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Vaccination against covid-19 for those aged 18-45 opens up on 1 May. Individuals in this age group will have to pay for the vaccination, even at government-run vaccination centres. Those above 45 got their vaccines for free at government-run vaccination centres and will continue to get them for free.

The Serum Institute of India (SII), which is producing the Covishield vaccine, has set prices at 600 per dose for private hospitals and 400 per dose for state governments. Covishield accounts for 90% of the vaccines administered in India so far.

The final cost of the vaccine might be more than 600 per dose at private vaccination centres, which will have to take their own costs of administering the vaccine into account.

This leads to the question about what finance minister Nirmala Sitharaman meant when she made the following statement in the budget speech she gave on 1 February 1: “I have provided 35,000 crores for covid-19 vaccine in BE 2021-22. I am committed to provide further funds if required." BE stands for budget estimate.

If those in the age group of 18-45 have to pay to get vaccinated, what will the 35,000 crore budget allocation be spent on? It needs to be mentioned here that the central government has advanced 3,000 crore to the Serum Institute and 1,567 crore to Bharat Biotech, which manufactures the Covaxin vaccine, for vaccine supplies until July.

The central government still needs to procure vaccines because those over the age of 45 will continue to be vaccinated for free at government-run vaccination centres. The government is spending 4,567 crore out of the total allocation of 35,000 crore. It will spend more to ensure that those over 45 continue to be vaccinated for free at government-run centres. Nevertheless, there will still be a lot of money left in the allocated kitty. What will this money be used for? Also, more importantly, why is a part of the population being treated in a different way?

Further, the issue is not just about different parts of the population being treated differently. Currently, there are two companies supplying the vaccine. The demand for the vaccine as of 1 May and in the weeks that follow, will be much more than what these companies will be able to supply. Of course, there are more foreign companies waiting in the wings. But the foreign vaccines will take time to come to the market.

Clearly, this is a supplier’s market. While Serum Institute has priced vaccines at 600 per dose for the private sector, the final price at a private vaccination centre will be higher. Also, with limited supply, there is a danger of a black market emerging in these vaccines, as has been the case with oxygen cylinders and medicines being used in the treatment of covid.

Let’s try and understand this issue in a little more detail, through the example of hand sanitizers. When covid first started spreading early last year, hand sanitizers disappeared from the market and were being sold in black. This was because demand far outstripped supply. Nevertheless, seeing the high price of sanitizers, many entrepreneurs entered the business, and soon the supply problem was solved, and prices became reasonable. So, the free market worked and it worked well.

But in the case of vaccines, new entrepreneurs cannot just enter the market, and start producing the vaccine and thus, ensure that the price of the vaccine doesn’t shoot up in the next few months. This does not mean that the private sector should not be involved in the vaccination. They should be, simply because the population needs to be vaccinated as quickly as possible.

Given that, there is need for a credible competitor who ensures that vaccine prices in the private market don’t go through the roof. Who can this credible competitor be? The central government. This could have been done by ensuring that the vaccine against covid-19 continues to be administered for free at government vaccination centres. This would have ensured that private players priced their vaccines at a reasonable price and did not end up making supernormal profits. The chances for the latter happening have gone up considerably now.

Other than ensuring that right incentives are on offer, there are other benefits of following good economics. Vaccines lead to what economists refer to as a positive externality, which basically means that the benefit of taking the vaccine goes beyond just the person taking the vaccine.

As Ryan A Bourne writes in Economics in One Virus: An Introduction to Economic Reasoning Through Covid-19: “Once someone has been vaccinated, they have a very high chance of being immune to a virus, or are at least less likely to get bad symptoms and so be highly infectious, meaning there are fewer people in the population who can spread the disease to unvaccinated people… That’s why many governments subsidize them."

Vaccination helps the society move towards herd immunity. As Bourne writes: “It is why one potential endgame of this pandemic is so-called herd immunity, a situation where enough people have immunity (having recovered from infection or having been vaccinated) that any further outbreak of the virus fails to accelerate because there are too few individuals susceptible to infection."

This helps the overall economy. The sooner the society moves towards herd immunity, the faster economic activity can recover, with the governments not having to resort to lockdowns and curfews. These come at a huge cost.

The gross domestic product (GDP) or the size of the Indian economy in 2019-20 was at 203.5 trillion (in nominal terms, not adjusted for inflation). This is expected to shrink to 195.9 trillion in 2020-21, which is a contraction of 7.6 trillion. This estimate was made before the second wave of covid started. Hence, the GDP for 2020-21 might be lower than 7.6 trillion and hence, the contraction might be higher.

This contraction in economic activity was the cost of the spread of covid and the fact that the society at large hasn’t achieved herd immunity, forcing governments to impose lockdowns and curfews. A fall in government tax collections or the fact that petrol prices almost touched 100 per litre, is a part of this as well.

Hence, it makes sense for the government to offer vaccines for free, at least at the government-run vaccination centres. Other than ensuring that the private sector pricing will remain reasonable, it will more importantly ensure that we will move towards herd immunity faster, as more and more individuals get vaccinated. At 800-1,000 per vaccine, we are looking at a cost of Rs1,600-2,000 per individual for two doses, at a time when incomes of a huge section of the population have been badly hit. If a third dose is needed, the costs might go up further. In this scenario, free vaccines will help a large section of the population.

In 2021-22, the Indian economy is unlikely to contract, given that it contracted in 2020-21. But if India grows at a rate lower than the 10-12% that it is expected to grow at currently, we are again looking at a few trillion rupees of economic destruction.

In this scenario, if the central government spends the 35,000 crore that it has allocated towards vaccines (or even more if required), it will benefit the overall economy tremendously.

Other than being an equitable and a humanitarian thing to do, free vaccines against covid-19 make tremendous economic sense as well.

Vivek Kaul is the author of Bad Money.

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