Heard often is a rumour that India is a country that
has been cautious in liberalising its economic policy. As a consequence,
it is argued, the country has been saved from the many difficulties
and crises that have afflicted many other nations, developed and developing.
However, for those closely following the evolution of Indian economic
policy since 1991 the basis for these rumours is unclear. Liberalisation
in India has indeed been slow on occasion because of the fortunately
messy complexity of a democratic polity. It has also been slackened
by the loss of popular support and social sanction for the country's
still dominant, ''centrist'' formation, the Congress. But these have
not held back the ideologues and advocates of so-called ''reform''.
Over the last decade, if there is a common element in policy, that has
been the near continuous pursuit of liberalisation, despite the restraints
that the country's history and polity and the poverty and deprivation
of its population set on the process.
The net result has been the liberalisation of policy across the board,
ranging from restraints on trade and foreign investment to controls
on investment, production and prices. India today is among the more
liberal of developing economies, despite the presence of a plethora
of toothless or ignored instruments of control. And, the process still
continues.
Among the more recent instances of liberalisation being pursued even
when controls have served the country well, are policies on patents,
foreign investment and pricing in India's pharmaceutical industry. It
is widely accepted that regulation and control in India's pharmaceutical
sector had resulted in a situation where the country had managed to
ensure access to cheap medicines for its population, with no damaging
shortfalls in the domestic availability of life-saving and other crucial
drugs. Besides the normal controls that had characterised India's regime
of intervention aimed at reigning in markets and directing development,
there were three sets of measures that were particularly important in
the pharmaceutical sector. The first was India's decision to require
leading foreign firms operating in its markets to dilute their foreign
shareholding to 40 per cent of total equity. Though these transnationals
dragged their feet when complying with this requirement and finally
did so only by creating a wide shareholding structure that allowed the
retention of foreign control, the measure did restrain their power and
enhance the transparency of their operations.
Second, India's early position on patents, that recognised process patents
and not product patents, had a salutary effect on drug availability
and pricing. Indian scientists and engineers had the capability not
just to de-synthesize patented drugs to identify their chemical composition,
but also to find alternative process routes to manufacture them. This
ensured that the production of medicines with important therapeutic
qualities could not be monopolised and that monopoly exploited by foreign
patent holders. Drugs were not just available in adequate quantities,
but at reasonable prices too. In the event, the foreign firms, rather
than lose out on India's large market chose to stay on and market their
own versions, even if at prices much lower than those they commanded
in markets abroad.
Finally, starting from 1963, the government through its drug price control
policy, set ceilings on the prices that could be charged on different
drugs. Those ceilings were cost-plus prices, accounting for costs of
production and adding on a margin, with the focus of control being the
''essentiality'' of a bulk drug or a formulation. The control on prices
formalised the government's policy of keeping essential and life-saving
drugs affordable, even while seeking to provide a ''reasonable'' return
to producers, both foreign and domestic. India's success in implementing
these policies was helped by the large size of its market, even if a
substantial share of that market was supported by the ''out-of-pocket''
expenditure of individual consumers, as opposed to state expenditures
on provision of health services. A large market made aggregate profits
significant even when profit margins were capped.
This was not to say that the powerful transnational firms did not fight
back and seek ways of circumventing controls. They delayed equity dilution,
they attempted to stall drug replication through alternative routes,
they spent huge sums trying to win over doctors who made the consumption
decisions for patients, and they used mechanisms such as ''transfer
pricing'' to escalate costs in order to conceal and transfer profits
abroad. Transfer pricing involved the sale at inflated prices (when
compared with available substitutes) of intermediates and bulk drugs,
by the parent company or its third-country subsidiary, to the Indian-arm
of the parent. Since margins under the price control regime had to be
added on to ''cost'', final product prices too were inflated through
this process, with those prices including profits that were concealed
as costs and transferred to some segment of the global operations of
transnational firms. These strategies notwithstanding, India's regulatory
regime in this sector was a great success.
Given this history, one would expect that a cautious policy of ''liberalisation''
would leave untouched policies with regard to the pharmaceutical industry.
Why tamper with a regime that has not created problems such as shortages,
has prevented exploitative pricing and has, in fact, been recognised
as a resounding success? Yet, liberalisation has been pursued here too.
The first casualty in such liberalisation was, of course, the patent
regime. The argument in favour was that India did not have an option.
To be a member of the world's multilateral trading regime and the World
Trade Organisation, it had to sign on to the Uruguay Round agreement
and the intellectual property regime it embodied. This required, among
other things, the acceptance of product patents. There is, however,
no evidence that India led the fight to limit the damage to developing
countries on this count, or demanded suitable exceptions in an area
impinging on the people's health. The net result was that the earlier
flexibility domestic manufacturers had, to look for an alternative process
to replicate old and new patented drugs for the domestic market, no
more exists. As a result, the danger of drug price inflation due to
monopoly was now real and already visible in the case of patented drugs.
There are, however, two other ways in which the indigenous drug industry
can continue to play a positive role in ensuring the availability of
reasonably-priced medicines. The first is by entering the production
of drugs that go off patent protection because of having crossed the
period for which patent protection is valid. Domestic firms can create
generic versions of these drugs that can compete with branded products
to bring down prices. There are a large number of drugs, estimated to
constitute a significant share of domestic drug consumption, that are
slated to go off patent over the coming years. So even this limited
flexibility could make a significant difference.
But here, fears are being expressed that one aspect of the liberalised
policy of the government could prove an impediment. In 2000, the policy
with regard to foreign direct investment (FDI) in the pharmaceutical
industry was liberalised. Under the new policy, FDI in the sector was
brought under the ''automatic route'', and the ceiling on foreign shareholding
was removed allowing for foreign ownership of up to 100 per cent. The
net result has been a spate of acquisitions of leading drug firms by
foreign producers. Among the recent acquisitions by transnational firms
have been the takeovers of Matrix Lab by Mylan, of Dabur Pharma by Fresenius
Kabi, of Ranbaxy by Daiichi Sankyo, of Shanta Biotech by Sanofi Aventis,
of Orchid Chemicals by Hospira and of Piramal Healthcare by Abbott.
An overwhelming proportion of recent FDI inflows into pharmaceuticals
production has been in such acquisitions rather than in greenfield projects.
What this does is that it places domestic capacities and capabilities
that could have served as competitors to foreign producers in foreign
hands. Besides the fact that this would influence pricing, given the
oligopolistic position and the global strategy of these firms, it could
lead to a decline in the production of generics. Firms with patents
for new formulations targeted at diseases that can also be treated by
off-patent generics may choose after acquisition to hold back on the
production of such generics or raise their prices to protect branded
products.
The implication of this is that with the liberalisation of FDI policy,
the effort to keep medicines affordable has become even more dependent
on price control. It is in this context that the recently released draft
National Pharmaceuticals Pricing Policy , 2011 gives cause for concern.
Ever since 1994, market criteria have been introduced into the drug
price control policy. As of then, commodities chosen for price control
were identified on the basis of the total turnover of the drug concerned
in the domestic market and the share of leading producers in that market.
So it was not so much ''essentiality'' as defined by the nature of the
disease for which the drug was relevant and the characteristics of the
population predominantly afflicted by that disease that rendered it
eligible for price control. Rather it was the size in value of the market
for a drug and the degree to which its production and sale was concentrated
that mattered. This did mean that medicines for the rich that were expensive
but could be afforded by them could be included under price control,
whereas some medicines important for the poor may be excluded. The dilution
did push up prices in the case of quite a few drugs. However, where
imposed, the ceiling price was determined by the cost of production
plus a margin for post-production expenses and profit.
But now, on the grounds of expanding the drug price control list, the
government is choosing to dilute price control even further. The draft
policy claims to be concerned with reverting to the essentiality criterion
(defined as the inclusion by experts in the National List of Essential
Medicines) as opposed to the economic criterion or market share principle.
In the process, drugs constituting a much higher 60 per cent of the
domestic market are reportedly to be brought under price control. However,
according to the All-India Drug Action network, the list of the top-selling
300 medicines prepared in October 2003 by ORG-Nielsen accounted for
more than Rs.35,000 crore of sales, which amounts to almost 90 per cent
of the retail market. Yet, at least 60 per cent of these top-selling
300 medicines are not in the National List of Essential Medicines (NLEM).
Moreover, on the grounds of the complexities involved in regulating
the prices in such a large section of the industry, the draft policy
recommends a shift away from cost-based pricing to market-based pricing.
According to the latter, the ceiling price for a drug would be fixed
on the basis of the Weighted Average Price (WAP) of the top three brands
by value. So the price charged by leading producers when the policy
comes into operation would provide the benchmark for fixing the ceiling.
These prices tend to be higher than that of low-ranked competitors,
because of the market power of the dominant firms. Thus, the shift from
what the regulator considers ''reasonable'' to what the market leaders
consider ''appropriate'' amounts to a substantial dilution of price
control, with even subsequent changes in the ceiling being linked to
changes in the wholesale price index for manufactures. What is more
the prices of patented drugs are to be determined separately by a special
committee constituted for the purpose, with no clear guidelines enunciated.
As of now the policy appears complex and its effects uncertain. But
in principle what it does is to take one more step away from regulation,
creating an environment in which all the gains of a well crafted and
highly successful post-Independence drug policy will be lost. Liberalisation
is indeed thriving in India, even in areas where it can be least justified.