India’s plan to fragment the vaccine market across the states is mind-bogglingly bad economics

We live in strange and unprecedented times. Logic has been sacrificed at the altar of public opinion on many occasions in the previous year, but the last week in particular has been – even by recent standards – a nadir.

India will now combat the threat of Covid-19 by running a tremendously expanded vaccination programme. All the editorials declare that this is wonderful news.

Two crucial components of this programme will be as follows:

1. The Indian government will pay two privately held firms Rs 4,500 crore to augment their vaccine manufacturing capacity
2. Indian states will be free to purchase vaccines in the open market from the May and will be responsible for vaccinating their populations that are older than 18 years – adding approximately 600 million people, and therefore 1.2 billion doses to the vaccination programme, at the very least.

This is not, to put it mildly, good news.

Consider this simple question: what did the government actually get for Rs 4,500 crore? What is the opportunity cost of the grant given to Serum Institute of India and Bharat Biotech when there were many perfectly viable, legal alternatives?

For example, the government could direct existing manufacturing plants (there exist over 20 manufacturing facilities in India that have the ability to make vaccines) to manufacture Covid-19 vaccines; it could authorise pharmaceutical firms to use patents “for the purpose of government”; it could expand vaccine manufacturing capacity in existing pharmaceutical public sector units; and it could even grant free licences and technology transfer to manufacture Covaxin (which was developed by the National Institute of Virology) – all of these are likely to yield better outcomes than giving Rs 4,500 crore to the Serum Institute and Bharat Biotech.

For a government whose finances were already stretched to breaking point, any of these suggestions merit careful consideration, at the very least. Were any of these avenues explored? If yes, why were these options discarded? If no, why not?

Cheaper solutions

Granted, none of these solutions is perfect, and they don’t conform to the ivory tower model of free markets. But they do have the attraction of being a lot cheaper, for one. For another, no other country in the free world has done what India has and that must tell us something. From the viewpoint of both cost-effectiveness and speed-to-market, therefore, these are likely better options than a one-time grant to private firms.

Second, a trope that refuses to die: free market procurement and market prices will increase vaccine supplies. Any economic textbook will tell you that an increase in price is likely to lead to an increase in supply. But equally, that same textbook should also tell you about the elasticity of supply: the percentage change in quantity supplied given a percentage change in price.

And for the short term – that is, for the next six months or so – an increase in the price will not lead to a commensurate increase in supply in the global market for vaccines. We only have to look at the scarcity of hospital beds, oxygen and essential drugs to treat Covid-19 to know that the free market in this case is really a “black market”.

As Thomas Abraham points out on the India Forum, global vaccine supplies are extremely tight, and whatever production does materialise over the next three months is already spoken for – in fact, as both the UK and the EU will tell you, it seems to be spoken for twice over.

The reason is simple: Covid-19 vaccines are not the same as, say, stocks in a financial market, or glasses of lemonade being sold from a neighbourhood lemonade stand. Orders for vaccines in most cases have been placed months in advance by countries the world over, and an increase in demand (and therefore in price) will not increase supply by much, if at all.

They will drive up prices though to a level which becomes unaffordable for India. Free markets are great things, but they are also on occasion impractical – which is why no other country has gone down this path.

In fact, it is not much use blaming the government for not having locked up supplies in 2020 on the global market either. Package it however you like, India just doesn’t (yet) have the muscle power to go toe-to-toe with the big boys in a global auction for vaccines. Whether then or now, procuring vaccines at scale from the global market was never going to work for a country with the size of India’s population.

Confused signals

Optimising domestic manufacture at scale, was, and remains, our best bet. But when the government ought to have been engaging with domestic manufacturers about capacity building and planning for a full vaccination of the Indian population, it was, sadly, undermining the demand signals to the suppliers. The signals from the Indian government were that the pandemic was over and there was no real demand for vaccines.

Having thus intervened in the market by overriding the demand signals, the Indian government damaged the demand-supply-price equilibrium in the “free market for vaccines”.

And that brings us to our most important point. If free market procurement is a bad idea for a country like India, fragmenting India’s total demand for vaccines into as many pieces as there are states is mind-bogglingly bad economics. Given that there are today only a few players with working vaccines the world over, losing out on what little monopsonistic power India could bring to the table is akin to shooting oneself in the foot twice over.

Here’s a simple question we are unable to answer: under which microeconomic model does fragmenting an all India demand curve into around 30 (wildly different) state-wise demand curves make sense – especially when the supply curve is assuredly inelastic?

It is not only the case that monopolist vaccine manufacturer will now have the ability to play off one Indian state against the other, but worse, piecemeal orders by each state will mean that we lose out on the ability to procure at scale on a set of reasonable terms. How will everyone be vaccinated in an equitable manner? The rich will get their vaccines but given that supply will not increase anytime soon, this will be at the cost of the poor.

Dual pricing has been tried in India for many commodities and no good has come from it but we know what damage it has caused. Market economics tells us that, given the price incentive, “private market” in vaccines will now annihilate the “public market”. Did no one in government or Opposition read Michael Sandel’s book, What Money Can’t Buy?

One reason, for example, that burgers at McDonald’s are so cheap is precisely because of centralised, standardised procurement. No sensible manager would recommend that procurement be decentralised for a large, distributed business. How does a decentralised procurement model then make sense for vaccines?

Finally, India has a long and unfortunate history of overemphasizing current expenditure in healthcare at the expense of capital expenditure for building out India’s healthcare infrastructure. Ninety two per cent of India’s total health expenditure was revenue and spent on private healthcare service providers.

Given these statistics, and given our present circumstances, giving about 15% of the government’s Covid-19 budget to the Serum Institute of India and Bharat Biotech remains true to past policy follies – but makes no sense.

This is strange and unprecedented policy in strange and unprecedented times. But the consequences are predictable, unjust and inequitable.

Ashish Kulkarni teaches courses in economics and statistics at the Gokhale Institute of Politics and Economics, Pune, and blogs daily at econforeverybody.com

Murali Neelakantan is the principal lawyer at amicus. He was formerly global general counsel at Cipla and global general counsel and executive director at Glenmark.