Capacity Utilisation in Indian Pharmaceutical Industry: A Non-Parametric Frontier Analysis

The present paper endeavours to analyse the production structure and provide the trends of Capacity Utilization (CU) in Indian pharmaceutical industry during the period 1980-1981 to 2017-2018 by using the non-parametric frontier analysis. Tobit regression analysis has also been used to examine the factors affecting variations in capacity utilization. For this purpose, the entire period has been divided into pre-reforms, post-reforms, pre-TRIPS (Trade Related Intellectual Property Rights) and post-TRIPS period respectively. The empirical analysis based on the econometric technique shows that the translog production function with capital using non-neutral technological progress represents the technological relationship in Indian pharmaceutical industry. The empirical results reveal that the Indian pharmaceutical industry is operating with an average excess capacity to the tune of 11.4 per cent during the entire study period. However, the comparative analysis of capacity utilization during the pre-reforms and post-reforms period reveals that the average excess capacity has marginally declined in the post-reforms period by about 0.50 per cent. Moreover, it has also been observed that the excess capacity in Indian pharmaceutical industry has decreased from 12.2 per cent in pre-TRIPS period to 9.9 per cent during the post-TRIPS period. Therefore, the result shows that both the economic reforms and implementation of TRIPS agreement has a favourable impact on the capacity utilization in Indian pharmaceutical industry. Further, the analysis for the factors affecting capacity utilization in Indian pharmaceutical industry reveals that the selected explanatory variables like skill and profitability in the industry significantly affect the capacity utilisation levels in Indian pharmaceutical industry. Therefore, it can be inferred that in the era of globalization Indian pharmaceutical industry has to comply with strict business standards and boost the level of investment in the Research and Development activities in order to expand and utilize the potential capacity during the post-TRIPS regime.