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1 Introduction
ndias industrial policy during the first phase after Independence was based on strict regulatory control, enforced
through severe import restrictions alongside various permit and licence requirements for the creation and expansion of
selected industries. There was no policy to encourage efficiency.
Indias industrial policy protected existing domestic firms
from foreign competition and, at the same time, lowered the
threat of competition from newly emerging firms at home. The
economic reforms initiated in the early 1990s, broadened in
scope gradually over the years that followed, have, however,
drastically changed the scenario. It is now becoming increasingly important for an individual firm to improve its productive efficiency in order to survive in the face of ever increasing
competitive pressures.
In this paper, we examine the levels of technical efficiency
of individual plants from the Indian pharmaceutical industry
(NIC Code 2423), using unit-level data from the Annual Survey of
Industries (ASI), covering the period 2000-01 through 2005-06.
This permits us to examine how the levels of technical efficiency
have changed over these years and to find the forces behind
the variation of efficiencies across plants. There are several
reasons why the pharmaceutical industry in India deserves
special attention in its recent past.
Foreign pharmaceutical companies dominated the Indian
pharmaceutical industry until the early years of the 1970s.
Prior to this, industrial policy was relatively favourable towards foreign pharmaceutical companies. The regulation on
foreign capital in the pharmaceutical industry was liberal. Under the Patents and Designs Act of 1911, which recognised
product patents for pharmaceuticals, foreign pharmaceutical
companies had been importing most of the drugs in bulk from
their parent companies abroad and selling the formulations.
The Patents and Designs Act of 1911 prevented Indian companies
from manufacturing new drugs. Thus, the foreign pharmaceutical companies in India enjoyed a monopoly in the Indian
market. At that time, India was dependent on imports for most
essential drugs. Due to the lack of competition in the industry,
drug prices in India were very high and drugs were unaffordable for a majority of the Indian population.
Several policy measures were taken in the 1970s that promoted the development of the Indian pharmaceutical industry
and restricted the activities of foreign pharmaceutical companies.
The most important policies were as follows: (i) the enactment
of the Patent Act of 1970, (ii) the introduction of the Foreign
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Since 1991, following the implementation of the policy of economic reforms that substantially relaxed barriers to business and
trade, the entry of firms and plants into the Indian pharmaceutical industry increased progressively. In addition to the
liberalisation of FDI regulation in the pharmaceutical sector
in 2002 that allowed FDI of up to 100% under the automatic
route, the introduction of pharmaceutical product patents
has also accelerated the inflow of foreign companies into
India, and several Indian companies have been taken over by
foreign companies.
The introduction of pharmaceutical product patents brings
new business opportunities to the Indian pharmaceutical
industry. The pharmaceutical outsourcing business has been
increasing in India. In the past, foreign pharmaceutical
companies hesitated to manufacture new drugs in India because
of the Patent Act of 1970, which did not recognise product
patents on pharmaceutical products. Recently, however, foreign
companies have been increasingly outsourcing the manufacturing of their new drugs. The introduction of product patents
due to the amendment of the Patent Act of 1970 made it impossible for Indian companies to manufacture patented drugs. The
incentive of Indian companies to misappropriate the know-how
gained from contractors (foreign companies) reduced. On the
one hand, for foreign companies, the amendment of the Patent
Act of 1970 that introduced product patents in India lowered
the risk of outsourcing to Indian companies. On the other,
multinational pharmaceutical companies were creating research
centres and manufacturing plants in India.
Recently, the contract research and manufacturing services
(CRAMS) business has been growing rapidly in India. Many
Indian companies entered the CRAMS business, and the
number of specialised CRAMS companies has increased. Foreign
pharmaceutical companies are increasingly outsourcing
manufacturing, drug discovery operations and clinical trials
to Indian companies.
The GMP, which is defined in Schedule M of the Drugs and
Cosmetics Rules of 1945, has become mandatory since 2005.
Many plants were not in a position to comply with the GMP and
these units have been closed. In addition to the increase in
competitive pressure, GMP compliance has possibly induced
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the exit of small and inefficient firms and plants from the
market. In addition, the degree of price control on drugs has
gradually reduced. All these factors contribute to an increase
in the competitive pressure on surviving firms and in the
number of firms entering and exiting.
The period after 1995 (i e, the post-TRIPS (Agreement on
Trade-Related Aspects of Intellectual Property Rights) period)
saw the strongest performance of the Indian pharmaceutical
industry on several fronts. The industry not only registered a
marked improvement in its production performance, but also
turned into a net foreign exchange earner during the recent
period. The Indian pharmaceutical industry, now a $19 billion
industry, has shown tremendous progress.
The Department of Pharmaceuticals has the following
Vision for the development of the Indian pharmaceutical industry (Department of Pharmaceuticals nd: 8):
develop human resources for the pharmaceutical industry
and drug research and development;
promote public-private partnership for the development of
the pharmaceuticals industry;
promote Pharma Brand India through international cooperation;
promote environmentally sustainable development of the
pharmaceutical industry; and,
enable availability, accessibility, and affordability of drugs.
For the achievement of these goals, it is necessary for the
Indian pharmaceutical industry to become globally competitive
through world-class manufacturing capabilities, with improved
quality and a higher efficiency of production, and there is a
need to stress on the up-gradation of R&D capabilities.
Studying the Changes
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Data Envelopment Analysis (DEA) based methodology to estimate productivity change, and decompose it into technical
and relative efficiency changes. They have found that higher
R&D investments and switching to higher value-added products
by a few innovative firms pushed the production frontier upwards, with increasing technical and productivity gains. The
higher technical and R&D capabilities, and wider new product
portfolios of multinational companies have also contributed to
the positive technical and productivity changes in the Indian
pharmaceutical industry.
In another study, Kiran and Mishra (2009) argued that during
the post-TRIPS period, the Indian pharmaceutical industry registered its strongest performance on several fronts. The industry
improved its production performance by a significant margin
and the pharmaceutical industry turned into a net foreign exchange earner during this period. Also, R&D expenses have increased at a higher rate in the post-TRIPS period. Mazumdar
and Meenakshi (2009) examined technical efficiency using DEA,
and tried to analyse the effects of technological gaps and productivity differences among different groups of industries. They
argued that most firms failed to appropriate the benefits of
technological change, leading to a rise in inefficiency, and there
is a positive association between the size of firms and efficiency.
Mani (2006) argued that a TRIPS compliant patent regime does
not appear to have dampened the innovation capability of the
domestic pharmaceutical industry, and, on the contrary, firms
have both increased their research budgets and patenting.
However, there are some deficiencies in understanding the entire
sequence of conducting research, developing a molecule, and
introducing a new drug in the market. In fact, our study shows
that this is an area where public policy ought to be focused.
A comprehensive analysis of the Indian pharmaceutical
industry is found in Chaudhuri (2005). In it, he covered a wide
range of problems relating to policies, patent laws, price
adjustment, etc, of the pharmaceutical industry in India in the
recent period.
There are some studies trying to find the factors responsible
for the variation of efficiency and productivity among firms.
However, few studies have analysed the performance of the
pharmaceutical industry using unit-level panel data. Hence,
there are good reasons to look into current performance
levels prevailing in the pharmaceutical sector in India using
such data as available in the ASI. An audit of the levels of technical efficiency, along with an analysis of the determinants of
efficiency is, therefore, of interest to both academicians and
policymakers. Some studies address the question of productivity and/or efficiency in the industry from the perspective
of technology. Fujimori et al (2010) estimated a stochastic
frontier production function, using data of small-scale Indian
pharmaceutical industries. In it, they use the data set of the
56th round (1999-2000) of the National Sample Survey (NSS)
manufacturing enterprise survey. The authors found that the
small-scale pharmaceutical industries (SSPI) have an inefficiency in their production activity. At the same time, they
showed evidence that an SSPI supporting policy improves the
technical efficiency to some extent.
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Data Set
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200
150
cy
100
50
Mean = 0.2468
Std. Dev. = 0.21356
N = 1,927
0
0.00
0.20
0.40
0.60
0.80
efficiency
Size-Specific Analysis
It has been argued that the larger sized plants usually get the
advantage of economies of scale. We are trying to see if this
phenomenon is true for the efficiency of plants in the pharmaceutical industry, that is, the larger sized plants are more efficient
than the smaller sized plants. We have classified the plants
into three groups by their value of fixed capital stock (FCS).
Small size is defined by an FCS value below Rs 10 crore, medium
is from Rs 10-100 crore, and large is more than Rs 100 crore.
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Table 1 shows that the mean efficiency is higher for the largesized plants as compared to that of small- and medium-sized
plants, and that the mean efficiency of medium-sized plants is
higher than that of small-sized plants. However, the variation in
efficiency indicates that the small-sized plants are more homogeneous than the large-sized plants in terms of technical efficiency. Thus, the large plants in the pharmaceutical industry
get the advantage of economies of scale.
Table 1: Comparison of Average Efficiency (Over Time) among Different
Sizes of Pharmaceutical Plants during 2000-05
Average Capital
Small
Medium
Large
Total
Mean
Minimum
Maximum
Std Deviation
439
273
42
754
.1382
.2958
.4643
.2134
.0038
.0012
.1244
.0012
.7164
.8794
.9086
.9086
.1267
.2182
.2250
.1963
Efficiencies are averaged over the period for each plant. Size is defined in terms of fixed capital.
Ownership-Specific Analysis
Mean
.1883
.1546
Minimum Maximum
Std
Deviation
.0048
.0119
.6106
.6115
.1966
.1761
.1651 .0209
.1748 .0138
.2347 .0434
.2152 .0012
.2637
.4448
.5449
.9086
.0912
.1470
.1952
.1979
However, only a small number of plants fall under the very high
efficiency category. Thus, the characteristics of private and public
plants are not very different in terms of efficiency distribution.
Table 3: Distribution of Average Efficiency of Pharmaceutical Plants of
Different Ownership Type
Efficiency
Class
Wholly
Wholly Central Government Joint
Central
State and/or and State and/or Sector
Government
Local
Local Government Public
Government
Jointly
0.0-0.2
0.2001-0.4
0.4001-0.6
0.6001-0.8
0.8001-1
62.50
25.00
72.73
18.18
12.50
9.09
60.00
40.00
Joint Wholly
Sector Private
Private Ownership
Total
Trend of Efficiency
2000
2001
2002
2003
2004
2005
Mean
Minimum
Maximum
Std Deviation
330
299
273
298
330
397
.1691
.1722
.2185
.3026
.2998
.3010
.0015
.0040
.0072
.0012
.0172
.0129
.8517
.8104
.8500
.8644
.9158
.9086
.1699
.1737
.2071
.2251
.2127
.2294
2001
Years
2002
2003
2004
2005
.2189
.2137
.4740
.3024
.3084
.2013
.3078
.3034
Dynamics of Plants
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0.15
State Government
Location-Specific Analysis
0.1
0.05
2000
2001
2002
2003
2004
2005
Discontinued
Continuing
Mean
Minimum
Maximum
Std Deviation
357
397
.1632
.2586
.0012
.0129
.8517
.9086
.1785
.2009
Discontinued
Continuing
0.1900
0.1039
0.0209
0.1918
0.0545
0.1825
0.1900
0.1341
0.2124
0.2524
0.3018
0.2790
Discontinuing
Continuing
Wholly
Central
Government
Wholly
State
and/or
Local
Government
Central and
State
and/or Local
Government
Jointly
75.00
25.00
45.45
54.55
20.00
80.00
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Joint
Joint
Wholly
Sector Sector
Private
Public Private Ownership
87.50 16.67
12.50 83.33
47.07
52.93
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Total
47.35
52.65
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the five regions. It indicates that the new industrial policy for
the region helps the pharmaceutical companies to perform
better than compared to the other regions. The efficiencies of
the non-agglomerated area and of Area-2 (Delhi, Haryana,
and Punjab) are very low, while the efficiencies of plants in the
other two regions, which are comparatively matured agglomerated regions, are moderately high.
Table 10: Comparison of Average Efficiency (Over Time) of Pharmaceutical
Plants in Different Locations during 2000-05
Area
Agglomerated-new (Area-1)
Agglomerated-established-1 (Area-2)
Agglomerated-established-2 (Area-3)
Agglomerated-established-3 (Area-4)
Non-agglomerated (Area-5)
Total
44
58
324
185
143
754
.3536
.1643
.2351
.1952
.1648
.2134
.0054
.0120
.0038
.0012
.0048
.0012
Std
Deviation
.9086
.6106
.8794
.8100
.8214
.9086
.2890
.1582
.1999
.1759
.1650
.1963
0.0-0.2
0.2001-0.4
0.4001-0.6
0.6001-0.8
0.8001-1
31.82
36.36
6.82
13.64
11.36
70.69
18.97
6.90
3.45
56.79
23.46
11.11
8.33
0.31
63.24
24.32
8.11
3.78
0.54
72.03
18.18
5.59
3.50
0.70
Total
60.88
23.08
8.75
6.23
1.06
Agglomerated-new (Area-1)
Agglomerated-established-1 (Area-2)
Agglomerated-established-2 (Area-3)
Agglomerated-established-3 (Area-4)
Non-agglomerated (Area-5)
Total
Discontinued
Continuing
34.09
53.45
48.77
47.03
46.15
47.35
65.91
46.55
51.23
52.97
53.85
52.65
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EPW
competition and threats result in mergers, acquisitions, and alliances for the survival of the plants.
In such a dynamic environment, it would be interesting to
examine whether there are any common factors in explaining
the performance, in terms of efficiency of plants, which influence
the survival and growth of a plant. From this analysis, we see that
the efficiencies of plants have increased over the years, but not
without fluctuation. However, the level and growth of efficiencies differ in considerable ways among the types of ownership
of plants. It is found that private players are doing significantly
better than compared to other types of ownership. A positive
association is found between the size of plants and their technical efficiencies. Therefore, we can conclude that economies of
scale are prevailing in the pharmaceutical industry of India.
Since the market of the pharmaceutical industry has become
more competitive, plants with low efficiencies cannot survive
and either merge with other plants, or are compelled to discontinue their operations. Managerial skill and wage rates
have a significant effect on the betterment of the performance
of these plants. Some of the newly identified areas, with special facilities, are found to be conducive to the better performance of the pharmaceutical industry.
Surinder S Jodhka
Biswajit Ghosh
Arjun Kumar
Sukanya Bose,
Arvind Sardana
Tushaar Shah, Yashree Mehta,
Vivek Kher, Alka Palrecha
Sukhpal Singh, Shruti Bhogal
Bipin K Deokar, S L Shetty
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