This article investigates the impact of economic policy uncertainty (EPU) on foreign trade and investment into India relative to other macroeconomic factors with reference to the Indian pharmaceutical industry. It employs the Bayesian vector autoregression (BVAR) approach to construct a model and then study the said impact by the impulse response function (IRF) analysis. In a Bayesian procedure, the parameters are treated as random variables and their posterior distribution is estimated via the imposition of prior beliefs on their distribution, which makes the analysis more robust when combined with vector autoregression. The IRF analysis shows no substantial protracted impact of policy uncertainty, inflation and interest rates on the pharma exports. Also, inflation seems to have a more pronounced impact on FDI as compared to the interest rate changes contemporaneously.

The paper investigates the interrelationship between the exports (EXP) and foreign direct investment (FDI) inflows with reference to the Indian pharmaceutical industry.It employs the hierarchical Bayesian vector autoregression (BVAR) framework, which is known to generate accurate out-of-sample predictions by selecting appropriate amount of shrinkage and tighter priors. It also performs well in terms of accuracy of the impulse response functions in identified VARs. A unidirectional positive impact from FDI to EXP has been found from the impulse responses drawn from the BVAR model. This result is most likely because most of the Indian pharma multinational corporations (MNCs) infuse their foreign investments to boost EXP from India.

This paper analyses the impact of monthly changes in EPU index of India (constructed by Baker, Bloom and Davis in 2012) on the BSE Healthcare Index returns that is representative and consists primarily of the pharma sector stocks. Impulse Response Analysis is carried out to determine the response of BSE Healthcare Index returns to the shocks in the EPU Index. The paper has the objective to find out if there is a causal relationship between EPU index and the returns on the BSE Healthcare Index. The results show that there is evidence of a causal relationship between EPU index and the returns on BSE Healthcare Index as seen from the results of the Granger Causality tests and the Impulse Response Function analysis.