Last week, The Kerala Essential Articles Control Act 1986 was invoked to impose price ceilings on goods related to COVID-19. The basis seems to be an epithet – no one would be allowed to profiteer off a pandemic. Policy making that views profit as evil and private entities as brutal isn’t new in India, but in the midst of cheers that emanated for this triumphant announcement, an exploration on price ceilings and their effects on an already strained economy never found space in our discourses. Political posturing in these times renders even opposition leaders incapable of such deliberations.
The tipping point here was an intervention from the Kerala High Court on a complaint against a private hospital in Aluva, with Justice Devan Ramachandran calling out inflated food prices, capturing headlines. The government responded first by capping prices for COVID-19 treatment at private hospitals, later added consumables including masks and sanitisers.
Public policy in India has perennially been headline-based than evidence-based, because evaluations are on intent rather than outcome. The intent here is ensuring equitable access to essential goods for everyone. However, for ensuring equitable access to everyone, the underlying asset needs to be non-excludable and non-rival, i.e, it’s supply should be significantly above demand and each incremental consumer should not rival its availability for potential future consumers. When every hospital has a fixed capacity which cannot be increased in the short run, beds are neither non-excludable nor non-rival. It is in this context that we need to examine the impact of price ceilings.
“If you want to create a shortage for tomatoes, just pass a law which states that retailers can’t sell tomatoes at more than 2 cents a pound – instantly you’ll have a tomato shortage,” said Milton Friedman, economist and Nobel Laureate.
Price ceilings were first introduced in India in the 14th century by Allauddin Khalji, and it immoderately threw open three challenges – hoarding, regrating and misinformation. Hoarding is when users buy goods in excess of what they need, in anticipation of a future demand spike. Regrating is when sellers procure goods at lower prices and resell them at exorbitantly higher prices. Misinformation is when manufacturers underquote the volume that they produce to sell excess through black markets.
Seven centuries later, challenges followed price ceilings from the United States to Venezuela. Price ceilings have an ability to induce an artificial shortage and deteriorate quality. In modern economic history, there is no major state which has been able to enact a price ceiling policy for goods without enabling a thriving black market in the process.
Girish Gupta’s reportage for the Guardian from the streets of Venezuela demonstrates how price ceilings resulted in empty supermarket shelves but a flourishing black market run by hustlers named buhoneros. Nearly all goods in Venezuela were imported. Thus, purchases were subjected to both fluctuations in international currency markets and supply chains of manufacturers. Price ceilings added complexity to this, crippling importers. Kerala is similar, with a huge proportion of goods inbound from manufacturers outside the state. Given this, a first order effect of price ceilings would be traders choosing to halt shipment, inducing shortages.
The next consequence would be a discernible drop in quality, as organised manufacturers may no longer find it viable. The fixed price mindset overlooks quality, parity on which can be ensured only if the government can scrutinise the entire supply chain. This is unrealistic due to two reasons.
One, barriers to entry in producing some of these goods are low. In March 2020, when sanitisers first gained popularity, Bloomberg reported that 152 new firms including alcohol distilleries and sugar mills started manufacturing them, capturing a market share of 61% by volume, pushing down leaders like Dettol from Reckitt Benckiser, Lifebuoy from Hindustan Unilever and Pure Hands from Himalaya Drug Company, from 85% to just 41%. The transition was easy, as a drug manufacturing licence is necessary only if the firm needed to claim that its sanitiser would kill 99.9% of germs. Thus, price ceilings may reduce shipments from tier I manufacturers, causing a subsequent rise in products from unorganised manufacturers. The threat is eventual substitution of high quality products with sub-standard ones, even for medical applications.
Two, lack of sufficient checks to ensure conformance to standards. The government has fixed a price ceiling on N95 masks, but ‘N95’ is a usage from the United States National Institution of Occupational Safety and Health (NIOSH), hence technically, only very few manufacturers operating in India such as 3M and Magnum Health currently hold certifications to manufacture actual N95 masks. Most manufacturers treat certifications from other bodies including India’s BIS or adherence to China’s KN95 as N95, while few simply print ‘N95’ without certifications.
Priyanka Pulla’s detailed piece in the Wire explains investigations by Arnab Bhattacharya of the Tata Institute of Fundamental Research on counterfeit N95 masks in India. Fake N95 masks worked at only 60%-80% efficacy, exposing healthcare workers to grave infection risks. An aggressive price ceiling for N95 masks may induce wholesalers holding stock of certified masks to divert it elsewhere, leaving room for counterfeits to flood themselves across Kerala.
The government currently uses only NABH accreditation to classify private hospitals, while there are different tiers of hospitals, from small clinics to multi-speciality referral hospitals. As even nursing homes can apply for an NABH accreditation, the cost of daily operations between different tiers of hospitals may vary from a few lakhs to multiple crores. A blanket price ceiling without exploring the nuances of care delivery across them is imprudent. An illustrative example may be how an ICU is set up at a nursing home, with a ten bed row ICU and one nurse, as against a multi-speciality hospital with a dedicated nurse at each ICU cubicle. Further, reliability of equipment used would vary drastically.
Juxtaposing this to California in the early 2000s, where the Senate controlled electricity prices. Large electricity companies who had invested in transmission systems had to compete with those providing unreliable power supply with frequent power cuts. As prices were fixed, all service providers tried to lower their costs, thus pushing everyone to the lowest quality, eventually making power cuts routine. A similar trajectory is evident in the RT-PCR testing patterns within Kerala. Since the government capped the price at Rs 500 based on input costs, laboratories began promoting rapid antigen tests and clubbing RT-PCR swabs together for bulk examinations to reduce costs, both eventually poised to result in lesser accuracy. In this way, speciality hospitals may now drop care quality to match nursing homes, aiming to operate at the least possible cost.
Besides these, as a democracy, the state is meddling in privately run businesses - an assault on liberty. While such acts may be justified under extraordinary circumstances like the one we are living through, it must come with full acknowledgment of the limits of the state. A simple metric would be to examine how well the state can ensure compliance. Currently, the government may punish a hospital refusing to comply with their price ceilings, but, is there anything they can do if a hospital compromises quality?
Many hospitals are stressing their assets to stay afloat, but cannot challenge the government, lest they be branded as greedy vultures. The trust deficit between patients and hospitals could have been addressed by allowing each hospital to declare its tariff in advance. While there would remain isolated incidents of profiteering, it would certainly be easier for the government to track and trace such outliers than impose blanket diktats. Tracing evidence from the past, the continued price regulation in California drove the state's largest utility firm, Pacific Oil and Electric Company, into bankruptcy. The last thing we would want in these times is our private healthcare system collapsing under financial duress.
That said, for a short period of time, we would be elated to live under the illusion of a fair world where everyone has equitable access to a limited resource. But if by any chance we do run into acute shortages in the near future, we may turn back to introspect whether we personified Friedman’s tomatoes through this policy.
Let’s sincerely hope we’d never have to get there.
Jithin is an author and winner of Amazon’s KDP Wordswthy Award 2018 for short fiction, and a graduate of IIM Kozhikode. Views are author's own.