It is not clear what incentive structures Kant will suggest, but the most important one has to be to get the pricing policy right. (Representative image)

A massive run-up in the prices of various medicines after the coronavirus crisis deepened has got Indian policymakers scrambling for solutions. Prices of the common analgesic paracetamol are up 40% and the antibiotic azithromycin costs 70% more thanks to the disruption in the production of Active Pharmaceutical Ingredients (API) in China; APIs are the basic raw material for making medicines, and 80% of India’s APIs are imported from China. While the plan is to build enough local capacity for at least 58 APIs, and even develop API parks—with low-cost land, electricity, etc—NITI Aayog CEO Amitabh Kant has been asked to come up with a blueprint for action. It is not clear what incentive structures Kant will suggest, but the most important one has to be to get the pricing policy right. Just as India cannot get a cold chain for perishable farm produce until there are enough large food retail chains—it is only when there is adequate demand that supply chains get created—it cannot get viable API units till there are healthy pharmaceutical units to buy the API.

Yet, with the scope of India’s price controls under the Drug Price Control Order (DPCO) increasing over time, the pharmaceutical industry was forced to look for ways to keep cutting costs; one of the first casualties of this was the domestic API industry as China’s API was far cheaper. Indeed, as the 2017 draft pharmaceutical policy points out, price controls were put on even API and this proved to be disastrous: “The Drug Price (Display & Control) Order 1966 put 18 APIs (raw materials) under price control … from 1996 … imported APIs and intermediates started becoming hugely lucrative as a price cap on drugs forced the manufacturers … to obtain the cheapest raw material with the basic minimum efficacy/quality”. Ironically, the policy still plumped for price-capping.

And yet, as the latest Economic Survey points out, price capping hasn’t helped control prices of medicines either. As it puts it, “our estimates also show that the prices of drugs that came under DPCO 2013 increased on average by Rs 71 per mg of the ingredient … for drugs that were unaffected by DPCO 2013, the prices increased by Rs 13 per mg of the active ingredient”. Some years ago, a study by two IIM professors—one in Ahmedabad and one in Udaipur—and also one by IMS Health had found that sales of DPCO drugs fell while non-control drugs rose; this is also evident from the fact that, over time the share of domestic sales of Indian pharmaceutical firms has reduced as producers have preferred to raise output of drugs where there are no price controls.

To stimulate development of the Indian API industry, needless to say, the government will have to work on eliminating the disadvantages Indian producers face in terms of the cost of finance, tax rates (that is why they were slashed recently), the cost of land, electricity, etc. But, the biggest impediment has to be local price-control policy, so the NITI CEO has to ensure that the DPCO and the National List of Essential Medicines are either scrapped or, at least, drastically pruned; with India having some of the largest number of producers for most medicines, in any case, the competition is so strong, it keeps prices down to the minimum.