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Photo: AP
Photo: AP

The best way to vaccinate most Indians in the least time

We need both a government subsidy and a free market for vaccines to fight the covid pandemic

As covid cases rise with increasing economic activity, the only way forward for India is to formulate a sensible acquisition and pricing policy for a coronavirus vaccine, when it becomes available. The goal is simple: a policy that ensures the fastest delivery of a vaccine for the largest number of people. The only way to achieve it is to rely on and work with the private sector to acquire and allocate the vaccine across India, and shun price and quantity controls. The country needs dual acquisition and pricing strategies. First, vaccines for the poor should be paid for by the government at cost; and second, a free market for the vaccine should operate for those who can afford it. The private testing market was crippled by slow approvals and court-mandated pricing. This must not happen with a vaccine.

The good news first. Unlike other illnesses, where the chance of vaccine development, production and availability for the poor is low, the pandemic has created a very large market for the vaccine, and the incentives of vaccine developers are well-aligned with society at large. Second, Indian manufacturers, frontrunners at mass producing vaccines, have struck deals with most vaccine developers and global pharmaceutical companies. This places India in a unique position to get early access to a vaccine—one it must not squander.

The next step would be vaccine delivery across India. The government is already working with pharmaceutical companies like Serum Institute of India. Ideally, it must acquire about 500 million doses in the first year and ensure delivery to the poor. Here, the government must resist India’s past impulses of nationalizing private firms, or imposing price and quantity controls, or strong-arming manufacturers on pricing. Instead, the government must pay for vaccine doses at cost, the only way to ensure India doesn’t destroy its own long-term private vaccine production capacity. Currently, Indian vaccine companies can produce at a scale that brings costs down to 150-225 per dose; 500 million doses would cost the government just over 110 billion to acquire at cost. In comparison, India spent almost a quarter of that on the Statue of Unity, and the 2014-19 NDA government spent half of that on publicity and advertising.

Paying 110 billion to acquire vaccines for half a billion Indians is a steal. The economic loss because of 2020-21’s first quarter contraction was 8.45 trillion. So a small and sensible investment by the government will be worth every rupee in jumpstarting economic activity and helping the poorest Indians who have suffered acutely in this crisis. There are many delivery strategies—reimbursing the poor for getting vaccinated, reimbursing private vendors for each patient administered, setting up a government-provisioned free vaccination drive, etc. But getting the pricing and quantities right with the private sector is crucial, and paying private firms for doses will not only pay for itself and more in increased economic activity, but also help develop India as a pharmaceutical hub.

Simultaneously, the government should allow a completely free market for vaccines that it doesn’t reimburse or acquire. Even if doses are priced well above cost, courts and governments should not worry about the rich getting the vaccine first in the market. Unlike other essentials, vaccines provide a huge positive externality, and also protect the unvaccinated.

When individuals get vaccinated against a disease, it reduces (or eliminates) their chances of getting it. Plus, it also reduces the chances of others getting the disease, as the recipient is less likely to transmit it. So, the social value of a single dose of vaccine is higher than the private value of that dose. The rich, even after paying a lot for vaccination, absorb only a part of the benefit. In standard neoclassical economics, this calls for a subsidy of some sort, since social benefits exceeding private benefits would imply the vaccine could be under-consumed. Aside from helping the poor, this is an economic reason for the government to reimburse the poor for getting vaccinated.

Counter-intuitively, the same logic also requires us to ensure a free market even if the rich get the vaccine first. Any vaccinated person, rich or poor, will inadvertently protect others. If the rich get vaccinated first by buying it at a market price, their actions will have two effects. They are more likely to venture out and spend, helping the economy. While doing so, they are less likely to transmit the disease. They are also less likely to burden the medical system. So the self-serving behaviour of wealthy Indians will benefit others. And high prices will also incentivize greater supply of vaccines swiftly to locations where they are most in demand. The rich, civil society and vaccine producers could consider special pricing strategies—for every person buying well above cost, firms will give one free to the poor.

Let’s restate the goal—the fastest delivery for the largest number. The moment a vaccine becomes available, goals will start shifting. There may be the usual outrage over pricing, profits and distributive concerns. India must resist the temptation to give in to the outrage of sociologists, lawyers, judges, doctors, social workers, politicians and journalists, who all have important roles to perform in the pandemic but could botch up vaccine delivery because of a misunderstanding of market processes and the price mechanism. Given that a vaccine is well on its way, its acquisition and allocation should be based on an economic way of thinking.

Shruti Rajagopalan is a senior research fellow with the Mercatus Center at George Mason University, US

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