100% FDI in medical devices is good start but long way to go

Prime Minister Narendra Modi played Santa for India's $6.3 billion medical devices industry. On the eve of Christmas, the government allowed 100 per cent FDI under the automatic route in the sector.

What does 100 per cent FDI mean for the industry?

A boost to medical devices manufacturing in the long run is in the offing - Wednesday's announcement means speedy investments in new factories, less red tape, and potentially more transfer of technology.

A foreign investor will no longer have to go to the Foreign Investment Promotion Board (FIPB) for permissions - they had to till now, which was a time-taking affair. No wonder, between April 2000 and June 2012, the sector received investments of only $523 million versus pharma that received inflows of nearly $10 billion in the same period.

But allowing 100 per cent FDI is only a start.

Making medical devices in India would require a lot more. India does not have the component ecosystem  - manufacturing a pacemaker, for instance, would require design, metals, software, lithium battery, an electronic circuitry and electrodes  among others components. India may still need to import the electronic circuitry.

Importing too many components would pressurize a company's operating margins and the end user - hospitals and in turn patients - would perhaps end up paying more. So the government, as a second step to 100 per cent FDI, may need to think of a cluster approach where component manufacturers and other ancillary companies get economies of scale.

A crucial question is who should India manufacture for? Is it the domestic market or for the world? At $6 billion, the domestic market is small.

The market would be even smaller once the big boys of the device game such as Philips and GE are taken out of the equation. If India wants to manufacture for the world, the government may need to look at taxation policies. Ireland is often cited as a good example of how a small country created a niche for itself in medical devices because of a combination of good medical education, engineering skills and financial stimulus.

The country has 320 medical device companies and they export $8 billion worth of equipment and services, everything from disposable plastic and wound care products to precision metal implants. The sector in Ireland employs 25,000 - an indication to the jobs it can create in India if the government, the industry, and consultants put on their thinking hat together.

Last but not the least, the government would also need to encourage research and innovation - a spanner in the wheels will be any price control on the equipment. Recent reports suggested that the government was considering a cap on the maximum retail price of some medical devices. Indeed, that could scare foreign investors as well.