Does R&D Intensity Matter for Trade Performance in case of Indian Pharmaceutical Industry?
Badri Narayan Rath
Though the global financial turmoil has dampened the growth momentum of India’s chemical sector, the effect of the crisis on pharmaceutical industry is lesser in comparison to other industries. The consistent demand for existing drugs for disease prevalence, growing ageing population, low R&D costs etc. are the major factors behind the insulation of pharmaceutical industry from the global crisis. Indian pharmaceutical industry, which had little technological capabilities and non-existent market in 1970s, has engraved a niche for itself in the pharmaceutical domain, today. The turnover of pharmaceutical industry in India has grown from Rs.1500 crores in 1980 to over Rs.78000 crores in 2008. The industry ranks fourth in terms of volume and thirteenth in terms of value in the world. The strategic government policies have changed the status of pharma industry from a mere importer to an innovative cost-effective producer with surplus trade balance in the global market. Despite all positive sides, Indian pharmaceutical industry still plays negligible role in terms of global competitiveness. The industry stands very low in terms of R&D intensity and labour productivity as compared to many of the developed countries like the US, Japan, Belgium and France. Although the trade performance of Indian pharmaceutical industry is quite impressive over the years, its export share in the global pharmaceutical export market is less than 1.5%. At the same time, the share of pharmaceutical export as a
Figure: R&D Intensity and Trade Balance of Pharmaceutical Industry
Source: R&D intensity has obtained using CMIE, Prowess Database, Exports and Imports data have been collected from RBI, Handbook of Statistics on Indian Economy, various issues.
percentage of India’s total manufactured exports is around 7% in 2007-08. Against the above backdrop, the linkage between R&D intensity and trade balance is definitely an important issue for the policy makers to address. Theoretically higher R&D intensity (R&D expenditure as a percentage of gross sales) will have a positive impact on trade balance. The higher the investment in R&D, higher would be the output and thereby exports will increase. Investing more on R&D will also increase the in-house technological capability of Indian pharmaceutical industry, which in turn, will reduce the import of sophisticated technology and raw materials. The figure exhibits a positive relation between R&D intensity and trade balance. The pharmaceutical industry in India demonstrates a surplus in trade balance due to relatively high exports as compared to its imports. As a consequence of rising trade balance, the export to import ratio has increased from 2.2 in 1990-91 to 5.1 in 2000-01. But after the period 2000-01, the ratio has declined drastically to 2.3 in 2007-08. This implies that though Indian pharmaceutical industry has significantly improved its R&D intensity from 0.2% in 1990-91 to 6% in 2007-08, but it may not sufficient to ensure a rising competitiveness in the global market. Therefore, the industry needs to increase its proportion of gross sales for R&D activities in order to play larger role in the global market. In a nutshell, the investment in R&D by industry is very low in India because of ample number of small size companies and risks related to profitability. Although, India has consistently increased its R&D expenditure and enjoyed a favourable trade balance in pharmaceutical products, its export share in the world market is still less than one and half per cent. In this juncture, it is important for the government to encourage the small and medium firms by providing low cost finance for research with subsidy facilities for indigenous research activities.