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SPECIAL ARTICLE

Factors behind the Performance


of Pharmaceutical Industries in India
Chiranjib Neogi, Atsuko Kamiike, Takahiro Sato

Changes in various policies related to trade and entry of


multinational companies in the Indian pharmaceutical
industry were initiated in the early 1970s. However, the
pace of growth of this industry has shown a remarkable
upswing only after 1991, and particularly after 2005. The
introduction of pharmaceutical product patents brought
new business opportunities. But the increase in
competitive pressure has possibly induced the exit of
small and inefficient firms and plants from the market.
Against this backdrop, it is necessary to assess the
performance of the pharmaceutical industry and find the
factors responsible for the variation in industry efficiency
and productivity. In this paper, stochastic frontier
analysis has been used to estimate the efficiencies of
plants using unit-level panel data (2000-05). An analysis
of the forces of variation in the efficiencies and
productivities of these industrial units has been
conducted. Plants with low efficiencies have not
survived they have either merged with other plants or
been compelled to discontinue their operations.
Managerial skill and wage rates have had a significant
positive effect on the performance of these plants.
Some of the newly identified areas, with special facilities,
are conducive to better performance.
We gratefully acknowledge financial support from the collaborative
research projects, The Internationalization of Japanese Firms and
Industrial Dynamics in India, sponsored by Grant-in-Aids for Scientific
Research (B), Long-Term Trends of India Villages, sponsored by
Grant-in-Aids for Scientific Research (S), and Constructing International
Research Network of Contemporary South Asian Studies project, which
is a part of the Young Researcher Overseas Visits Program for
Accelerating Brain Circulation scheme by Japan Society for the
Promotion of Science. We are also grateful to the referee of this paper
for giving valuable comments and suggestions.
Chiranjib Neogi (cneogi@yahoo.co.uk) is with the Economic Research Unit,
Indian Statistical Institute, Kolkata. Atsuko Kamiike (atsukokamiike@gmail.
com) is with the Department of Economics, Outemon Gakuin University,
Osaka. Takahiro Sato (takahirodevelop@gmail.com) is with the Research
Institute for Economics & Business Administration, Kobe University, Kobe.
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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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Exchange Regulation Act of 1973 (FERA), and (iii) the


announcement of the Drug Policy of 1978.
In order to improve accessibility and affordability of essential
drugs in India, the Patent Act of 1970 was enacted, replacing
the Patents and Designs Act of 1911. The Patent Act of 1970
recognised only process patents and not product patents, and
reduced the patent period from 16 to seven years. Automatic
licences of rights could be issued three years after the grant of
patent. The Act allowed Indian pharmaceutical companies to
produce alternative processes for drugs that were not patented
in India. The Act encouraged reverse engineering and the
development of alternative processes for products patented in
other countries. Gradually, the market dominance of foreign
pharmaceutical companies had been reduced by the growth of
the indigenous pharmaceutical sector.
FERA was introduced to regulate foreign companies (foreign
capital) in India. FERA was to distinguish between companies with
foreign equity of more than 40% and those with foreign equity at
or below 40%, in order to restrict companies with foreign equity of
more than 40% to specific segments involving high technology. However, under FERA, foreign companies engaged in the
bulk manufacture of drugs involving high technology were allowed to hold foreign equity above 40%. Under the circumstances, foreign pharmaceutical companies were still predominant in the Indian pharmaceutical market until the mid-1970s.
The Drug Policy of 1978 played a crucial role in lowering the
market dominance of foreign pharmaceutical companies. This
was the first comprehensive drug policy enacted in India. The
basic objective of the policy was to achieve self-sufficiency in the
production of drugs by promoting the development of the indigenous pharmaceutical sector. The policy emphasised the role of
research and development (R&D) and technology, and enhanced
the technological capabilities of the Indian pharmaceutical
industry through the provision of R&D promotion measures.
Several measures to guide and control foreign companies with
75% share of the domestic market were implemented, to be
consistent with the basic objective of the Drug Policy of 1978.
The policy strengthened regulations on the foreign pharmaceutical companies with foreign equity of more than 40%. The
foreign pharmaceutical companies engaged in manufacturing
formulations only or bulk drugs not involving high technology
were required to reduce foreign equity to 40% or below. In
addition, under the policy, the Indian government gave production licences to foreign pharmaceutical companies only if
they were involved in high technology bulk drugs and related
formulations, provided half of the bulk drug manufactured
was sold to other formulators. Most foreign companies had to
reduce their foreign equity to below 40% because they were
manufacturing only formulations or not manufacturing bulk
drugs involving high technology.
While these policy initiatives promoted the growth of the
indigenous pharmaceutical industry, they resulted in the decline
of the market dominance of foreign pharmaceutical companies.
The Indian pharmaceutical industry that relied on reverse
engineering and process innovation achieved self-sufficiency
in technology, and has been strengthening its export orientation
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in the tide of economic liberalisation since the early 1980s. There


has been a steady growth of the Indian pharmaceutical industry
during the last three decades and it has emerged as one of the
leading global players in generics. It has also registered evolutionary dynamics, driven by the survival, entry, and exit of plants.
The Indian pharmaceutical industry thus makes a good
case study for the process of creative destruction, which
Schumpeter (1942) proposed in order to explain the dynamics
of industry evolution. We will now review important shifts in
policies related to the pharmaceutical industry: (1) the liberalisation of foreign direct investment (FDI) regulation in the
pharmaceutical industry, (2) the introduction of pharmaceutical
product patents, and (3) the mandatory implementation of
good manufacturing practices (GMP).
Competitive Pressure

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

As one of the biggest emerging markets of the pharmaceutical


sector, India has to necessarily evaluate the performance of
the Indian pharmaceutical industry, especially after the enactment of TRIPS. There are some studies on this industry that
are worth mentioning from the perspective of efficiency and
productivity, using establishment-level information.
One major study was done by the Institute of Economic
Growth (2010) on the effects of the new patent regime on
the pharmaceutical industry in India. In this study, the
authors argued that the introduction of TRIPS could result in a
reduction in the proportion of multinational pharmaceutical
companies in the Indian drug market and the prices charged
by foreign producers could go up on average, by about 250%
if the foreign firms had full freedom in pricing their products, with the government not resorting to compulsory licensing. A major impact of the TRIPS agreement is the changing
strategy of the big pharmaceutical firms in India with respect
to not only the quantum of R&D expenditure, but also the direction of their R&D. It has been argued that in the last decade,
domestic companies have started filing increasing number of
patents at home, as well as in international patent offices.
Saranga and Banker (2010) studied the productivity change
and factors driving this change in the Indian pharmaceutical
industry during 1994-2003. They have used a non-parametric
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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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After the enactment of deregulation policies, the firms have


to find ways to survive in the market by increasing efficiency
and productivity. India is a typical example, where each state
has some special characteristics that influence the growth
and performance of industries in different ways. In addition,
the spread of types of industries in each state is not similar.
Each state has its own industrial policy, and though there is a
broad agreement in the policies of the states, their approaches
are not always the same. As a result, the growth and performance of industries in the states do not always move in the
same direction. Since the efficiency and productivity of the
industries also depend on the labour laws and the governments
attitude towards implementation of labour laws, the liberal
states suffer from the inefficient use of labour in industries. In
addition, the performance of production units depends on
the organisation and ownership type. It is a common belief
that public sector enterprises, in general, are inefficient as
compared to private sector firms. However, inefficiencies are
not only confined to the public sector. Some recent studies
argue that inefficiency is an all-pervasive phenomenon, even
in developed countries where the role of public sector enterprises is very limited, and efforts should be made to increase
the efficiency of production units by the appropriate use of
inputs in the production process.
The main advantage of using plant level data is that the information loss will be much less as compared to that of aggregate data. Since the information is available for each unit of
the industry and the information about the location and ownership type of each unit is also available, the analysis is done in
the following areas:
(1) The overall efficiency trend of the industry during the period.
(2) The state/location-specific analysis of efficiency.
(3) The ownership-type specific analysis of efficiency.
(4) The size-specific analysis of efficiency of each group of plants.
(5) Efficiency of surviving and exiting plants.
(6) Forces behind the efficiency variation of production units.
In this study, effort has been made to understand the nature
of inefficiency in the pharmaceutical industry in India during
the recent period. The paper is based on unit or plant level
information on production of the pharmaceutical industry.
This is supposed to be the first attempt to measure technical
efficiency using plant level data of this industry.
The paper is organised as follows. Section 2 deals with data
and methodology. Empirical analyses are in Section 3 and
concluding remarks are in Section 4.
2 Method of Analysis
Efficiency Model

Theoretically, a competitive market in equilibrium cannot allow


any inefficiency of production units. In measuring efficiency, a
benchmark production function has to be constructed to judge
the performance of production units. This efficient production
function is called a frontier. The method of comparing the
observed performance of a production unit with the postulated
standard of perfect efficiency is the basic problem in measuring
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efficiency. This is primarily a two-stage problem. First, an


ideal production frontier should be estimated with the observed production information. Then, in the second stage, the
efficiency of production units is to be measured by the departure of the observed from the potential values.
If the objective of a producer is to minimise the wastage of
inputs, the performance of the production unit can be measured in terms of technical efficiency/inefficiency. On the other
hand, if the objective of a production unit is to minimise the
cost for a given level of output or the maximisation of profit by
allocating inputs and outputs, then the performance of a production unit can be defined in terms of economic efficiency.
A stochastic frontier model is a major improvement over the
former models in that it makes a clear distinction between
white noise and inefficiency. Aigner, Lovell and Schmidt (1977)
proposed this stochastic model with the idea that the error
term is composed of two parts, and the form of the function is
y i = f(xi;)e(viui) [i = l,...,n].
The random error term vi has some symmetric distribution
to capture the random effect of measurement errors and exogenous shocks, while ui is assumed to be a non-negative truncation of the N (0, 2) distribution, providing the measurement of
technical efficiencies relating to the stochastic frontier. Now, a
simple OLS type estimate can provide a test for the presence of
technical efficiency in the data, that is, if ui = 0, then the variation in production from the frontier level is only due to the
random error or white noise. If it is assumed that technical
efficiency is present among the production units, then a
stochastic frontier approach to estimate the (in)efficiencies can
be obtained from the estimates of the parameters of the model.
In a panel estimation of efficiency, two aspects of efficiency
are of interest with respect to policy prescriptions regarding
industrial performance. The first aspect is to analyse the trend
or pattern of movement of efficiency over the period, and the
second is the identification of factors responsible for the variation of inefficiencies across time. The first aspect is important
in circumstances where policy interventions like deregulation,
introduction of reforms, new entry, etc, take place at particular
points in time. The second question encompasses the first, but
looking at the former is often done to get an aggregative idea.
Since the main motivation for efficiency analysis to policymakers
is to design policies to improve the performance of producers,
especially the inefficient ones, it is highly desirable to know
whether there are factors that can explain inefficiency.
Kumbhakar, Ghosh and McGukin (1991) and Reifschneider
and Stevenson (1991) first pointed out this inconsistency and
proposed a stochastic frontier model in which the inefficiency
effect (ui ) is expressed as an explicit function of a vector of plantspecific variables and a stochastic error term. Battese and Coeli
(1995) proposed a model that was equivalent to the Kumbhakar,
Ghosh and McGukin (1991) model, with the exception that when
allocative efficiency is imposed, the first-order profit maximising
condition is removed, and panel data is permitted. The Battese
and Coelli (1995) model specification may be expressed as
y'it = 0 + k'kit + (vit uit), i =1, 2,, N; t= 1, 2,, T,
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where vit are random variables which are assumed to be iid,


following N(0, 2v ), and independent of uit. uit are non-negative
random variables and assumed to account for the technical
inefficiency in production, while being independently distributed, as truncated at zero of the N(mit , 2u ), distribution.
mit = zit,
where zit is a vector of variables that influence the efficiency of
plants, and is the vector of parameters to be estimated. In
this model, all the parameters of the stochastic frontier function, as well as those of the inefficiency function, can be
estimated together by a single MLE procedure.

price index are taken from the Handbook of Monetary Statistics


of India (RBI), Database on Indian Economy (CSO), Input-Output
Transactions Table, and National Account Statistics (CSO). Manhours of workers are used to measure labour input (x1) and
capital (x2 ) is defined as the initial value of net fixed capital,
deflated by the implicit deflator of net capital stock in the registered manufacturing sector. Implicit price deflators are constructed from the National Account Statistics of CSO. However,
it is well known that there is no universally accepted method
of measurement of capital stock and that measures are imperfect and subject to measurement error.
3 Analysis of Efficiency

Data Set

Our empirical application is based on plant- or factory-level


data for the period from 2000-01 to 2005-06, which was
collected by the Central Statistical Office (CSO) of India in
the ASI. The primary unit of enumeration in the survey is
a factory in the case of the manufacturing industries, and
data are based on returns provided by factories. The present
study uses data on various plant-level production parameters,
such as output, sales, labour, employees, capital, materials,
and energy.
The ASI factory frame is classified into two sectors: the
census and the sample sectors. The sample sector consists of
small plants, employing 20-99 workers if not using electricity,
and 10-99 workers if using electricity. The census sector comprises relatively large plants. It covers all units having 100 or
more workers and some significant units, which, although
having fewer than 100 workers, contribute significantly to the
value of the manufacturing sectors output. While the units in
the census sector were approached for data collection on a
complete enumeration basis every year, sample-sector units
were covered based on well-designed sampling.
The present study focuses only on the census-sector data
for comparing the economic performances between continuing plants, entrants and exiters. This is because comparative
analysis requires a consistent and exhaustive database to
distinguish between continuing plants, entrants and exiters.
A challenge was, however, posed by changes in the definition
of the census sector in the recent past. For the years 1997-2000,
the census sector was limited only to factories employing
200 or more workers. From 2000-01 onwards, factories employing 100 or more workers were under the census sector.
For consistency in the analysis, we exclude the years prior to
2000-01 from our analysis, and focus on the period from
2000-01 to 2005-06.
Gross value added (Y) in real terms is measured by the double
deflation method. Output is deflated by the corresponding
wholesale price index of drugs and medicine, while the inputs
are deflated by the aggregate price index, constructed as the
weighted average of fuel price, material price, and other input
prices. Fuel price, material price, and other prices are constructed using wholesale prices, implicit deflators of national
account statistics, and weights taken from the Input-Output (I-O)
tables. The data sources used for the construction of the input
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Technical efficiencies are estimated for the panel data of plants


in the pharmaceutical industry in India over the years 2000-01
to 2005-06. Since we consider both the exiting and continuing
plants, the panel is unbalanced in this analysis. We have used
Coellis programme, FRONT4.1, for estimating the efficiencies,
and used the effect model of the programme to find the factors
behind the variation of efficiencies. Figure 1 shows the distribution of efficiencies of plants, which is positively skewed,
indicating concentration of plants at lower efficiency levels.
Figure 1: Frequency Distribution of Efficiency
250

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

It is generally believed that manufacturing units in the private


sector are more efficient than public sector units. The units
producing pharmaceutical products are classified in terms of
ownership and a comparison of their efficiencies are reported
in this section. There are six types of ownership, as defined by
CSO, namely, (i) wholly central government, (ii) wholly state
and local government, (iii) central and state government and/or
local government jointly, (iv) joint sector public, (v) joint sector
private, and (vi) wholly private. The number of wholly private
sector units in the pharmaceutical industry is much higher
than compared to other types of ownership. Table 2 reports
the values of mean efficiencies of units for different categories.
Table 2: Comparison of Average Efficiency (Over Time) of Pharmaceutical
Plants of Different Ownership Types during 2000-05
Type of Ownership

Mean

Wholly central government


8
Wholly state and/or local government 11
Central and state and/or
local government jointly
5
Joint sector public
8
Joint sector private
6
Wholly private ownership
716

.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

Efficiencies are averaged over the period for each plant.

The average efficiency figures show that the efficiencies of


the private joint sector units is the highest, and slightly higher
when compared to those of the private sector units. Dispersion
of efficiency in the private sector is maximum among these
categories of ownership. However, a similar value of standard
deviation is observed in wholly central and joint sector private
units. The wholly state government units and the units belonging to the public joint sector show poor performance in terms
of average efficiency. The distribution of average efficiency in
Table 3 suggests that most of the plants are concentrated at a
low efficiency value, irrespective of the ownership type. Values of
joint sector public plants show that 75% of the plants are at
the lowest efficiency level. Though we have observed that the
average efficiency of the wholly private plants is the highest
among the different ownership types, the distribution shows
that about 83% of the plants are at the lower ranges of efficiency.
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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

75.00 50.00 60.61 60.88


12.50 33.33 23.04 23.08
12.50 16.67 8.94
8.75
6.28 6.23
1.12
1.06

Trend of Efficiency

Table 4 describes the year-wise mean efficiency of plants and


their corresponding dispersion values. The number of plants
during this period are between 273 and 397, due to the entry
and exit of plants during each year. The figure of mean efficiency indicates that there is a rising trend of efficiency from
2000-05, with a marginal fall in 2004. However, it is interesting to note that there is also a rising trend of variances during
this period that indicates the existence of both low- and highefficiency plants in the latter period.
Table 4: Comparison of Efficiency of Pharmaceutical Plants during 2000-05
Year

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

The figures of year-wise efficiencies of the units in Table 5


show that units belonging to the private sector show a rising
trend throughout the period of study. However, the units belonging to other sectors show a mild downward trend during
the latter phase of our study. Thus, the above analysis reveals
that in terms of efficiency, the units that belong to the private
sector perform better than those in the state-managed sector.
Figure 2 (p 87) depicts the trends of efficiency of units in four different ownership categories during 2000-05. In this figure, we
have clubbed all the joint sector units into a single category.
Table 5: Year-Specific Comparison of Average Efficiency of Pharmaceutical
Plants of Different Ownership Type during 2000-05
Type of Ownership
2000

Wholly central government


Wholly state and/or local government
Central and state and/or local
government jointly
Joint sector public
Joint sector private
Wholly private ownership

2001

Years
2002
2003

2004

2005

.1762 .1625 .1824 .2125 .2745 .1946


.0952 .1197 .0826 .1818 .1481 .1510
.0654
.1571 .2366 .2912
.1177 .0545
.1711 .1755 .2231 .3072

.2189
.2137
.4740
.3024

.3084
.2013
.3078
.3034

Dynamics of Plants

The Indian pharmaceutical industry has seen steady growth


during the last three decades and has emerged as one of the
leading global partners in generic drugs. It has also registered
december 27, 2014

vol xlix no 52

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SPECIAL ARTICLE

central and state and/or local government joint ownership


have a lower percentage of discontinued plants and thus get
protection. Finally, Table 9 shows Table 9: Percentage Distribution
that the percentage of small-sized of Continuing and Discontinued
plants that discontinued their Plants in Different Size Groups
Discontinued Continuing
operation is much higher as comSmall
53.53
46.47
pared to the other two size
Medium
37.73
62.27
classes, namely, medium and large. Large
45.24
54.76
This indicates that small-sized Total
47.35
52.62
plants are more vulnerable than
compared to larger-sized plants and prone to exit the industry.

Figure 2: Comparison of Average Efficiency of Pharmaceutical Plants of


Different Ownership Type during 2000-05
0.35
Private
0.3
Joint Sector
0.25
Central Government
0.2

0.15
State Government

Location-Specific Analysis

0.1

0.05
2000

2001

2002

2003

2004

2005

evolutionary dynamics, driven by the survival, entry and exit


of plants. In this section, we try to understand if there is any
correspondence between this dynamic and the efficiency of
plants. Table 6 shows that the mean efficiency of the 357 discontinued plants during the total period of study is 0.1632,
while that of the 397 continuing plants is 0.2586. Naturally, we
can argue that a low level of efficiency is one of the causes of
the plants exiting from the industry. It is evident from Table 7
that this phenomenon is observed irrespective of type of ownership of plants. It has often been argued that the public sector
plants are better protected than the private sector plants, and
that the plants do not quit from the market or close down their
units even in the case of poor performance. However, this
story is not true in the pharmaceutical industry. It is observed
from Table 8 that a high percentage of public sector plants
discontinued their operations during the period of study.
However, the figures show that the plants belonging to the
Table 6: Comparison of Average Efficiency (Over Time) of Continuing and
Discontinued Pharmaceutical Plants during 2000-05
Plant Type

Discontinued
Continuing

Mean

Minimum

Maximum

Std Deviation

357
397

.1632
.2586

.0012
.0129

.8517
.9086

.1785
.2009

Efficiencies are averaged over the period for each plant.

Table 7: Comparison of Average Efficiency of Continuing and Discontinued


Pharmaceutical Plants of Different Ownership Type during 2000-05
Type of Ownership

Wholly central government


Wholly state and/or local government
Central and state and/or local government jointly
Joint sector public
Joint sector private
Wholly private ownership

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

Table 8: Percentage Distribution of Continuing and Discontinued


Pharmaceutical Plants of Different Ownership Type during 2000-05
Type of
Ownership

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

Economic & Political Weekly

EPW

Joint
Joint
Wholly
Sector Sector
Private
Public Private Ownership

87.50 16.67
12.50 83.33

december 27, 2014

47.07
52.93

vol xlix no 52

Total

47.35
52.65

We have already mentioned that the spread of the type of


industries in each state is not similar. Each state has its own
industrial policy, and though there is a broad agreement in the
policies of the states, their approaches are not always the
same. Recently, some state governments have taken measures
to promote industrial agglomeration. In April 2000, the Government of India released the special economic zone (SEZ) policy,
and the state governments then set to work on the building of
SEZs for pharmaceutical industries in the agglomerated areas.
Till date, 40 such pharmaceutical and biomedicine SEZs have
been approved in agglomerated areas.
Some industrial policies have been undertaken by the
Government of India for the development of backward regions
of the country, in terms of industrial development. Some
industries are identified as thrust industries for the development of those regions. The pharmaceutical industry is considered a thrust industry, and some proposals to provide incentives to this industry have been accepted in these industrial
policies. In these policies, fiscal incentives such as excise duty
exemption, exemption of income tax for companies, and capital
investment subsidies were granted to new and existing industrial units for their substantial expansion. A specific industrial
policy has been announced for the states of Himachal Pradesh
and Uttarakhand as the Himachal-Uttaranchal Policy,
and it has promoted industry agglomerations in both states
(Kamiike et al 2012).
According to Kamiike et al (2012), considering the degree
and age of agglomeration of the Indian pharmaceutical industry, the geographical locations are classified into four regions.
First, the agglomerated industrial area is classified into two
groups, the new or emerging area, and the established area,
based on the initial year of operation of the plants. According
to these criteria, Himachal Pradesh and Uttarakhand are considered as Area-1, which is the new area. The other agglomerated areas are classified into three sub-areas, according to
their age of operations. These are Area-2 (Delhi, Haryana, and
Punjab), Area-3 (Gujarat, Maharashtra, Goa, Daman and Nagar Haveli, and Daman and Diu), and Area-4 (Andhra Pradesh,
Karnataka, Tamil Nadu, and Pondicherry). Finally, Area-5 is
classified as other states of non-agglomerated area.
The mean efficiencies of pharmaceutical plants of different
regions are presented in Table 10 (p 88). It is observed that the
efficiency of the newly agglomerated area is the highest among
87

SPECIAL ARTICLE

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

Mean Minimum Maximum

.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

Efficiencies are averaged over the period for each plant.

The distribution of efficiency in different regions is


described in Table 11. The percentage figures indicate that
only 31.82% of plants of Area-1 fall in the lowest category of
efficiency, while the percentage of plants in that category
from the non-agglomerated area (Area-5) is 72.03%. The
second highest percentage of plants in this category is
70.69%, and belongs to Area-2. The distribution generally
suggests that the matured agglomerated areas and the nonagglomerated area are highly skewed in terms of the values of
efficiency. Table 12 shows the distribution of continuing and
discontinued plants in different regions. It is found that the
percentage of exiting plants is lowest in Area-1, while it is
highest in Area-2. The percentage of discontinued plants in
other areas is almost the same, around 47%. All these results
indicate a favourable effect of policies taken for the promotion of industrial growth and efficiency in the industrially
backward regions.
Table 11: Distribution of Average Efficiency of Pharmaceutical Plants in
Different Areas
Efficiency
Class

0.0-0.2
0.2001-0.4
0.4001-0.6
0.6001-0.8
0.8001-1

Himachal Pradesh, Delhi,


Uttarakhand
Haryana,
(Area-1)

31.82
36.36
6.82
13.64
11.36

70.69
18.97
6.90
3.45

Maharashtra, Andhra Pradesh, Others


Gujarat,
Karnataka,
(Area-5)
Punjab
D&D, D&NH Tamil Nadu
(Area-2)
(Area-3)
(Area-4)

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

Table 12: Percentage Distribution of Continuing and Discontinued Plants


in Different Areas
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

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

Factors Responsible for Variation of Efficiency

The above findings have emboldened us to find out the


variables that are responsible for the variation of the technical
efficiency of plants in the pharmaceutical industry, using
88

some rigorous econometric Table 13: Estimation of Frontier


Function (Effect Model)
methods. As pointed out, Production
Dependent Variable = Log Value Added
we have used the method Independent Variables
Coefficient
of Kumbhakar, Ghosh and Alpha
11.2657 (31.6266)
McGukin (1991) for our Log -capital
0.1903 (9.7673)
analysis in this section. Log- labour
0.5037 (14.5953)
0.8687 (22.2610)
We have used the Effect sigma-squared
0.7535 (20.3533)
Model for estimating the gamma
1,927
stochastic frontier and the No of observations
Figures in parentheses represent t-Statistics.
estimates of the parameters
considered for the analy- Table 14: Factors Responsible for the
Variation in Inefficiency (Effect Model)
sis. Table 13 shows that the Dependent Variable = Inefficiency
coefficients of labour and Variables
Coefficient
capital of the stochastic Intercept
5.3884
frontier production func- Continuity dummy
-0.1725** (-2.4572)
tion are highly significant. Skill
-0.5887** (-2.1385)
-0.00004** (-21.2168)
The coefficients, and the Wage rate
--1.7767** (10.9358)
corresponding t-statistics of Size dummy-1
-3.3800** (-14.5322)
the explanatory variables, Size dummy-2
are presented in Table 14. Ownership dummy -0.4946** (-3.5990)
Location dummy 1
-0.3155* (-1.6871)
This analysis explains the
Location dummy 2
0.4105** (3.2069)
inefficiency of the plants,
Location dummy 3
0.0254 (0.3302)
and all the variables are Location dummy 4
0.1814** (2.1832)
found to be highly signifi- Time
-0.1409** (-7.4075)
cant, except one dummy Log likelihood function
-2419.59
variable. We have consid- No of observations
1,927
ered the following effect * Indicates significance at 10% level; ** indicate
significance at 5% level.
variables for the analysis:
(i) Continuity Dummy = 0 for exiting or entering plants, = 1
for continuing plants
(ii) Skill = Employees other than workers/All employees
(iii) Wage Rate = Total emoluments/Number of employees
(iv) Size Dummy-1 = 1 for medium sized, =0 otherwise
(v) Size Dummy-2 = 1 for large sized, =0 otherwise
(vi) Ownership Dummy =1 for wholly private, = 0 otherwise
(vii) Location Dummy 1= 1 for Area-1, = 0 otherwise
(viii) Location Dummy 2= 1 for Area-2, = 0 otherwise
(ix) Location Dummy 3= 1 for Area-3, = 0 otherwise
(x) Location Dummy 4= 1 for Area-4, = 0 otherwise
(xi) Time points (1, 2, 6)
It is found from Table 14 that the continuity dummy is negative and highly significant. This indicates that the continuing
plants have a positive impact on the variation of efficiency.
Similarly, the coefficients of skill and wage rate indicate a positive influence on the technical efficiency of plants. This result
is very natural, since most of the pharmaceutical plants are
capital-intensive and the efficiency of these plants depends on
the handling of the machines by skilled workers and on the
efficiency of the managerial staff.
The coefficients of wage rates indicate that the higher the
wage rate, the higher will be the efficiency. The coefficients of
the size dummy indicate that there are economies of scale,
that is, large-sized plants are more efficient than smaller-sized
plants. The coefficients of the ownership dummy are also
highly significant, and it indicates that there is a positive
impact of private ownership on the variation of efficiency
december 27, 2014

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SPECIAL ARTICLE

of plants. The sign of the coefficients of location dummies


implies that the efficiency of newly agglomerated areas (Area-1)
is significantly high when compared to locations in Area-5
(non-agglomerated areas). Coefficients of location dummy 2
and 4 indicate that efficiencies of Area-2 and Area-4 are
significantly lower when compared to Area-5. Coefficient of
location dummy 3 is not statistically significant. However,
these observations, except the first one, are not very prominent in the analysis of mean efficiencies of different areas.
Finally, the coefficient of the time variable is significant and
it has a positive impact on efficiency, that is, efficiency is
increasing over time.
4 Some Concluding Remarks

It has been observed that the Indian pharmaceutical industry


was affected in a big way due to the implementation of the
policy of Process-cum-Product Patents during the last few
years. In addition, the policy of liberalisation of the Indian
economy in recent years created a dynamic environment for
the plants in the industry. The Indian pharmaceutical industry
is now facing competition in the home market, as well as
threats from multinational pharmaceutical companies. Such

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Financial Literacy in Rural Banking: Proposal for an Alternative Approach


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