Living with price caps since 1960s

In a latest display of imposing policies merely to appease voters without considering the unseen consequences, the Government has enforced a price cap on drug eluting stents used in heart surgeries. This is not the first time prices of drugs or medical tools have been regulated in India. In this piece from the handbook of ‘Forum of Free Enterprise’, written in 1970, N.H. Israni, talks about how Price control is not the most effective way to curb rising prices and the ill consequences of attempting it.

Let us now analyse in a constructive manner what this Price Control means from the consumer’s point of view. There is no doubt whatsoever that there is an immediate gain to the consumer. Prices of various essential items have come down drastically and the anticipated loss of profit of about Rs. 15 crores per annum of the industry is the gain of the consumer. However, from the long-term point of view, the consumer would stand to lose (unless the situation is corrected in the near future).

First of all, the price control system is based on cost plus formula and there is no incentive for efficiency and reducing costs.

Secondly, as material costs by virtue of import substitution or canalisation through Government agencies, wages, Government taxes, etc. go up, prices of drugs must go up since there is no flexibility left.

Thirdly, since price increases will be resisted, there is no incentive for the industry to pass on the economies of scale for essential drugs to the consumer, particularly, as the Government, through the price control mechanism, has inhibited competition and has virtually created conditions which are inconsistent with some of the principles incorporated in the Monopolies and Restrictive Trade Practices Act.

Fourthly, the sword of price control hanging on the industry’s head, as experience in many other industries has shown, cannot generate an atmosphere of confidence, innovation and enterprise.

This is bound to affect the industry’s investment and growth, particularly in regard to basic and new drugs, which the people of our country would need in the coming years. Instead of making the country self-reliant, this must then lead to either shortages of drugs or increased imports, apart from affecting badly our fast developing exports of drugs.

Last but not the least, drug research and development are extremely sophisticated and expensive. I do not see how the industry can be expected to set up research unit.; and make heavy commitments for recurring expenses when its margins are squeezed and there is a real danger of further squeeze under political pressure. All this is not in the best long-term interest of the consuming public and the country’s economic and technological development in this important health sector. For some short-term gains, which could have been achieved in a more persuasive and voluntary manner, we have sacrificed our long-term interests. Instead of aiming to reduce drug prices in a selective, priority-oriented manner, we have created an instrument of compulsion which equally applies to essential and non-essential items and is based on various irrational considerations.

If we really wish to safeguard the long-term consumer interests, which is tied up with the country’s and the industry’s healthy development, then the following steps need to be taken.

(1) We must abolish the price control and create greater forces of competition instead of inhibiting competition through the price control mechanism. This competition can be intensified by allowing the industry to expand freely without any ideological considerations, particularly in the field of essential drugs, by permitting the industry to import its necessary requirements fully but on a competitive basis and by substantially improving the performance of the existing Public Sector units which supply various bulk drugs at high costs which must be reduced. This guided freedom to operate will also generate additional employment which we need most.

(2) We must encourage and not penalise cost consciousness and innovation in the industry. A lot has been done by the industry in these areas but a lot more can be done. We must learn to appreciate efficiency and not run it down.

(3) We must allow the industry to grow and make profits-and reasonably good profits ultimately to encourage basic research, especially in tropical disease problems: Research in drug industry is extremely sophisticated and expensive. Out of 3,000 compounds which have to be vigorously screened, hardly one comes out successful in the market. A worthwhile research unit of bare minimum size involves a capital cost of Rs. 2 to 3 crores and minimum recurring expenses of Rs. 50 to 60 lakhs. This kind of risky research is not financed by banks and can be indulged in only by large-size units having good profits-today and tomorrow. Research must ultimately bring better drugs, cheaper drugs and drugs which treat the tropical diseases of our people and those of the countries around us through export of Indian goods and technology.

(4) In any attempt either to bring down prices, to safeguard consumer interest otherwise or to seek any fruitful results, the industry in general must be looked upon with confidence as a necessary and responsible partner and all issues resolved in a persuasive manner rather than resorting to compulsion which should be applied only under exceptional circumstances and to those defaulters in the industry who are not prepared to fall in line with the desirable objectives which may be jointly agreed upon and pursued by the Government and the industry in general.

(5) We must examine the burden of direct and indirect taxes on drugs. Today, every rupee that we pay for drug includes about 22 paise or 22% as excise duties, central sales taxes, state sales taxes, octroi, licence fees, customs duties, etc. payable directly or indirectly at various steps. There is no reason why the drugs should be so heavily taxed and the burden increased almost every year.

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