Patently absurd

Though bound to go down well with the masses, Chemicals and Fertilisers Minister Ram Vilas Paswan's proposal to impose trade margins on the bulk of the country's Rs 20,000 crore pharmaceuticals industry is a bad idea, apart from being impossible to implement.

The decision to implement margins (around 25-30 per cent for retailers and 15-20 per cent for wholesalers) stems from a limited survey presented to the minister several months ago.

This showed that while companies were selling drugs to wholesalers for Rs 3 per strip, to use an arbitrary figure, their retail price was even as high as Rs 12 for the same strip. While it appears morally correct to try and stop such profiteering, a few points need to be kept in mind.

First, if the government is to determine what a manufacturer's cost is, and there are many thousand manufacturers of medicines in the country, this will unleash a completely new level of control-raj, with the accompanying corruption, since the price of each medicine will depend on what the inspector determines the cost to be.

Of course, with just one inspector for every 500 chemist shops in Delhi (it's even worse elsewhere in the country), and each chemist stocking hundreds of drugs, it's an open question as to just what kind of control can be exercised to keep a check on margin structures.

Second, the real issue that is important from the consumer's point of view is not the margin that the company enjoys on its produce, but the presence of competition.

After all, if a drug that costs Rs 3 is sold for Rs 12, that is a 300 per cent profit margin, certainly large enough to ensure a host of other manufacturers jump into the fray, effectively lowering prices.

That this will happen, and in a very short period too, is pretty obvious given the low-tech and low-capital nature of the generics business.

If the issue is that of a cartel which prevents prices from dropping (seemingly impossible in a situation of 15,000-odd producers), then Mr Paswan needs to take action on this front, not on any other.

In any case, from the consumer's point of view, if a branded drug, say, Zinetac, is sold at Rs 10 per strip and an unbranded ranitidine (the chemical name for Zinetac) is sold at Rs 8, he's making a saving of Rs 2 per strip, and it doesn't matter whether the cost of producing the Ranitidine is Rs 2 or 3 per strip.

If, on the other hand, the point is that drugs of inferior quality are being sold to customers at high prices, then the issue is of checking and maintaining quality standards and nothing else.

Another issue that needs to be kept in mind while proposing such controls is their final impact. In the case of the Drugs Price Control Order (DPCO), where the government fixes the retail price of around 74 drugs even today, the production of DPCO drugs has remained virtually stagnant over the past decade.

The production of DPCO drugs fell 1 per cent annually since 1994, compared to a growth rate of 9 per cent for non-DPCO drugs.

So, apart from the harassment and corruption, even the supply of drugs is likely to get affected. Who Mr Paswan hopes to benefit from his misdirected initiative is unclear.