Vaccination: The $5 trillion question

The answer to the question of how to vaccinate a billion Indians is perhaps to be found in basic economics

What is the most important health imperative as well as the most significant economic stimuli for India today? Unarguably it is Covid vaccination. We must remember that the story does not end with the strains of Covid-19 present now; perhaps we will all need annual booster shots. We, therefore, need to think through policy pathways for the long run with one immediate objective. Get the overall system to herd immunity as soon as possible.

In modern public economics, the big but simple idea is that freedom works well, and that state intervention is only justified in the face of “market failure”. There are four categories of market failure: Presence of market power, externalities, information asymmetry, and provision of public goods. Government intervention requires two checkpoints: The presence of market failure and a credible pathway to successfully implementing the proposed state intervention. This provides us with the concepts and principles through which to think about vaccination.

With only two major sellers of vaccines in India, there is concern about market power. However, once we open up to the world market, there is significant competition. This is a recurrent theme in addressing market power: Instead of getting into complicated state intervention in India into a monopolistic sector, it is better to open up to trade, and thus avoid the problems of state capacity in competition policy in India.

Vaccination will protect the person getting vaccinated. By enabling her mobility and interaction with a lower likelihood of spreading the disease, it creates an important positive externality. This is normally not factored in by her in determining how much she is willing to pay for vaccination if it was a priced good. Hence she will typically be willing to pay less than what is optimal, given the benefits to her and society. This divergence of social benefit and private benefit is a good reason for state intervention in the market for vaccines.

Information asymmetry is at one level the core societal interaction problem with Covid. Since X has no credible way of knowing whether Y is likely to be a Covid spreader, interactions get restricted to only people who know each other’s Covid status. Credible third party signalling, i.e. vaccination passports, re the infection status of X, is a potential solution to the problem of information asymmetry caused by Covid.

In economics, curative health and vaccinations are not categorised as “public goods”. X’s use of a dentist’s chair prevents Y from using it at the same time. Likewise, the dentist can exclude anyone from availing of his services. Hence, curative health services are excludable and non-rival and, unlike national security, are not “public goods”. Ignoring this private good characteristic of curative health is likely to lead to wrong types of state interventions, which cause more harm than good. Similarly, vaccination against flu or polio drops are also not “public goods” though the state may decide in view of their importance for the well-being of the individual and society, to provide it either free or at a subsidised price.

Illustration: Binay Sinha

On Covid vaccination, there is no real difficulty on the first checkpoint — the presence of market failure — but what about the second? Do we have the state capacity for doing a lot of vaccination through the government machinery? The best that India has done and in peaceful and non-pandemic type conditions is reach about 50 million persons (mothers and infants) and vaccinate them each year. For Covid, the estimate is that about 950 million Indians above the age of 18 will need two shots. The vaccinations that need to be done then are 1.90 billion doses. Public sector delivery can meet only about 3 per cent of this. In addition, adult vaccination of this nature is very different from vaccinations that governments have done till now. This is the state capacity problem that the vaccination drive needs to factor in when deciding on private/public sector modes of delivery.

What is the way forward?

Currently what is available in the world market is about $10/dose. On some reasonable assumptions, the vaccination cost per person will be $25. Ayushman Bharat has identified about 500 million people as eligible for government-funded health care. Of these about 200 million are estimated to be under 18, leaving a balance of 300 million who should be provided free vaccination. At current rates of exchange, this will mean an expenditure of Rs 56,250 crore. If the government were to buy 600 million vaccines (300 million X2) in a global tender with assurance of a certain minimum offtake, the price will be less. Experts say it could be about 20 per cent less and future prices are expected to be lower. The outgo then is likely to be around Rs 45,250 crore. This vaccination expenditure needs to be compared with expenditure saved by the scheme on prevented hospitalisation. Given the usual pathologies of the Indian state in beneficiary identification, if required, a drive to include left out eligible beneficiaries could be undertaken so that no poor person ends up without vaccination. Ayushman Bharat has empanelled 24,000 hospitals for providing curative health care. To begin with, these can be the delivery points for the vaccination while efforts are launched to massively increase this number in the next three months.

Like in other curative health care services the non-poor can pay for their vaccination or be taken care of by schemes like Employees’ State Insurance, Central Government Health Services, and other formal sector employee insurance schemes.

This approach to roll out vaccination rapidly while addressing market failure and potential state failure was suggested by many experts as far back as August 2020. It is not too late even now. Instead of multiple states individually tendering (unsuccessfully?) for vaccines, a composite large GoI tender will bring scale in procurement and help in securing competitive prices at least initially. Depending on the success of this, in future more decentralised procurement processes can be thought of. The state and markets can thus potentially jointly solve independent India’s biggest challenge.

The writer retired as a secretary to GoI and is now a professor at the National Council of Applied Economic Research. Views are personal