It’s strong medicine that global pharmaceutical companies will find difficult to swallow but Indian firms may savour. The Chinese government recently decided to reduce value added tax (VAT) subsidies by upto 8 per cent on a range of products, including chemicals and active pharmaceutical ingredients (APIs). Since these products are used to make drugs, Beijing’s decision to lower subsidies will raise input costs for the global pharma companies, including Indian generic drug manufacturers such as Ranbaxy Laboratories, Orchid Chemicals, Lupin and Aurobindo Pharma.

That’s because these companies, who bulk manufacture copies of original drugs after their patents have lapsed, also rely on low-cost Chinese inputs to maintain the tight margins demanded by the highly competitive generic drug market.

For now, Ranbaxy and other Indian generic manufacturers are playing down the repercussions of China’s move, which could raise drug manufacturing costs between 4 per cent and 10 per cent across the board. “The increase in prices can’t be to the extent of the subsidy withdrawal,” a senior Ranbaxy official says. “I’ll know in a couple of weeks.”

Since China exports $4 billion (Rs 16,000 crore) worth APIs and related products to global pharma companies, the cost of drugs may rise across the world, affecting poor countries that already struggle with high medication costs.