Science Act is a useful template for industrial policy in semiconductors. The administrative capacity that the US has marshalled together institutionalises the Act in a manner that will ensure its continuity beyond governments. We urge that India’s semiconductor strategists study the positives and drawbacks of this Act deeply. After all, nothing matters more in industrial policy than effective implementation.
India Policy Watch #2: Generic Bad Policy
Insights on current policy issues in India
— RSJ
We love misguided public policies here. You know the kinds.
Like imposing a licensing regime on imports because we should encourage make in India. Anyway, imports are bad and as the PM helpfully told us in his Independence Day address when we import, we import inflation from other countries too. Hmm. Someone must have forgotten to tell him that our domestic inflation is higher than most countries from where we import hi-tech and electronic goods. But maybe swadeshi inflation is of better quality and has no side effects. Somewhat like Ayurveda.
Like taking policy measures in the name of protecting the poor and the middle class who wouldn’t know any better otherwise. So, we have random price ceilings on things like we had on masks and flight tickets during the pandemic, illogical subsidies on diesel, administered price mechanism to protect farmers - the list is long.
Like crafting policies with the initial assumption that profits are bad and the state should aim to rein in the private sector. Again, examples abound of policies that have stifled innovation and enterprise through the past 75 years because of this central assumption that’s deeply embedded in the psyche of the state.
We love them all. In fact, we wrote a book covering these tendencies of the state. And now we have an audible version of it available too. So, those of you who were waiting to hear the book rather than read it, here’s your chance.
And then on some rare occasion we have a policy that checks all the boxes of being misguided that makes writing this weekly newsletter so much easier.
Here’s a May 12 ‘office order’ from the Directorate General of Health Services:
“It is to be noted that all the Doctors in the Central Government Hospitals/CGHS Wellness Centers / Polyclinics have been instructed time and again to prescribe Generic Medicines ONLY. Despite this, it has been observed that Doctors (including Residents) in some instances continue to prescribe branded medicines. This has been viewed strictly by the competent authority.
2. This may be noted by all head of institutions, and they may ensure strict compliance by the doctors working under them.
3. If anyone continues to be non-compliant, he/she shall be liable for further action.
4. Further, it may be ensured that visits of Medical Representative to hospitals premises are completely curtailed. Any information about a new launch may be communicated by way of email only.”
What a beautiful order!
Self important: check (note the usage of the term ‘competent authority’)
Passive aggressive: check (repeated usage of ‘may’)
Random threat with limited basis: check (“shall be liable for further action”)
Hierarchical: check (“doctors working under them”)
Poor drafting: check (bullet point starts from 2; there is no point no. 1)
Any whiff of consultation to anticipate the unintended: Zero.
Therefore, check.
A little bit of background on the issue of generic drugs and their prescription in India. There is an existing 2002 code of ethics issued by Medical Council of India that states:
“Every physician should, as far as possible, prescribe drugs with generic names and he / she shall ensure that there is a rational prescription and use of drugs.”
But it is more of a best efforts basis - as far as possible. Has this worked? To a large extent. Generics account for between 75-80 percent of total drug sales in India. Technically, generics are bioequivalents of branded drugs that are made with the same active ingredient, same dosage forms, strength, performance, quality and tested the same level of rigour for safety and stability. Generics are developed or reverse engineered by pharma companies after the patent over the branded drug (and the underlying active ingredient) runs out. Generics therefore tend to be anywhere between 70-90 percent cheaper than the branded drugs.
So, prima facie, a low income country like India should be making more generics domestically and the doctors should be prescribing more of it. Left to itself that’s where the market will find an equilibrium. And I guess we are already there. So, what’s the need for this order, you may ask? Well, it goes back to those primal desires among Indian policymakers? A view that doctors are in the pockets of big pharma who encourage them to prescribe expensive branded drugs when generic alternatives are available. Also, a warped notion that those companies who make generic drugs cannot make enough profits to have the doctors dance to their tunes. This is easily disproved looking at the profit margins of large generic Indian companies. And lastly, the desire that we must protect the poor and the middle class who are gullible and can easily be fooled by doctors. The monopoly of fooling the masses should rest, of course, only with the state.
There are five key issues I have with this kind of an order apart from the mechanics of issuing it with limited or no consultations.
One, for a moment assume that it is true that the doctors are in bed with big pharma and that this order will set this right. Fine. Doctors will start prescribing (in legible handwriting which is also an order) generics. The patient will then take this prescription and go to chemists. The chemist can easily say that the particular generic drug isn’t available and push a branded equivalent. Will this happen? You can bet your last Rupee on this. Pharma companies already have a deep relationship with the chemists and for the chemists this is an additional level to bargain with them. So from doctors having the power, the balance will shift to the chemists. Who do you think has taken a Hippocratic oath to serve the patient between the two? And, how do you think this will be a better outcome for patients?
Two, what is the state of affairs regarding the quality of generic drugs manufactured in India? I don’t want to be alarmist here but the track record is patchy at best. The bioequivalence norms for generic drugs aren’t complied to all the time. The checks for these are not rigorous to benchmark with the best in the world. Stability, the ability of the drug to retain its effectiveness over time and change in environment, isn’t a criteria that’s mandated with clear guidelines. We have had negative global publicity multiple times in the past few years of the safety of our generic medicines. This isn’t to diss the generics industry but it still has a distance to go on being of the highest global quality. The regulatory regime isn’t tight enough for fake drugs that masquerade as generics to be available in the market. These are all issues that Indian consumers contend with already. The focus of the regulatory regime should be to make generics made in India to be the safest and the most effective in the world instead of prescribing a top-down diktat.
Three, there are multiple diseases or conditions for which the generic equivalent might not be available or according to the doctors, might not be safe and effective. What does a doctor do then? Risk prescribing a branded drug and be ‘liable for further action’ as the order reads. Why should the original ethical code that uses the language ‘as far as possible’ be tinkered with to make this compulsory with consequent actions?
Four, if the concern is on the price of branded medicines that are being prescribed at the central government run hospitals, has the government tried any other option like negotiating with pharma companies directly to purchase drugs in bulk and reduce their cost? If yes, what kind of reduction has been possible? Can more be done with centralisation of inventory and purchase decisions? That will possibly help patients more than a move like this.
Lastly, in a country where we have an acute shortage of doctors because of warped policies around setting up of medical colleges (we wrote about it here), where pseudosciences like homeopathy and ayush treatments are being encouraged without having them follow double-blind tests and minimal standards of safety and effectiveness and where we have barely adequate health cover for most of the citizens, is this the area where state capacity be focused?
The road to public policy hell is paved with good intentions. Always.
The monopoly of fooling the masses should rest, of course, only with the state. :)
It's a norm in govt to start numbering from the second paragraph. Any discussion with medical industry insiders at least makes me feel that medical industry is absolutely corrupt. Stories of expired medicine being repackaged, no quality controls, bribes to doctor being the major cost to the company etc are common.