Economic reform drove Indian pharma manufacturing boom

By Nick Taylor

- Last updated on GMT

Related tags: Capacity utilization, India

Liberalisation of Indian regulations in the early 90s caused a surge in manufacturing capacity but a dip in efficiency, research claims.

In 1991 India began an economic reform programme and abolished the license raj needed to set up a business. After increasing 78 per cent in the 1980s the economic capacity output of the Indian pharmaceutical industry accelerated following reforms at the start of the following decade.

Abolition of license raj during post-reform period paved the way for expansion of capacity​”, research in the Journal of Emerging Knowledge on Emerging Markets​ claims. In the decade following abolition of the license pharmaceutical economic capacity more than doubled, the researchers found.

However, analysis suggests expansion cut efficiency. “Conclusive inference can be drawn in that liberalisation has its significant negative impact on capacity utilisation during post-reforms period​”, the research claims. Expertise gained over this period will help Indian in the coming decade though.

India’s strength lies in process development skills. This expertise utilised within the WTO (World Trade Organization) framework with emphasis on quality standards will provide India a competitive advantage over other Asian countries​”, the research concludes.

Estimating output

The researchers estimated economic capacity and its use by looking at labour, energy and capital inputs from 1979 to 2008. Analysis of these inputs allowed the researches to estimate the most cost-effective level of production and compare it to their calculation of the actual output in a given year.

In the early 1990s utilisation improved but dipped in the second half of the decade as capacity expansion outstripped growth in demand. “Removal of industrial licensing restriction might have encouraged the entrepreneurs to invest more and expand their plant capacity​”, the researchers said.

Demand deficits, labour problems, transport bottlenecks, failures in power supply, mechanical or maintenance troubles, and strikes are suggested as reasons for under-use of capacity in India.

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