To promote India as a global health destination, the Indian government has announced in its annual federal budget a series of new tax concessions and incentives for private investment.

The new scheme, announced 28 February, aims to boost investment from foreign pharmaceutical companies and projects India as an attractive place for drug research and clinical trials. The budget for domestic biomedical research, however, is at Rs 9.8 billion—up just 1% from last year.

The announcement was greeted with cheers from the pharmaceutical sector. “For the first time, pharmaceutical and biotech industry are treated at par with the much-pampered information technology,” says Khalil Ahmed, director of Hyderabad-based Shantha Biotech. “It is a clear recognition of health care sector as a knowledge-based industry with great export potential.”

The new budget includes Rs 1.5 billion to allow Indian companies to develop original drugs. Copying foreign drugs—which Indian companies are famous for doing—will be outlawed by a new patent plan effective in 2005. The government will not tax royalties earned by drug companies and will waive excise and customs duties on life-saving drugs. International companies like Novartis, GlaxoSmithKline and Pfizer and Indian biotechs like Ranbaxy will all benefit from a cut in customs duties on bulk drugs.

Most important, drugs and materials imported for clinical trials will not be taxed. “This will enable India to become more competitive as a center for clinical trials,” says Kewal Handa, finance director of Pfizer's Indian operations.

As a result of all these measures, prices of vaccines, drugs and diagnostics are bound to fall. One company has already announced a 16% cut in the price of its anticancer drugs and a 10% cut in the price of glucometers. Boston Scientific, the largest equipment supplier to Indian hospitals, has also proposed a downward revision of prices.

Lack of funding has thus far been the biggest obstacle to the growth of private hospitals. The government eliminated this constraint by extending tax benefits to investors in private hospitals with 100 beds or more. It also reduced the import duty on life-saving equipment from 25% to 5% to encourage hospitals to import the latest equipment.

The private sector already accounts for about 70% of India's health care services market and the latest incentive will further fuel the growth, says Pratap Reddy, chairman of the private Apollo hospitals. “This budget will definitely see domestic investments of Rs 25 billion to Rs 50 billion in health care and foreign direct investments in billions of dollars,” he said. “It is a signal to foreign investors that we are now open for business.”

Health care costs in India are about one-tenth of those in the US or the UK, says Reddy, whose Apollo hospitals already have patients from west Asia and Africa. The average cost of a cardiac surgery at the best hospital in India is only $4500, with a success rate of 98.5%. A single tooth filing costs $10 against $300 in the US. With its technology, skilled specialists, sound infrastructure and paramedical staff, Reddy says, “India can become a global health care destination.”