#366 Shooting Ourselves in the Foot

#366 Shooting Ourselves in the Foot

Opposition to the IDBI Bank Disinvestment, RBI Trying Too Many Things at Once, and Drastic Price Controls on Anti-cancer Drugs.

India Policy Watch #1: Never Remember, Never Learn

Insights on current policy issues in India

—RSJ

Earlier this week I read Rahul Gandhi’s letter to IDBI Bank employees on the proposed sale of the majority stake held by the government to Fairfax (a Canadian investment firm) and did a double take. It is not every day you see the Leader of the Opposition throw economic logic to the wind and make arguments against privatisation that I remember hearing from the likes of Karat and Bardhan about two decades back. IDBI Bank already runs as a private sector bank (by RBI regulations), and its turnaround in the last five years can be credited to it being run professionally with quality talent hired at market compensation.

IDBI is a mid-sized bank that morphed from a development finance institution into a bank in 2004. It went through a near-death experience in 2019 when it was bailed out by LIC, which acquired a controlling stake. That is what made it a private-sector bank, despite LIC owning a majority, for reasons too detailed to get into now.

As I said, the bank has done well since then, but there’s hardly anything distinctive about it. It is in its best health today (perhaps the 14th biggest bank on a total-assets basis), and any outperformance from here on will require significant investment in talent, technology, and branches. Banking is a cyclical business that requires frequent infusion of equity capital for meeting risk and growth needs. The ECL (expected credit loss) norms coming up in April will mean banks will need more capital (one-time and ongoing) to transition into the new regime.

The banking regulations continue to get more onerous, and it will become difficult for mid-sized institution to manage them. The risk of cybersecurity, the speed of AI adoption and competition for deposits will challenge a bank with a smaller balance sheet and limited access to talent. In short, IDBI Bank has a limited strategic future in government hands, and the most sensible outcome is to find someone willing to buy it, put capital behind it and take responsibility for its future.

The way I see it, the current ownership has done its best to strengthen the bank and dress it up for a sale. Even that sale process has been difficult because the reserve price set by the government has been seen as too high by potential investors. After a lot of effort, we have somehow got this over the line with Fairfax, who will now try and use this as a platform to consolidate its financial services interests in India. Fairfax paid a bit more than anyone else would because it saw a strategic value in owning this platform, government and LIC got a good value for their investments while still retaining a sizeable stake, and the bank will now have foreign capital to draw upon to give wings to whatever it wants to do from here on. It is a win-win for everyone.

Yet we have opposition to it for some strange ideological reasons that make no sense. There are random news reports about how the government has not disclosed the name or bid details of the other bidder in the fray. Why should they? There are reports alleging a conflict of interest seen in some LIC employee sitting on the board of a Fairfax-invested company in India. This is beyond stupid. LIC is the biggest institutional investor in India, and it has directorships in multiple companies. Fairfax also invests in various companies, and in a few of them they place their directors. The decision to sell government stake in IDBI Bank or Fairfax’s plan to buy it won’t be getting discussed at the board of some investee company of theirs (that’s into travel). This is all too bizarre to even discuss. The whole thing made me depressed about the economic literacy among the political class and how little consensus we have on fairly fundamental economic questions.

There is also the argument about what happens to SC/ST reservations and employment opportunities once the bank is privatised. Firstly, the bank has been running like a private sector bank since 2019. These things have changed, and I’d argue they are part of the reason for the bank’s turnaround. Secondly, of course, the culture and work practices will change when ownership moves to an investment firm. That is precisely what a change in ownership entails. Why should one presume that going into private hands will be an undesirable outcome for employees? Have we learnt nothing from the growth of the private sector in the past 30 years or the fate of public sector units and their employees over the past 75 years? For an opposition party, trying to come back to power on the back of the incumbent's poor economic record, and to present the continuation of government ownership as an unquestionable public good and privatisation as something inherently harmful, is just a bad-faith act.

The second issue, where again the economic thinking has been muddled in the past 6 months, is the stubborn attempt to thread the impossible trilemma I wrote about last week. Or what I had called the Amar Akbar Anthony problem. The RBI is trying to do all three things simultaneously: manage the exchange rate, manage capital flows and retain control over domestic interest rates. In doing so, we are now finding ourselves digging the hole a little deeper.

The latest example is the special window for oil marketing companies to access dollars directly from the RBI. The intention is to take a significant part of the dollar demand from oil companies out of the regular market and hope the immediate pressure on the rupee can be reduced. This is no solution, really. As Ghalib once wrote: dil ke khush rakhne ko Ghalib yeh khayal achha hai (this is an enjoyable way to distract myself and avoid facing the reality). And more such knee-jerk acts, including rumours of lowering LRS limits, only signal the dire straits we are in. These are read by the market, and they then act to make things worse.

Depending on how one adjusts the headline reserves for forward INR commitments, gold and other relatively illiquid components, the real reserve cushion might be below $500 billion now. With the Indian oil basket at around $120-125, the import cover is somewhere between four and four-and-a-half months. We could be one or two external shocks away from seeing this cushion come under further pressure. We have seen this movie before in 1991. The impossible trilemma is not some abstract economic construct that exists only in textbooks. When you try to manage all three, you often end up managing none of them.

Which brings me to what connects these two issues. It is the larger problem with the way we approach economic policy in India. The IDBI privatisation debate or the RBI’s attempts to manage the currency are both examples of our preference for central planning and to control outcomes.

We like things that can be directed and managed through decisions taken at the top. We have bureaucrats presiding over multiple regulators and market institutions who have an enduring belief that everything can be managed by tinkering around. The problem is that markets couldn’t care less about these. We have had more than three decades of empirical evidence demonstrating that economic fundamentals matter, and that allowing markets to function, within a sensible regulatory framework, generally produces better outcomes than trying to engineer every outcome from the top.

But we love sticking to the same instincts. The cost of bad economic thinking is borne by the very people we want to serve or protect. What makes this particularly disappointing is that the current government is not short of political capital. This is a third-term government with a strong parliamentary majority that remains electorally formidable. There is no shortage of market advice, economic expertise or institutional experience available to it. If even a government of this kind finds it difficult to pursue the economically sensible course, what hope do we have of building a consistent economic policy framework in this country? And if the alternative political leadership is also approaching these questions through the lens of political convenience rather than fundamentals, then we are doomed.

None of our critical goals, to become rich before we get old or to avoid the middle-income trap, will be achieved through administrative ingenuity alone. We think that the economy is something that can be administered into delivering political objectives. The frustrating part is we have the evidence of what worked and what happened when we allowed sound economics to play out. We have never sold the benefits of reforms the right way to our people. So, there’s never a strong backlash when you see political leaders talk or act in a manner devoid of any sound economic sense. This will be our undoing.

India Policy Watch #2: Never Remember, Never Learn, Always Control Prices

Insights on current policy issues in India

—Pranay Kotasthane

RSJ discussed our muddled economic thinking on disinvestment. As if to fuel his frustration, another policy change this week came along with the sign, “Hold my beer”.

On 17 October 2026, the National Pharmaceutical Pricing Authority (NPPA) capped trade margins on 137 non-scheduled anti-cancer drugs at 30 per cent of MRP. It used a provision which allows it extraordinary intervention in the public interest. The revised prices will take effect on 9 November.

This margin cap follows weeks of pressure from the Supreme Court in a public interest litigation. The petition sought mandatory generic prescribing, price controls on non-scheduled medicines, and margin caps on medical devices. Throwing caution to the wind and oblivious to what Hayek tells us about the role of prices, the Court said markups are “carnage” and “broad day light dacoity”. The omniscient judges suggested that a uniform 16 per cent retail margin should be extended to all drugs. For now, the Union government has resisted a broad change and applied a 30 per cent margin only on cancer drugs.

Apparently, the grievance was related to some generic drugs being sold at a markup of 10x compared to the prices at which they were procured by wholesale dealers. For example, RPG Life Sciences sold its prostate cancer drug at ₹40,421 per unit. From 9 November, the RPG brand will be mandated to cost ₹6,278. What a masterstroke!

Of course, there is a BUT… Will government intervention drastically reduce cancer drug prices soon? And how do we make sense of these trade margins? This policy puzzle is worth decoding.

How are Drug Prices Set?

From what I could gather, the Drugs (Prices Control) Order, 2013 specifies four routes for setting prices.

1. Essential medicines: Medicines on the National List of Essential Medicines are “scheduled”. For these, NPPA sets a ceiling price, which is the simple average price of all brands with at least 1 per cent market share, plus a retailer margin. Ceilings move each year with wholesale inflation. This “market-based pricing with government characteristics” is obviously a major problem, and we covered it in edition #140. Our Dolos and Crocins fall under this category.

2. Non-scheduled drugs: These make up about 80 per cent of the market. Companies can launch at any MRP. The only rule is that they cannot raise it by more than 10 per cent a year. Even this light rule gets broken frequently; a parliamentary committee found 307 violations up to March 2025.

3. New variants of essential medicines: A new strength, combination or dosage form of a scheduled drug needs a retail price fixed by NPPA. This stops firms escaping the ceiling with a slight tweak.

4. Extraordinary powers. Paragraph 19 lets the government intervene on any drug in the public interest. It has been used for cardiac stents, knee implants, and diabetes formulations before.

Most of the cancer drugs fall under Route 2. Companies were free to print any launch MRP. NPPA did not move them to Route 1, but used Route 4. Instead of setting a price, it tied each brand’s MRP to its own stockist price. The stockist price is the price on the manufacturer’s invoice at the first point of sale, usually to a stockist or distributor. Firms declare this number themselves.

The formula for trade margin cap is as follows. The MRP, excluding GST, can be at most the price to the stockist divided by 0.7. A drug the company sells to the stockist at ₹70 can carry an MRP of no more than ₹100. The remaining ₹30 must cover both the stockist’s and the retailer’s cut.

How Generics Supply Chain Works

There are dozens of generic makers, thousands of stockists and many hospitals. Why should the government fix margins at all? Competition should do it. But this supply chain has two unique features.

One, reverse competition. In a normal market, a new entrant cuts prices to win buyers. Here, the buyer that a generic firm must win is not the patient. It is the oncologist, the hospital or the chemist who decides which brand the patient gets. So firms compete by offering intermediaries a bigger gap between the stockist price and the MRP. More competition means a fiercer bidding war for intermediaries, which means a higher MRP! Patented drugs face no such contest for the prescriber’s favour as they distinguish themselves on the product. For such drugs, the problem is the ex-factory price, not the margin.

Two, hospitals do not compete in reality. Patients choose a cancer hospital for its oncologist, reputation, and location, not for its biosimilar prices. Once treatment starts, they are captive. Cancer treatment is given inside the hospital, often only with drugs from its attached pharmacy. And when insurance reimburses at MRP, a high MRP suits everyone in the chain except the payer. Information asymmetry in this domain further reduces consumer autonomy.

Anticipating the Unintended

Given these features, the trade margin cap solution has four weaknesses.

First, the patient remains captive, and the intermediary still gains from the margin. Only the margin size has shrunk on paper.

Two, a percentage cap still rewards expensive brands. Thirty per cent of a ₹12,000 MRP is more rupees than thirty per cent of a ₹6,000 MRP. The dispenser’s incentive to push the costlier brand is intact.

Third, the margin will likely migrate elsewhere. New brands, strengths and packs launched after March 2026 get a fresh base. Free goods under patient assistance programmes can be excluded from the calculation. Hospitals buying in bulk pay below the stockist price, so 30 per cent is closer to a floor than a ceiling for them. And after the 2017 stent caps, hospitals raised charges for consumables, procedures and lab tests to make up the difference. So we should expect “drug administration” and “pharmacy handling” fees to rise.

Finally and fundamentally, it assumes humungous state capacity, which exists only in our dreams. The cap assumes the regulator knows the right margin for every product. A cold-chain drug and a shelf-stable tablet get the same 30 per cent. A uniform 16 per cent across all medicines, as the Honourable Court has floated, would make this problem worse.

There are Better Options

Fixing trade margin caps won’t solve the root cause, which is information asymmetry. So our solutions should tackle this problem with the least possible market distortion. Some such options are:

1. Autonomy to buy from outside hospitals. Require hospitals to administer a drug that the patient brings, subject to verification of batch codes and cold-chain records. This restores the competition that should have disciplined margins in the first place. Hospitals will also try to recover lost margin through administration fees, which is why those fees must be published.

   A related idea, generic prescribing, does not get us far on its own. The National Medical Commission mandated it in 2023 and put the rule on hold after pushback. Critics argued, correctly, that it would let pharmacies push high-margin generics.

2. Disclosure requirements. Disclosure to patients is weak in this domain. Hospitals should publish, in machine-readable form, their purchase price, billed price and MRP for each drug, along with administration and handling fees. Disclosure also needs verification. The stockist price at the heart of the cap is self-declared. NPPA already has a better tool within reach, which is GST e-invoicing. Larger businesses must generate a GST e-invoice for every business-to-business sale. Cross-matching a manufacturer’s declared stockist price against its own e-invoices to stockists would turn a self-reported number into an audited figure. I am not aware if NPPA does this today. Building verification capacity is a better use of regulatory effort.

3. A Patient Protection Service. The poorest patients, in the middle of a medical crisis, need the most protection against malpractice. In 2017, Pavan Srinath, Ajay Patri and I had proposed a Patient Protection Service for Karnataka. This would be a cadre of independent officers in hospitals who inform patients of their rights, give them cost comparisons with nearby alternatives, and help them seek redress. This officer should be purely the patient’s agent, funded independently of hospitals and judged on patient savings and grievances resolved. Government funding here to resolve this information asymmetry is justified. A digital-first service with human escalation would also be far cheaper to scale today than it was in 2017.

Unless the government tackles the root cause, do not expect a steep fall in prices despite the NPPA’s new trade margin cap. The outcome this policy must be tested against isn’t a drop in printed MRPs. It is whether hospital bills for cancer patients fall after 9 November. I don't expect it to come down at all.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Article] The Trump Mobile T1 Wikipedia page is a laugh riot. Do not miss.

2. [Watching the Wheels] Amit Varma discusses his life lessons from film editing.

   

3. [Slideset] I recently took a session for Life Lessons, the online course taught by Amit Varma and Mohit Satyanand. In keeping with the course's theme, I tried to explain the meta-ideas that underlie how states, markets, and societies work. My slides are here.

4. [Report] This Parliamentary Standing Committee Report provides a good overview of the issues at hand with medicine prices and how governments think about it.

© 2026 Pranay Kotasthane & RSJ
Bengaluru, India