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Oil reserves, Indian pharma & more... - Views on News from Equitymaster
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  • Feb 19, 2008

    Oil reserves, Indian pharma & more...

    • With the signs of a recession looming large over the US economy, the Federal Reserve and the policymakers are taking all steps necessary to prevent the American consumer from feeling the pinch of an economic slowdown. While the Fed has resorted to interest rate cuts to boost spending, the government has unveiled a package of tax rebates and temporary investment incentives worth US$ 152 bn or just over 1% of its GDP. But given the rising food and energy prices, the likelihood of stagflation seems to be more prominent.

      Juxtapose this against the economic environment in emerging economies, which are shying away from loose monetary policies largely due to inflationary concerns given the firm oil and food prices. Hence, the central banks in these countries and more notably in India, in a bid to contain inflation, are refraining from undertaking interest rate cuts. And very rightly so! This is despite the widening interest rate differential, which is likely to propel further foreign inflows.

    • Crude oil prices continue to hover on a higher terrain and the world's growing demand for the fuel has not helped matters. This means that oil-production will have to be stepped up a notch to bridge the demand supply gap. However, it is not as easy as it seems. While geopolitical issues, war and natural disasters tend to disrupt the supply of oil, many oil experts conclude that the world's oil reserves are depleting. Others claim that while oil is indeed finite, even now there is plenty of oil available. Only, it needs to be brought to the consumers. And therein lies the problem. New technologies would have to be employed to extract oil and convert it into a more usable form - a daunting task indeed. Also, much of what remains of oil lies in remote places making extraction of the same that much more difficult. As per reports published on CNN Money, a US government survey has said that the world has 3 trillion barrels of oil left as compared to the 1 trillion used so far in history.

    • One of the various reasons, which will contribute to the growth of the Indian pharma industry are the rising incomes that will increase the affordability of drugs. At present, India's per capita health expenditure in absolute terms is considerably lower in comparison to countries such as China, Brazil, Malaysia, Russia, the UK and the US. Around 80% of the healthcare payments are borne by the individual in India, as against the developed markets, where only 10% to 30% are borne by individuals. Therefore, besides intense competition, this fact also explains why India is a low-price, high-volume market. Unless a new drug provides a significant therapeutic use, the willingness to purchase a relatively high-priced drug is absent. Thus, for patented drugs to do well, there will have to be increased penetration of health insurance in the country and a significantly better therapeutic use of the patented product to justify the high premium for the same. In the long-term, healthcare expenditure is expected to increase in line with the growth in per-capita income.

      Another thing to be noted is that medical facilities are very outdated and unaffordable for a large-section of the Indian society (70% of the population lives in rural areas). So, by increasing penetration i.e., making adequate medical facilities available, volumes are expected to grow. Besides this, life-style related diseases would increase in line with urbanisation leading to a demand for chronic therapy-related drugs. Given the fact that the cost of medical care for chronic diseases such as diabetes and cardiovascular is higher than acute diseases such as fever, cough and cold, in value terms, Indian healthcare market will grow. This also explains the reason why most of the domestic companies are increasing the focus on lifestyle drugs.



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