HS 300439 : Study of trade indicators and

Policy Recommendations

IIFT MBA IB (Weekend) | 2015-18 | GROUP #03

Roll No Name

20 Mohammad Nadeem Badr

22 Neeraj Kumar Sharma

28 Ramrao Patil

31 Saurabh Verma

19 Kshitij Bansal

1

Contents 1. INTRODUCTION ................................................................................................ 2

2. OBJECTIVE ...................................................................................................... 3

3. TRADE INDICATORS ............................................................................................ 4

A. ANALYSIS OF INDIA’S OPPORTUNITIES IN A MFG PRODUCTS & IDENTIFY THE RIGHT MARKET ....... 4

B. RCA ANALYSIS ................................................................................................. 8

C. TARIFF BARRIERS IN THE MARKETS ......................................................................... 10

D. EXPORT SPECIALIZATION INDEX & TRADE BALANCE.................................................... 10

E. INTRA INDUSTRY TRADE .................................................................................... 12

F. CMS ANALYSIS ............................................................................................... 13

4. POLICY RECOMMENDATIONS ............................................................................... 15

A. GROW EXPORT TO USA .................................................................................... 15

B. FDI IN PHARMA SECTOR .................................................................................... 15

C. CONSOLIDATION PHARMA SECTOR ........................................................................ 16

D. SHIFT FROM GENERIC TO SPECIALIZED PRODUCTS ...................................................... 16

APPENDIX A ......................................................................................................... 17

2

1. Introduction

Global generic market is estimated to be of size $ 294 billion. The market grew 2015

approximately by 4% as Per IMS (World renowned market audit agency) data.

India, a predominant player in Global Generic market has clocked $ 12.6 billion of Exports out of

this $ 294 generic market with a growth of 12.8% during the year2015-16.

Following table shows the progress of India’s exports of Pharmaceuticals during the last two

years.1

India’s Exports of Pharmaceuticals Category wise in $ mn

Category 2015 2016 Growth %

Ayush 118.46 108.76 -8.19

Bulk Drugs & Drug Intermediates 3564.57 3585.05 0.57

Drug Formulations & Biologicals 11214.16 12645.51 12.76

Herbal Products 236.41 249.84 5.68

Surgicals 299.46 300.02 0.19

Grand Total 15433.06 16889.18 9.44

India has a market share of almost 30% of Generic market size of Africa and Middle East put

together. Region of North America has contributed over 33% to India’s pharmaceutical exports

and has grown by a 26% in Fy-16 which is highest when the data is plotted by regions as

reported by DGCIS.

Indian pharmaceutical sector accounts for about 2.4 per cent of the global pharmaceutical

industry in value terms and 10 per cent in volume terms and is expected to expand at a

Compound Annual Growth Rate (CAGR) of 15.92 per cent to US$ 55 billion by 2020 from US$

20 billion in 2015.

With 71 per cent market share, generic drugs form the largest segment of the Indian

pharmaceutical sector. By 2016, India is expected to be the third-largest global generic Active

Pharmaceutical Ingredient (API) merchant market. The country accounts for the second largest

number of Abbreviated New Drug Applications (ANDAs) and is the world’s leader in Drug

Master Files (DMFs) applications with the US.

1 http://www.pharmexcil.com/content/pharmexcil-research-publications/223/57880ed74e7cde1c703c2d1505335dfc (annual report - Accessed on 22nd Jan 2017)

3

Indian drugs are exported to more than 200 countries in the world, with the US as the key

market. Generic drugs account for 20 per cent of global exports in terms of volume, making the

country the largest provider of generic medicines globally and expected to expand even further

in coming years.

The Government of India plans to set up a US$ 640 million venture capital fund to boost drug

discovery and strengthen pharmaceutical infrastructure. The ‘Pharma Vision 2020’ by the

government’s Department of Pharmaceuticals aims to make India a major hub for end-to-end

drug discovery.2

Pharma domain is represented by HS30 code and HS3004 is for medicaments nesoi, mixed or

not, in dosage.

HS300439 code is for medicaments containing hormones or steroids used as hormones but not

antibiotics, put up in measured doses "incl. those in the form of transdermal administration" or in

forms or packing for retail sale (excluding medicaments containing insulin or corticosteroid

hormones, their derivatives or structural analogues)Show a less detailed product description.3

2. Objective

The purpose of the present study is to following trade analytics indicators for HS Code 300439

(at 6-digit level) using data sources such as Trade Map, WITS.

Specific objective are:

1. Analyze India’s opportunities in a manufacturing product within pharmaceutical sector (HS

30) at 6-digit level (HS30439 selected).

2. Identify the right markets with help of Trade Map

3. Compare RCA patterns of India with the key markets and analyses the competitiveness of

the country vis-à-vis leading markets

4. Check the tariff barriers in the markets

2 http://www.ibef.org/industry/indian-pharmaceuticals-industry-analysis-presentation 3 http://www.cybex.in/indian-custom-duty/details.aspx?HSCODE=300439

4

5. Analyze the Export Specialization Index and Trade Balance

6. Determine the type of trade India is having with select partners (IIT)

7. Find whether these markets offer the right market-mix for India through CMS analysis

And based on analysis draw appropriate policy conclusions.

3. Trade Indicators

This section shall cover all trade indicators.

a. Analysis of India’s opportunities in a Mfg products

& Identify the right market

Using trademap data, we identified top 8 markets for HS300439 product. As observed, USA has

16% share export market of product, followed by UK and Russia. Singapore and Nigeria

continue to show growth.

Importers

Value exported in 2015

(USD thousand)

Share in India's exports

(%)

Quantity exported in 2015 (tons)

Unit value (USD/unit)

Growth in exported

value between

2011-2015 (%, p.a.)

Ranking of partner

countries in world imports

Share of partner

countries in world imports

(%)

Total imports

growth in value of partner

countries between

2011-2015 (%, p.a.)

Average tariff

(estimated) faced by India (%)

United States of America 10324 16.2 160 64525 10 1 23.2 6 0

United Kingdom 6905 10.8 167 41347 21 6 4.7 -7 0

Russian Federation 4444 7 138 32203 -42 14 1.6 -7 4.5

Singapore 4140 6.5 35 118286 31 49 0.2 40 0

Nigeria 3025 4.7 226 13385 2 69 0.1 2 0

Hong Kong, China 2246 3.5 18 124778 61 45 0.2 3 0

Australia 2224 3.5 38 58526 6 15 1.1 -11 0

Sri Lanka 2130 3.3 78 27308 17 121 0 -1 0

Following is graph reflect change in importing market for product HS300439 exported by India.

5

In recent years, USA has shown reduction in imported value – which shows needs to diversify to

other markets for this specific product.

Following graph display prospect for market diversification for product HS300439. USA is our

largest customer. Australia & Turkey are showing prominent growth in import demands for

product. We can also grow United Kingdom to close gap between import leader country - USA.

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We should verify tariff for these two markets as except Russia – top 4 markets have 0 tariff

applied on product HS300439.

Following graph display growth in demand for product HS300439. Malaysia, Uzbekistan,

Singapore are top 3 growth market based on demand. Singapore has 0 tariffs for this product

and thus India should focus on Singapore as target market.

We also see decline in USA, UK and Russia – which are currently top 3 markets for HS300439.

Iran and Islamic republic show growth in demand but these countries has 34.5% tariff - hence it

shall be challenge for India to export product to this market.

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In following table, we studied USA market – which is India’s largest market for HS300439

product. As observed from graph, there is large potential for India to grow its USA market.

Currently India owns <1% of USA Import market for product.

USA Pharma continues to highly regulated market and is tough to enter or grow. Further

intervention from government as well as quality products from companies could help it grow

further.

Year

India's exports to USA

USA imports from World

India's exports to world

India's share in USA’s Imports

2008 8720 2739784 36436 0.32%

2009 11026 2528241 45416 0.44%

2010 6205 3420682 47826 0.18%

2011 5940 4018516 66617 0.15%

2012 35357 4621271 108101 0.77%

2013 35833 4275996 83226 0.84%

2014 29162 4383293 78323 0.67%

2015 10324 5423766 63780 0.19%

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b. RCA Analysis

RCA attempts to explain the observed pattern of inter-industry trade in an indirect

manner, as relative prices noted in theoretical models is not observed in real world.

RCA indices use the trade pattern to identify the sectors in which an economy has a

comparative advantage, by comparing the country of interests’ trade profile with the

world average.

Takes a value between 0 and +∞. A country is said to have a revealed comparative

advantage if the value exceeds unity.

We compared India with two major exports of HS300439 product i.e. Belgium and

Switzerland. We found that for this product, India do not have competitive advantages

compared to these two world leaders. India’s RCA value is less that unity/cut-off value.

0

1000000

2000000

3000000

4000000

5000000

6000000

1 2 3 4 5 6 7 8

Axi

s Ti

tle

India Export v/s USA Import

India's exports to USA

USA imports from World

India's exports to world

9

Year India Belgium Switzerland Cutoff

2006 0.1847 1.2171 8.8246 1.0

2007 0.2415 2.3973 9.0941 1.0

2008 0.2169 2.4749 7.9953 1.0

2009 0.2092 2.9638 6.0044 1.0

2010 0.2239 4.6006 8.7793 1.0

2011 0.2237 4.0622 8.6948 1.0

2012 0.3828 5.3325 6.5164 1.0

2013 0.2184 6.4369 5.1448 1.0

2014 0.2143 5.2168 6.4856 1.0

2015 0.2077 6.1154 6.9819 1.0

0.0000

1.0000

2.0000

3.0000

4.0000

5.0000

6.0000

7.0000

8.0000

9.0000

10.0000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

RC

A I

nd

ex

HS300439 RCA

India

Belgium

Switerzland

Cutoff

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c. Tariff barriers in the markets

Following table contains India’s top 9 markets for product HS 300439. Except for Russia and

Myanmar, rest of countries offer 0 tariff rates for Product. Russia and Myanmar apply 4.5 and

1.5% of tariff respectively – which are relatively small market but growth potential markets.

Sr. Importers Share of partner

countries in world imports (%)

Total imports growth in value of partner countries between 2011-

2015 (%, p.a.)

Average tariff (estimated) faced by

India (%)

1 United States of

America 23.2 6 0

2 United Kingdom 4.7 -7 0

3 Russian

Federation 1.6 -7 4.5

4 Singapore 0.2 40 0

5 Nigeria 0.1 2 0

6 Hong Kong,

China 0.2 3 0

6 Australia 1.1 -11 0

7 Sri Lanka 0 -1 0

8 Uganda 0 -17 0

9 Myanmar 0 15 1.5

d. Export Specialization Index & Trade Balance

For HS 300439, Belgium, Switzerland and Germany are top 3 world exporter countries. India

contributes about 0.2% of world trade. Here is Export specialization index and trade balance is

calculated between India and Germany.

Value in 2006 Value in 2007 Value in 2008 Value in 2009 Value in 2010

India Export to Germany 307 881 184 6 901

India Total Export to Germany 3851693 4726289 5915161 5848329 5989522

Germany Export to India 4544 4720 3673 4362 3412

Germany Total Export to India 8004414 10130046 12002444 11197322 12261064

0.00008 0.00019 0.00003 0.00000 0.00015

0.000568 0.000466 0.000306 0.00039 0.000278

Export Specialization India 0.14 0.40 0.10 0.00 0.54

Trade Balance -4237 -3839 -3489 -4356 -2511

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Value in

2011 Value in

2012 Value in

2013 Value in

2014 Value in

2015

India Export to Germany 509 442 3540 2551 655

India Total Export to Germany 8260406 7133757 8081320 7745249 7023455

Germany Export to India 7773 4567 4093 5212 4350

Germany Total Export to India 15211502 13445408 12219924 11884510 10870848

0.00006 0.00006 0.00044 0.00033 0.00009

0.000511 0.00034 0.000335 0.000439 0.0004

Export Specialization India 0.12 0.18 1.31 0.75 0.23

Trade Balance -7264 -4125 -553 -2661 -3695

Year Export Specialization Index of India Cut-Off

2006 0.14 1.00

2007 0.40 1.00

2008 0.10 1.00

2009 0.00 1.00

2010 0.54 1.00

2011 0.12 1.00

2012 0.18 1.00

2013 1.31 1.00

2014 0.75 1.00

2015 0.23 1.00

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

ESI

ESI India

Export SpecilizationIndex of India

Cut-Off

12

India is below cut-off of ESI – which means, India require tremendous investment in terms of

quality, economics of scale and government intervention in terms of Free trade agreement

policy with various largest importer countries.

e. Intra Industry Trade

The sectorial intra-industry trade (IIT) is a measure of the degree to which trade in a

particular sector represents intra-industry trade (based on scale economies and/or

market structure). By engaging in IIT, a country can reduce the number of similar goods

it produces, and benefit from scale economies. Higher IIT ratios suggest that these

sources of gains are being exploited. It may also indicate that adjustment costs would

be lower with trade expansion.

The IIT index measures the degree of overlap between imports and exports in the same

commodity category, with a value of 1 indicating pure intra-industry trade and a value of

0 indicating pure inter-industry trade

The index ranges from 0 to 1, with zero indicating pure inter-industry trade, and one

indicating pure intra-industry trade.

As can be observed from data, India continues to have reduction in IIT value – i.e. shift

from inter-industry trade to intra industry trade.

Year reporter partner HS Code (Pharma)

IIT(Sectorial)

2007 India United States

30 0.12

2006 India United States

30 0.16

2005 India United States

30 0.23

2004 India United States

30 0.16

2003 India United States

30 0.16

2002 India United States

30 0.18

2001 India United States

30 0.47

2000 India United States

30 0.49

1999 India United States

30 0.45

13

1998 India United States

30 0.5

1997 India United States

30 0.53

1996 India United States

30 0.33

Trade Intensity

We can think of the trade intensity index as a uniform export share. In other words, the statistic

tells us whether or not a region exports more (as a percentage) to a given destination than the

world does on average. It is interpreted in much the same way as an export share. It does not

suffer from any ‘size’ bias, so we can compare the statistic across regions, and over time when

exports are growing rapidly.

The trade intensity statistic is the ratio of two export shares. The numerator is the share of the

destination of interest in the exports of the region under study. The denominator is the share of

the destination of interest in the exports of the world as a whole.

It takes a value between 0 and +∞. Values greater than 1 indicate an ‘intense’ trade

relationship.

The trade intensity index takes the ratio of the trade share of the source and the world trade

share to the same destination. It takes a value between 0 and infinity, with value greater than 1

indicating the export relation is greater than average.

year 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998

Trade intensity

1.55 1.19 0.6 1.2 1.04 1.22 0.67 0.32 0.27 0.56

f. CMS Analysis

Constant Market Share analysis theory states that, over time, a country’s share of world’s

markets should remain unchanged. But in reality, there are fluctuations in market share over

time and the CMS model is a statistical quantification of the structural and market deviations.

It was developed by Tyszynski (1951) and later followed by others.

Constant Market Share (CMS) analysis is a technique for decomposing the growth in a

country’s exports into components that correspond to holding its market shares constant at

various levels.

14

The theoretical foundations of CMS analysis is drawn from the idea that demand for exports in a

given market from competing sources are a function of the relative prices. The theory suggests

that export shares will remain constant except the case when the relative prices vary. So,

changes in exports beyond the constant share norm can be attributed to price changes - or

changes in the level of ‘competitiveness.’

Since the imports of different countries grow at different rates, the geographical distribution of a

country's exports may also affect the overall export growth of the country.

It decomposes reasons for changes in %share of exports into following factors.

World Growth, Commodity Effect, Market Effect and Residual Competitiveness Effect

Here is two level break-down of exports of HS3004 code for India’s largest Pharma market

USA.

As can be observed from exports are largely (70%) due to growth in USA market and ~12% by

product category. Rest of ~17% is due to residual competitiveness effects.

It means, USA market demand largely contribute to demand of HS3004 Products but India can

do well to provide facilities to Pharma sector to improve its competitiveness in World market.

India Exports to USA (USD$) USA Import from World (USD $)

X0 (2014) X1 (2015) M0 (2014) M1 (2015)

Total 55218257 64396003

'300490 3042446 3936257 39779651 48234515

'300420 373737 433583 1202351 1447176

'300410 201990 108508 508916 507970

'300431 23628 33801 4934108 4061786

'300450 18521 32835 193562 97034

'300440 8423 11471 2224083 2379884

'300439 29162 10324 4383293 5423766

'300432 1442 635 1992293 2243872

15

M mi X1-X0 mX0 mi-m (mi-m)X0 miX0 Xi-Xo-miXo

0.166208542

0.212542 893811 505680.5 0.046334 140968.4 646648.9 247162.1102

0.203622 59846 62118.28 0.037413 13982.76 76101.04 -

16255.03957

-0.00186 -93482 33572.46 -0.16807 -33947.9 -375.47 -93106.5303

-0.17679 10173 3927.175 -0.343 -8104.47 -4177.29 14350.29491

-0.49869 14314 3078.348 -0.6649 -12314.6 -9236.29 23550.29167

0.070052 3048 1399.975 -0.09616 -809.928 590.0462 2457.953755

0.237372 -18838 4846.974 0.071164 2075.282 6922.255 -25760.2554

0.126276 -807 239.6727 -0.03993 -57.5826 182.0901 -

989.0901434

868065 614863.4 101791.9 151409.7351

100.00 70.83 11.73 17.44

Total Growth Product RCE

4. Policy Recommendations

a. Grow export to USA

The United States has one of the world’s most supportive domestic environments for the

development and commercialization of pharmaceuticals with minimal market barriers. Its

strengths include an intellectual property system that rewards innovation through patent and

data protection, a science-based regulatory system that is considered the most rigorous in the

world, the world’s largest scientific research base fostered by academic institutions and decades

of government research funding, and robust capital markets.

In recent years, several of Indian companies’ mfg sites were banned due to lack of quality,

certifications, procedures followed. Government should setup a world-class manufacturing

certification authority and ensure each year, it urge companies to quality certify these

manufacturing sites.

b. FDI in Pharma Sector

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While continuing with 100 per cent FDI in the pharmaceutical sector, the government on

Monday allowed foreign investors to pick up to 74 per cent equity in domestic pharma

companies through the automatic route — a change aimed at making the investment process

easier4. This has resulted in further fund availability to existing players and will allow investment

in R & D. Recently there is surge in foreign player acquisition by Indian companies. It is due to

following factors

1. Entry to foreign market due to strict regulations

2. Cost of new product discovery is quite high and risky. Thus buyout of existing products is

relatively cheap. i.e. Pfizer has reduced its investment in R &D

The drugs and pharmaceuticals sector attracted cumulative FDI inflows worth US$ 13.85 billion

between April 2000 and March 2016, according to data released by the Department of Industrial

Policy and Promotion (DIPP).5

c. Consolidation Pharma sector

Indian pharmaceutical industry is fairly fragmented with top 10 companies contributing to

41% of total sales. The next ten companies contribute to 22% of sales while the remaining

companies contribute to 37% of the total sales.6 In order to take benefits of scale of

economics, there should be consolidation in Indian Pharma sector.

Government should offer guidelines for consolidation – like it has offered in case of Telecom

Domain.

d. Shift from Generic to Specialized Products

The Indian pharmaceuticals market is the third largest in terms of volume and thirteenth

largest in terms of value, as per a report by Equity Master. India is the largest provider of

4 http://indianexpress.com/article/business/economy/fdi-in-pharma-india-fdi-policy-narendra-modi-2865482/ (Accessed on 22nd Jan 2017) 5 http://www.ibef.org/industry/pharmaceutical-india.aspx (Accessed on 22nd Jan 2017) 6 http://www.business-standard.com/content/b2b-chemicals/success-strategies-for-indian-pharma-industry-in-an-uncertain-world-114021701557_1.html (Accessed on 22nd Jan 2017)

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generic drugs globally with the Indian generics accounting for 20 per cent of global exports

in terms of volume.

The Indian pharma industry, which is expected to grow over 15 per cent per annum

between 2015 and 2020, will outperform the global pharma industry, which is set to grow at

an annual rate of 5 per cent between the same period. The market is expected to grow to

US$ 55 billion by 2020, thereby emerging as the sixth largest pharmaceutical market

globally by absolute size.

Branded generics dominate the pharmaceuticals market, constituting nearly 80 per cent of

the market share (in terms of revenues). It is time to shift from generic to specialized

products – for higher margins.

Appendix A

Hereby enclosed is data used in all above trade indicators. Sources such as Trademap7 and

ESCAP8 were used to retrieve information for HS 300439 (Pharma Product).

Trade Indicator File details

RCA

RCA_HS300439Data.x

lsx

Export Specialization and Trade Balance

ES_Index.xlsx

New Market Opportunity

Trade_Map_-_List_of

_importing_markets_for_the_product_exported_by_India_in_2015.xls

Trade_Map_-_List_of

_importing_markets_for_a_product_exported_by_India.xls

CMS

CMS_Product_level_H

S300439.xlsx

7 http://www.trademap.org/Bilateral_TS.aspx (Accessed on 21-22 Jan 2017) 8 http://artnet.unescap.org/APTIAD/iti_home.aspx (Accessed on 22 Jan 2017)