Penicillin is the first antibiotic that was discovered. Over the years, penicillin and its derivatives became one of the most important drug families to fight infectious diseases in a very cost effective manner. The way in which the Government of India tried to manage price and supply of this drug makes an excellent case study on the impact of micromanagement of resource allocation by government.
In view of the criticality of this drug, the Government of India (GOI) set up facilities in two Public Sector Undertakings [PSUs] to manufacture penicillin. Within a short span of time, the capacity of these production facilities was incapable of meeting the demand. Even at Rs 1200 per unit (as against an international price of about Rs 600 per unit) these PSUs could just about meet the cost of production.
The government needed to keep the price low, keep the inefficient PSU afloat and also manage the shortage. A complex problem of optimisation!
The scene was perfect for control, corruption, privilege postings and bulk gratifications; sacrifices in the name of providing healthcare for the poor and needy. Now the government came out with a bizarre plan to manage price and supply of the drug in the domestic market without compromising the sustainability of the PSUs.
The department of Chemicals and Petrochemicals, the operating ministry for managing this complex social challenge of such national importance, in the beginning of the year would ask the industry players what their expected demand for the drug was for the oncoming year. Then they asked the PSUs how much they expected to produce during this period. Now the ministry officials, after significant deliberation even at the level of the secretary made allocation of domestic production to the buyers on some ratio of their expected demand and last year consumption. The ministry also fixed the price of penicillin to about Rs 1200 per unit. The government also ensured that no new licenses were given to produce this in India. Then to manage the demand these buyers were allowed duty free import in proportion to what they bought from domestic market.
The domestic suppliers were often unable to keep up with the supply they promised and although the price was fixed and the suppliers were PSUs the buyers were overcharged by demanding interest free deposits and other charges euphemistically called packing and forwarding charges. Even after all this, every month the buyers visited with begging bowls like supplicants. Once the buyers managed to buy from the domestic suppliers then they rushed for the import license; filling in bundles of forms that had to be pushed from table to table. The industry players had special skilled staff to manage this ‘logistics’. Once they got the import license, they had to woo the egos and line the purses of the customs department to clear the goods although it was duty free. Industry had specialists employed for this too.
A total waste of time and resources; but for some it provided opportunities for privileged postings and corruption. All for the benefit of the poor! Finally sense prevailed and such draconian controls on import and domestic production were lifted. Penicillin became available in the domestic market at less than half the price.
The story was similar for many more products. Cement is another excellent case in point. I remember standing with a begging bowl at the district collector’s office for allocation of cement to build our house. The construction activities had to be synchronised to match the erratic supply of this precious commodity. In fact almost at the end, when I wanted few more sacks of cement I had to buy the same from black market at three times the price.
Why am I remembering these past horrors?
One reason is to remind that there are still many areas where the policy makers appear to be micromanaging; supposedly for the larger good of the public. But in the end it just adds to corruption and inefficiency. The Air India kept alive on ventilator is a case in point.
More damaging outcome of such policies is that very small interest groups are able to influence policy makers to create market distortions and enrichment of the select few. Amartya Sen has beautifully described how the agriculture pricing policies destabilize market, fail to benefit the deserving farmers or the guy on the street and distort farming practices. As per him “The overall effect of the subsidy is more spectacular in transferring money to medium and large farmers with food to sell, than in giving food to the undernourished consumers” (For a detailed discussion on this, refer to “The Argumentative Indian” by Dr Sen page 212 to 215)
Even the free electricity to the farmer is the same story. The poor farmer gets no benefit as he can’t afford even a pump and the electricity board is in perpetual red!
Reminiscing of this past becomes even more relevant today when we hear cries for more government intervention and control on account of recent failings in the markets.
But I think the problem also lies in our basic feudalistic culture. I have had many opportunities to be associated with projects where the so called non-bureaucrats appear to be in positions that require them to be involved in areas of public policy. It was almost hilarious and shocking to see them changing their colour so fast. They suddenly wanted absolute control and were even worried whether the democratic process and market forces can be depended on for balanced development.
It is worthy to remember that as Garry Hammel noted in his famous book "Future of Management” democracy with its checks and balances and markets with its invisible hand are two of the few institutions in this world that have sustained for centuries.
We have few examples in India of right policy interventions revolutionising industry sectors. As Dr Ajay Shah noted in his article "Flying on One Engine” “In the story of India’s economic reforms, the revolutionary changes on the equity market stand out with respect to the magnitude of the change which has come about from 1993 to 2003 despite concerted political lobbying in trying to prevent change”
It is true that at times markets will fail. We need to try to correct the failure and not to abolish the market. What is needed when the market fails is to correct irresponsible behaviour for which rules have be in place and the regulators will have to intervene. But what we need is course correction and policy nudges and not wholesale nationalisation or control. Infants should be nurtured; but also exposed to the reality of the competitive world else they grow up to be spoiled brats. (Take a look at "Devastation of world financial markets - A case of Policy Reversals in India?” and "Checks & Balances - Who checks and Who balances” for some thoughts on this.)
It takes imagination and ability to think through the ground realities and to come up with policy framework that nurtures healthy competition and incentivise responsible behaviour instead of creating ‘tables with a value’ in government offices. What we need today is administrative reforms that would compel and encourage policy makers to be adept in this than become feudalistic despots.
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