Determinants of Trade, Trade Advantage & Trade Competitiveness in Indian Pharmaceuticals.

AuthorVarshini, N.M.


Drugs and pharmaceutical industry plays a vital role in the economic development of a nation. It is one of the largest and most advanced sectors in the world, acting as a source for various drugs, medicines and their intermediates as well as other pharmaceutical formulations. Being an intensely knowledge-driven industry, it offers innumerable business opportunities for the investors and corporate the world over. The existence of well-defined and strong pharmaceutical industry is important for promoting and sustaining research and developmental (R&D) efforts and initiatives in an economy as well as making available quality medicines to all at affordable prices. That is, it is essential to improve the health status of the individuals as well as the society as a whole, so that positive contributions could be made to the economic growth and regional development of a country.

Pharmaceutical industry contributes to the welfare of humanity and provides significant socio economic benefits to the society through creation of jobs, supply chains and community development. Indian Pharmaceutical industry is one of the largest and most developed industries in the world. The country accounts for an estimated 10 percent of global production and 2 percent of world markets in pharmaceuticals. It has over the years made significant progress in infrastructure development, technical capability and hence produced a wide range of pharmaceutical products. The industry now produces bulk drugs under all major therapeutic groups.

It has been theoretically argued that both export and import may play a crucial role in the economic development. The theoretical and empirical studies mainly concentrate on either the relationship between export and growth or between import and growth or the association between export, import and economic growth. The Export-led Growth hypothesis (ELGH) assumes that export advancement is one of the key indicators of growth. The overall progress of countries can be achieved not only by mounting the quantity of manpower and investment within the economy, but also by increasing exports.

This study analyzes the determinants of balance of trade in real terms since it plays a vital role in national income accounts of a country and it appears in the GDP equation as net export. Trade balance is the difference between the monetary value of exports and imports in an economy over a certain period of time or simply the difference between what goods a country produces and how many goods it buys from abroad. The sum can take the form of a deficit if imports overweigh exports or a surplus if exports are more than imports or equivalent when the values of exports and imports are equal. This concept is known since the sixteenth century, but for these many centuries, economists have debated its significance without agreement. As a result they are divided between those who are for and against trade surplus and trade deficits. Those who believe that trade deficits are harmful, have often interpreted it as a sign of a country's economic weakness, and a source of increased and excessive foreign dependence, which is at the expense of domestic production and jobs. It also represents a sacrifice of future growth because the country purchases more than it produces, and investment in future growth is being traded for consumption in the present. Large trade deficits also create an environment conducive to financial crises that could damage the economy.

On the contrary, when a country's total annual exports exceed its total annual imports, it is said to have a trade surplus. This means that the country gets more resources than it spends; a situation that attracts foreign currency, and generates jobs in the exporting country. Thus, whether a country runs trade deficit or surplus is not by itself indicative of the strength of that economy or of its prosperity. Deficits are only good for transitional economies, and they are a sign of strength if they are accompanied by rising domestic investment and/or rising government expenditures on infrastructure. Trade deficits are linked to economic development due to imports of capital goods, raw materials, intermediate products among others. However when trade deficits arise on the current account, there is an equal and opposite trade surplus on the financial account of the balance of payments, which indicate that foreigners are purchasing domestic assets. Therefore trade deficits cannot be condemned wholly and even the economic theory dictates that a trade deficit is not purely bad as it will correct itself over time.

Analysis of determinants of trade openness is regarded significant since it also leads to better allocation of resources. When an economy opens up, components of comparative advantage force the economy to specialize in the sector for which it has better factor endowments. As a result, productivity of that sector goes up. The exports from that sector also increase which consequently boost growth. Lastly, trade openness also encourages technology transfer from developed to developing economies which leads to an increase in factor productivity and finally enhances growth. The investigators had considered this aspect also from the economics point of view.

Export diversification (or concentration) index is held to be important for developing countries because many developing countries are often highly dependent on relatively few primary commodities for their export earnings. Unstable prices for these commodities may subject a developing country's exports to serious terms of trade shocks. Since co-variation in individual commodity prices is less than perfect, diversification into new primary export products is generally viewed as a positive development. The strongest positive effects are normally associated with diversification into manufactured goods, and its benefits include higher and more stable export earnings, job creation and learning effects, and the development of new skills and infrastructure that would facilitate the development of even newer export products. Hence an effort was made in this study to...

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