Foreign Investment in Hospitals in India:

Status and Implications

1 Overview of the Indian Healthcare Sector

The Indian healthcare delivery market is estimated at US$ 18.7 billion and employs over four
million people, making it one of the largest service sectors in the economy today. Total national
healthcare spending reached 5.2% of GDP, or US $34.9 billion in 2004 and is expected to rise to
5.5% of GDP, or US $60.9 billion by 2009. The sector comprises of many segments, which include
hospitals, medical infrastructure, medical devices, clinical trials, outsourcing, telemedicine, and
health insurance, to name some. The industry has grown at about 13 per cent annually in recent
years and is expected to grow at 15 per cent per year over the next four to five years. According to
a recent study, the industry will account for 6.1 percent of GDP by 2012 and is projected to provide
employment to around 9 million people.1 Hence, by all estimates, this is a sector, which is growing
rapidly and is seen to have considerable potential. This growth and potential is due to the growing
demand for healthcare services in the Indian market, which is driven by rising incomes, a growing
propensity to spend on healthcare, a shift to lifestyle related diseases, and demographics, among
other factors.
Notwithstanding the sector’s rapid growth and potential, in many respects, India’s healthcare
sector falls well below international benchmarks for physical infrastructure and manpower, and
even falls below the standards existing in comparable developing countries. The total number of
doctors (all kinds included) per thousand persons stood at only 1.27 in 2006 and 0.5 physicians per
thousand persons in India, compared to a world average of 1.5. The number of nurses per
thousand persons stood at 0.9 in 2006 compared to a world average of 1.2. Added to this
deficiency is the mal-distribution between rural and urban areas and shortages of specialized
personnel. These ratios are projected to remain below the existing world averages even in 2016.
The current ratio of beds per thousand persons is a mere 1.03 (well below the WHO norms)
compared to an average ratio of 4.3 for developing countries like China, Korea, and Thailand, and
in the best of circumstances is projected to reach 1.85 per thousand persons by 2012. It is estimated
that over a million beds have to be added to attain this 1.85 ratio, which translates into a total
investment of $78 billion (Rs. 350,830 crores) in health infrastructure. An additional 800,000
physicians are required over the next 10 years, which in turn translates into huge investments in
training facilities and equipment. In order to reach even 50-75 percent of the present levels of other
developing countries, the sector will require an estimated investment of $20-30 billion.2 Thus,
India’s healthcare sector needs to scale up considerably in terms of the availability and quality of its
physical infrastructure as well as human resources so as to meet the growing demand and to
compare favourably with international standards.

1
These statistics are taken from IBEF, available at www.ibef.org
2
See, Ernst and Young (2007) and CRISIL Research (Feb 2007).
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A striking feature of India’s healthcare system is the significant and growing role of the private
sector in healthcare delivery and total healthcare expenditures. Public health expenditure accounts
for less than 1 percent of GDP compared to 3 percent of GDP for developing countries and 5
percent for high income countries. The private healthcare sector in India accounts for over 75
percent of total healthcare expenditure in the country and is one of the largest in the world. An
estimated 60 percent of hospitals, 75 percent of dispensaries, and 80 percent of all qualified doctors
are in the private sector. However, private healthcare delivery is highly fragmented with over 90
percent of private healthcare being serviced by the unorganised sector, according to a recent
consulting firm report.3 Some 2 to 3 percent of hospitals are 200-bed plus, some 6-7 percent are
100-200 bed size hospitals, and the bulk 80 percent of private sector hospitals are very small, less
than 30 beds.
Studies by the Central Bureau of Health Intelligence have shown that a majority of Indians trust
private healthcare despite a higher average cost of US$ 4.3 compared to US$ 2.7 in government-
owned healthcare agencies. Only 23.5 percent of urban residents and 30.6 percent of rural residents
choose government facilities, reflecting the widespread lack of confidence in the public healthcare
system. The private sector’s role is expected to grow in the future. It is estimated that out of the 1
million beds to be added by 2012, the private sector will contribute 896,000 beds. Government
spending on healthcare infrastructure (excluding land) is projected to rise only marginally, by 0.12
percent of GDP and is expected to meet only 12 percent of the huge investment required in the
healthcare sector, with the private sector providing some 88 percent of investment requirements.4
Hence, the private sector will be a key player in driving the future growth of India’s healthcare
sector, including in segments such as hospitals.
Given the growing demand, the emergence of reputed private players, and the huge investment
needs in the healthcare sector, in recent years, there has been growing interest among foreign
players and non resident Indians to enter the Indian healthcare market. There is also growing
interest among domestic and international financial institutions, private equity funds, venture
capitalists, and banks to explore investment opportunities across a wide range of segments (drugs
and pharmaceuticals, medical devices, hospitals, etc.) in the Indian healthcare sector. In the
hospitals and medical devices segment alone, there are reportedly at least 20 international players
competing to have a share on the Indian healthcare market. These players are entering mainly
through joint ventures with Indian companies and also through technology and training
collaborations.
The growing presence of corporate players and foreign investors in India’s healthcare sector,
although highlighted and also documented in various reports by industry associations and
consulting firms, is not yet well understood in terms of its current status as well as its implications
for the healthcare system at large. For example, while the emergence of corporate hospitals or
foreign funding and tie ups in the hospital segment can have many positive implications, such as
helping to improve physical infrastructure, standards, quality of healthcare, technology, and
delivery systems and processes along with spill over benefits in areas such as medical devices,
pharmaceuticals, outsourcing, and research and development, it may also result in higher costs of
healthcare and greater segmentation between the public and private health sectors. Thus, there is a
need to examine the state of play so as to better understand the nature and extent of foreign

3
Technopak (February 2007).
4
Ernst and Young (2007) and IBEF.
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presence in selected segments of India’s healthcare sector and its realized as well as likely impact
on the concerned segment and on the healthcare system at large.