Pharma sector offers potential for high exports but India overly relies on China for drug ingredients

Over one-third of India’s finished pharmaceutical products are exported.

India has 2,000 enterprises supplying drugs from its facilities to the US. But 90% of these are exporters of cheaper generic medicines to international markets, and 90% of the finished drugs are imported from China. Over one-third of India’s finished pharmaceutical products are exported. Few other developing countries rely so heavily on imports for their healthcare. The problem is that India does not have that many manufacturers that could specialize in medical equipment or biotechnology — and, apart from imports, India does not have the means of assembling these products locally.

India also has one of the highest bankruptcy rates in the world, so there are a lot of US companies that would rather terminate their Indian supplier ties than face India’s multiple-claim creditor system. That’s why if India wanted to innovate, it would have to bring forward its antitrust initiatives and enact new regulations that protect companies from unreasonable action by rivals or competitors who might try to corner markets, forcing them to seek shelter in China. But India hasn’t been pursuing that strategy, and it remains too important to allow itself to be dominated by a single export competitor.

Our export performance contrasts with developing countries with far fewer advantages but also much lower costs: Taiwan has done a fantastic job of developing high-end, product-specific industries; Chile has turned out some of the world’s most advanced biotech and medical-device products. India’s failure to succeed in these areas is a major source of our dependency on China. But with a careful review of our dependence on China, we could also take some basic steps that might even allow us to become more competitive.

First, all of India’s advances in innovation are chipped away at, one at a time, by the Chinese. Second, that must change — we can’t rely on Chinese cheating to earn our progress. Third, our trade with China has to shrink. And fourth, if we can’t achieve the first three, we must create incentives in other sectors that would enable us to create some of our own.

Trade with the US doesn’t have to be a zero-sum game: India already has copious trade surplus with the US, and its trade with China is virtually no more than a consolation prize. Any trade pact should explicitly aim to shift it out of China. We also shouldn’t talk about trade as a zero-sum game in general — we need to keep the mood upbeat and purposeful.

Another opportunity could be to offer better trade terms to the developing world. India can make a special case, given its successful pharmaceutical exports. Even looking at just India’s current trade surplus, it’s easy to see how developing countries could be better off. Less than 15% of India’s trade is with the US, the European Union and Japan. A similar share is with China, even if India’s overall trade deficit with China is much larger. By contrast, almost 80% of Peru’s exports are with the US, 90% of Sri Lanka’s and 95% of Bangladesh’s. Countries that export a lot to China in volume have little leverage to negotiate better terms. On the other hand, a country that exports a lot to India has a much greater claim on India’s treatment — a case already being made by Malaysia and other Southeast Asian states.

Since most emerging-market countries have lower barriers to exports than India does, India has an opportunity to lower its barriers to exports and become a cheap alternative for foreign firms, in much the same way that Singapore does for tech firms. We can’t just shift the trade balance between India and China; India must also develop a strategy for improving its own exports. “Health and wellness” is on everybody’s list of priorities. If India wants to go down this path, we ought to cheer for her.

But to stay competitive, it must go beyond simply buying medications from China. First, India will have to adopt a free-trade agreement that provides a foothold for domestic players into the market — but one with very high and very open internal trade barriers. Second, it will have to deepen its trade with countries such as Thailand, Sri Lanka and Malaysia, reducing competition for Chinese goods with manufactured products. Third, it will have to expand exports in things like food and household appliances, since there are plenty of markets out there, outside of China, for those kinds of products, as there are in food.

After a decade of lifting production of basic medicines like those used in hospitals, India must also confront a rather unpleasant fact: With few domestic businesses able to make low-cost generic drugs, India simply can’t sell as

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