"There were over 4,000 units operational about two years ago, contributing 20 per cent of the Rs 30,000 crore (Rs 300 billion) Indian domestic pharma market.

We estimate that functional SSI pharmaceutical units, currently, are less than 2,000 and most are fighting for survival, said TS Jaishankar, chairman of the Confederation of Indian Pharmaceutical Industries (CIPI), a national grouping of small-scale pharmaceutical associations in various states.

Two major policy initiatives in 2005 -- to mandate good manufacturing practices (GMP) for all pharmaceutical units and excise exemption to industrial units located in the hill states of North India -- affected the fortunes of these players.

The GMP norms forced them to invest heavily in modernisation to comply with the rules. As a result, many manufacturers surviving on thin profit margins exited the business, instead of risking investments on borrowed capital, said sources.

According to a Union Health Ministry data published in 2007, as many as 788 units have either cancelled or suspended operations after the Government implemented the GMP norms.

 The excise duty exemption for hill states made manufacturing in non-excise free zones an un-viable option and resulted in migration of more than 500 units to excise free zones.

Issues like debt burden and loans from banks force most sick units to sell the companies or surrender their manufacturing licences. Since the units are not well modernised, big pharmaceutical units are not interested in taking over the manufacturing assets, said Jaishankar.

"At least 1,000 units are up for sale, but there are no takers," he added.

Even those units which migrated to the excise free zones hoping for contract manufacturing business from big units are in trouble due to over capacities created in the hill states.

Most of the large pharmaceutical units preferred to set up their large units in tax exempt states like Himachal Pradesh and Jammu and Kashmir, instead of contracting out work to SSIs as done earlier, said sources.

Adding more woes, a recent decision of the Drug Controller General of India (DCGI) not to licence fixed drug combinations and register new drugs with the office caused the SSI units to stop new product introductions

If the SSI units were introducing about 1,000 brands every year with licences from the state drug controllers, this number has shrunk to less than 100. New drug registrations are expensive for the SSIs since they have to give safety and efficacy data to the authority for approval.

Doctors are also reluctant to prescribe fixed dose drugs of unpopular companies, following the DCGI directive.

Most of the SSIs market their products only to traders with attractive incentives as they lack the financial muscle to set up a dedicated medical representative team to call on the doctors, sources said.

Reduction of excise duty from the current 16 per cent to 8 per cent and increase in the turnover criteria for SSIs to Rs 5 crore from Rs 3 crore will offer a breather and a level playing field for units operational outside the hill states, said Jaishankar.