Price Control on Drugs

Summary

Published by the Forum of Free Enterprise on 10 October 1970, this pamphlet collects three short polemics opposing the Government of India’s Drugs (Prices Control) Order of 16 May 1970. The contributors — economist Prof. P. A. Gaitonde of K. C. College, Bombay; pharmaceutical Managing Director N. H. Israni; and PAMDAL Past President Champaklal Zaveri — share a common argument: in the absence of war or emergency shortage, rigid price control on drugs will throttle competition, deter R&D, reduce supply, and ultimately injure the very consumers it claims to help. The volume marshals price-index data, comparative international evidence, the Tariff Commission’s 1968 report, and the confusion produced by the Order’s repeated amendments to argue that the industry’s growth and the public’s health are best served by lower taxes, decanalised raw-material imports, and the discipline of competition rather than by a single-formula government fiat.

Essays

Price Control on Drugs

By Prof. P. R. Gaitonde

Prof. Gaitonde frames the Drugs (Prices Control) Order of 16 May 1970 as a non-economic intervention dressed up as consumer protection. He concedes controls can be justified during war or shortage but argues that, absent those conditions, competition — not coercion — is the engine of falling prices and broader prosperity. Reviewing wholesale-price-index movements from 1952-53 onward, he points out that drug and pharmaceutical prices rose far less than the general index (88.7 per cent vs 111.6 per cent between 1956-57 and 1968-69), so the Government’s premise of runaway drug prices is empirically thin. He traces the regulatory creep from the 1963 Drug Price Control Order through the Tariff Commission’s two-year inquiry, the August 1968 report whose recommendations were shelved, and Dr. Triguna Sen’s announcement of the new formula-based Order.

Gaitonde then dissects the Order’s pricing formula, showing that the permitted mark-ups (75 per cent over costs, 100-150 for products requiring development and research, with manufacturers’ price further cut by 20 per cent off retail and trade commissions squeezed to 12.5 per cent for ethical drugs and 10.5 per cent for others) leave too thin a margin to fund R&D in an industry where new products take four years and substantial capital to develop. He warns that the Indian industry, which has grown from Rs. 34 crores in 1954 to Rs. 235 crores in 1969 and projects Rs. 625 crores by 1980-81, will be choked precisely when investment of around Rs. 750 crores is needed. The remedy he urges is structural: cheap raw materials from the public sector, monetary and fiscal discipline, lower taxation on inputs, and a growth-oriented climate — not a price freeze.

• Concedes controls may be justified in shortage, emergency or war — but rejects them as the default tool in normal conditions.
• Cites wholesale-price-index data showing drug prices rose much slower (88.7%) than general commodity prices (111.6%) between 1956-57 and 1968-69.
• Reviews 1963 Drug Price Control Order, 1966 Tariff Commission reference, and 1968 report shelved by Government.
• Argues the May 1970 Order’s mark-up formula leaves no incentive for the four-year, capital-intensive R&D cycle new drugs require.
• Notes IDPL and other public-sector raw-material producers sell at far higher rupee-per-kg prices than imports, calling that the leverage point Government should fix.
• Recommends reduction of the 20-30 per cent indirect tax burden on drugs and a growth-oriented climate rather than price freezes.

Drug Price Control & the Consumer

By N. H. Israni

Writing as Managing Director of a pharmaceutical company, Israni argues that public discussion of drug prices over the four or five months since the Order has been driven more by emotion than by evidence. He sketches the pre-1963 history — when prices of bulk drugs (Tetracycline capsules from Rs. 2.50 to Rs. 1.15 between 1956 and 1963, Penicillin Ointment, PAS, Vitamin C tablets and others) fell year after year under the discipline of international competition — to show that competition, not control, was already delivering reductions. The first 1963 Order, he says, was a panicked response to the Chinese aggression that ended up freezing prices and was unfair to manufacturers who had been selling cheap.

The core of the essay reviews the Tariff Commission’s 1968 finding that Indian pre-tax profits varied widely (5-25 per cent of turnover) and that the industry could not absorb a uniform 25-30 per cent cut. Israni recounts how, in February 1970, manufacturers offered to bring down prices of selected essential drugs by 10-25 per cent, but the Government chose instead to rationalise all 18 categories through a rigid formula — the first country in the world to do so. He details the 50-66 per cent voluntary cuts on around 1,100 products, the Rs. 15-crore annual gain to consumers, and the confusion sown by 1,500 amendments. He closes with a five-point programme: abolish controls and intensify competition; encourage cost-consciousness; permit profits to fund tropical-disease research (where a single research unit needs Rs. 2-3 crores and Rs. 50-60 lakhs annually); treat industry as a partner rather than a target of compulsion; and examine the 22 per cent burden of indirect taxes on every rupee of drugs.

• Pre-1963 history shows competition was driving drug prices down (Tetracycline capsule from Rs. 2.50 in 1956 to Rs. 1.15 in 1963; similar falls in PAS, Penicillin Ointment, Vitamin C).
• Indian profits were already lower than international comparators per Tariff Commission’s 1968 report; uniform 25-30% cut was rejected as unworkable.
• Industry voluntarily reduced prices of about 1,100 products by 50-66% (annual consumer gain ~Rs. 15 crores) before being subjected to a rigid formula.
• India is the only country in the world applying so rigid a price-formula approach to pharmaceuticals.
• Five-point reform agenda: abolish controls, encourage efficiency, allow profits for tropical-disease R&D, treat industry as partner, cut the 22% indirect-tax load on drugs.

Will There Be a Shortage of Drugs?

By Champaklal Zaveri

Champaklal Zaveri, writing as a Past President of PAMDAL, opens by restating the volume’s frame: price control is an emergency measure, not a routine instrument. He concedes that some branded drugs are expensive but argues that competitive pressure has already kept Indian manufacturers’ prices reasonably low — often lower than the mark-up the formula now permits. He puts drug prices in perspective by noting a vial of B-Complex parenteral solution costing Rs. 3 supports ten injections of the same solution priced at Rs. 30, so the medical context matters more than headline drug prices. He revisits the 1963 Statutory Control Order under Chinese-aggression conditions, which froze rather than reduced prices and penalised manufacturers who had been selling cheap.

The essay then examines the 1970 Order, the 54 per cent reductions / 25 per cent unchanged / 21 per cent increases revealed in the Health Minister’s Lok Sabha statement, and the two main drivers of the increases: seven years of cost build-up not reflected in prices, and imported raw-material price rises forced by canalisation through Government undertakings. Zaveri reports four amendments in quick succession, culminating in the fourth amendment rolling all increases back to the 15 May level — a step he calls administratively chaotic, especially for Indian-sector manufacturers who most needed rationalisation. He closes by urging Government to settle the revised prices quickly, to retrace canalisation if public undertakings cannot meet raw-material demand, and warns the country will face an acute shortage of drugs otherwise.

• Frames price control as an emergency tool only; competition already keeps average Indian manufacturers near a low price level.
• Argues drug prices must be read against total medical costs (Rs. 3 vial vs Rs. 30 of injection charges).
• Recounts the 1963 freeze as a Chinese-aggression response that penalised low-priced manufacturers.
• Reports Health Minister’s Lok Sabha disclosure: 54% of drugs cut, 25% unchanged, 21% increased — with positive reductions ignored by Press.
• Two causes of the 21% increases: seven-year cost build-up and canalisation-driven raw-material price rises.
• Fourth amendment rolling prices back to 15 May level created confusion and hit the Indian sector hardest.
• Warns of acute drug shortage if Government does not retrace canalisation when public-sector supply falls short.

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