Editorial: Inflation prescription

Policymakers in India, especially in the finance ministry

As in pharma, cap price hikes in wheat/rice etc

Policymakers in India, especially in the finance ministry, have spent over a year battling RBI on inflation control when the solution was staring them in the face: put annual caps on price hikes that will be tolerated as has been done once again in the case of the pharma sector through a new drug price order. If it is wheat prices that are causing inflation, just restrict annual price hikes to 5%; 3% in the case of rice, 5.8% in the case of milk, and so on. There is little pricing power the manufacturing sector has had for well over a year as is evident from shrivelling bottom lines, but there?s no reason why similar controls can?t be applied there. After all, in the case of pharmaceuticals, India has among the lowest prices in the world?between 2004-05 and January 2012, while WPI rose 57.2%, prices for drugs and pharmaceuticals rose just 21.3%.

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To be fair, the market-share based new drug pricing order tries to minimise the damage to company bottom lines?Kotak estimates a 15% EPS cut each for GSK and Ranbaxy but just 0.8% in the case of a Sun Pharma in FY14?but with anywhere between 5,000 and 10,000 manufacturers and the market leader having a market share of under 5.5%, there is no evidence of any kind of cartelisation. Even in the case of the National List of Essential Medicines (NLEM)?around 348 drugs and 648 formulations?where the government wants to put price-caps, there are an average of 60 manufacturers per drug, ranging from 20 for anti-hypertensive Enalapril Maleate to 124 in the case of the painkiller Paracetamol. While the most expensive anti-cholestorol Atorvastatin costs R8.5 per tablet, there are versions available at 69 paise per tablet as well.

There is, of course, the little matter of supply response that the price-control zealots haven?t taken into account, and faced with as many controls as pharma does?including ill-thought of compulsory licensing and laws that allow firms to rip off even Indian patents?firms are likely to lower production or just export more and invest less in R&D. Even illiterate farmers, it has to be recognised, will lower production if the prices aren?t right. But with elections constantly in the air?for panchayats, municipalities, state assemblies, even the Lok Sabha?seeming to do the right thing by putting price ceilings appears so much more appealing.

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First published on: 20-05-2013 at 00:56 IST