1.Reducing out of pocket burden for Indians (Live Mint)

2.Going beyond bitcoin (Live Mint)

3.Too Many Regulations Are Ruining CSR (General)

1.Reducing out of pocket burden for Indians (Live Mint)

Synoptic line: It throws light on the issue of high out of pocket expenditure for medical care. (GS paper II)

Overview

  • India is the largest supplier of generic drugs in the world, and Indian pharmaceutical companies have famously succeeded in pushing down the cost of medication in many countries across the world. Yet, too many Indian citizens do not get access to medicines owing to high costs. The preferred solution of the government right now price control is suboptimal.

Problem of out of pocket expenditure

  • The problem starts with the thin insurance cover that leads to most patients paying for medical expenses out of their pockets after they have been diagnosed with an ailment. The latest National Sample Survey Office (NSSO) survey on healthcare, in 2014, shows that 86% of the rural population and 82% of the urban population were not covered under any scheme of health expenditure support, and that medicines are a major component of total health expenses 72% in rural areas and 68% in urban areas.
  • Healthcare costs pushed 60 million Indians below the poverty line in 2011. Therefore, even a modest drop in drug prices will free hundreds of households from the widespread phenomenon of a medical poverty trap.

Government’s efforts and its challenges

  • The government is aware of the problem, which is why it has been fixing the prices of “essential medicines” for some time, and even medical devices such as stents and knee replacement caps from this year.However, price controls have their costs.
  • First, investment in price-controlled medicines has fallen vis-a-vis non-price-controlled ones. Second, while stent manufacturers like Abbott have been denied permission to withdraw their high-end stents from the market, it is also unlikely that high-end, innovative products will be introduced in the market if they’re commercially unviable.
  • Generic medicines are affordable versions of the drug, introduced after a company loses patent over a medicine. These medicines are sold either by their salt-name or by a brand (called branded generics). For example, Crocin is a branded generic whose active ingredient is paracetamol. A study by the Indian Journal Of Pharmacologyin 2011 revealed that the price to the retailer for the branded product of cetirizine was 11 times the price of branded generics by the same company  the price of the generic was Rs2.24 per strip of 10 tablets and that of the branded medicine, Rs27.16.
  • These costs reveal the markup that companies charge for the research, reputation and marketing costs of branded medicines. However, doctors continue to prescribe branded medicines for rational reasons.
  • In most countries, the generic drug manufacturers have to prove “bio-equivalence”, i.e. the generic medicine works the same way, to the same extent and for the same purpose, as the originally patented drug. The regulations in India until April 2017, oddly, required bioequivalence testing only during the first four years of a drug becoming available for generic production; after four years, manufacturers only need permission from the state licensing authorities that don’t demand the data.
  • The law has changed to require bioequivalence tests for some classes of generic medicines, but its coverage is not universal and enforcement is yet to be evaluated.
  • This is going to be a challenge because the Central Drugs Standard Control Organization (CDSCO) has been accused of engaging in malpractices such as faking endorsement letters from doctors to secure marketing authorizations, approving drugs without conducting clinical trials, and accepting bribes from companies for fast approval of products.
  • Moreover, the president of the Indian Medical Association (IMA) told that there is an inadequate number of drug inspectors roughly 1,800 for the entire country.
  • Thus, there are several challenges before generic medicines can become mainstream.
  • First, the poor regulatory regime has dented perceptions about the quality of generic drugs. Second, since generic products don’t advertise and save costs that way the good-quality manufacturers are not able to compete with shoddy manufacturers on cost, essentially creating the “lemons problem” by driving the good-quality generic manufacturers to advertise and become branded generics, or exit the market. Third, the incentive to cut costs increases as massive government contracts are allocated to the lowest bidder. That probably explains why over 10% of the medicines in the government supply chain were found to be not of standard quality (NSQ), according to the National Drug Survey 2014-16. The globally accepted NSQ level is only 2%.

Way ahead

  • The government’s strategy of increasing affordability by reducing compliance costs on the pharmaceutical industry has increased the advertising burden on the good-quality producers. Certification practices, whether by government or a private agency, can mitigate that problem and allow good-quality generic medicine manufacturers to differentiate themselves on a variable other than price.
  • Cheaper generics are one of the important factors for reducing healthcare cost. The practice of generic substitution is strongly supported by health authorities in many developed countries, where bioequivalence tests are mandatory, to help contain prescription drug spending. These requirements might increase the price of generic medicines slightly, but they will drive poor-quality manufacturers out of the market and allow generics to compete with branded generics.

Question India’s high out of pocket expenditure threatens the stability of lower-middle income class groups. Comment.

2.Going beyond bitcoin (Live Mint)

Synoptic line: It throws light on how rising prices of unregulated crypto currencies could pose a number of problems for the formal financial system. (GS paper II)

Overview

  • Bitcoin has dominated headlines in the financial world in recent months with a return of over 1,700% so far this year. Rising prices are attracting more investors, though some experts see the increasing level of interest as a sign of a bubble. But this is not the only problem.

What makes bitcoin sticky

  • Bitcoin is an unregulated cryptocurrency which is administered by a network of users through an open and distributed ledger known as blockchain. Each transaction is verified by the network. Since it is a distributed ledger and no one person or organization controls it, technically, chances of someone manipulating the system are very low.
  • There are multiple reasons why people around the world are getting attracted to bitcoin or other such virtual currencies. Some people like the idea that it is actually possible to make electronic transactions without involving the formal system of banks and financial institutions. The possibility that demand for such an instrument will increase over time is pushing prices. In different parts of the world, some people also wish to take their savings out of domestic currency owing to economic and political instability.
  • However, a large number of investors are buying just to ride the momentum and make quick returns. Rising prices of unregulated cryptocurrencies could pose a number of problems for the formal financial system.

Problems of bitcoin

  • First, if the prices of bitcoin and other such currencies keep going up for a considerable period, the fall could be painful. Prices are clearly being driven by speculation, as there is no underlying asset to back them.
  • Further, rising prices will attract more people to start such currencies and invest in them. This will increase the contact of virtual currencies with formal finance, and developments in this market would affect the financial system. The beginning of futures trading in bitcoin is a major step towards making it more mainstream, even though its consequences are not well understood.
  • Second, if adoption of bitcoin or other such instruments actually increases significantly, it will make things difficult for central banks. A central bank manages the supply and cost of money in the system to attain maximum growth with price stability. But in the world of unregulated cryptocurrencies, central banks may find it difficult to manage the level of economic activity. Bitcoin, for example, is deflationary by design. Greater adoption could also alter the dynamics of capital control, especially in developing economies.
  • Third, an increase in the use of such instruments could also affect financial intermediation, investment and growth. Therefore, it is important for policymakers to carefully evaluate the potential costs and benefits of a possible rise in the use of unregulated cryptocurrencies. However, as things stand today, the high level of volatility shows the limitation of bitcoin and other such instruments. It is highly unlikely that individuals or firms would be willing to write contracts in a currency whose value changes by 20-30% in either direction in no time. But it is possible that some virtual currencies may become more stable over time.

Utility of technology associated with bitcoin

  • Although the outlook for bitcoin is fairly uncertain at this stage, the technology on which it works has a much wider appeal and could be useful in a number of areas. For instance, as we have argued in these pages before, blockchain has the potential to end property-related litigation in a country like India. The government can have a blockchain where ownership and transactions can be tracked easily.
  • Similarly, blockchain can make government spending more efficient in areas such as the social sector, as it will increase transparency. The technology is also being tested in the financial sector to settle transactions. This could help reduce costs for financial institutions and the working capital requirement for other firms. The distributed ledger can have other usage such as smart contracts.
  • While blockchain can help reduce cost and increase transparency in various sectors, it could also pose challenges for risk management in the system. In a speech earlier this year, Federal Reserve chair nominee Jerome Powell, for example, noted: If automated risk management, smart contracts, and similar tools are deployed across a network, cascades of rapid and hard-to-control obligations and liquidity flows could propagate across a network.
  • This interdependence will likely call for creative organizational thinking to address the need for governance and strong risk management.

Way ahead

  • Even though the future of cryptocurrencies is uncertain at this stage, it is the idea of blockchain that deserves more attention, as it could potentially transform the way transactions are settled. Regulators would do well to closely track developments in this area so that financial stability risks can be avoided if adoption increases in the system.

Question Though the future of crypto-currencies is uncertain at this stage, the idea of blockchain deserves more attention. Comment.

 

3.Too Many Regulations Are Ruining CSR (Live Mint)

Synoptic line: It throws light on the interventions in Corporate Social Responsibility (CSR) regime. (GS paper III)

Overview

  • India’s Companies Act 2013 has introduced several new provisions which change the face of Indian corporate business; one of such new provisions is Corporate Social Responsibility (CSR). The concept of CSR rests on the ideology of give and take; the object of introducing the section was to promote corporate philanthropy to ensure that growth remains inclusive.
  • Companies take resources in the form of raw materials, human resources etc from the society. By performing the task of CSR activities, the companies are giving something back to the society.
  • While the intent was to keep the provision principle-based and flexible, the leakage between intent of the law, its drafting, its delegated interpretation, and its final execution by the company on the ground gives rise to concerns that it does not realize what it set out to accomplish.

About CSR

  • The term “Corporate Social Responsibility (CSR)” can be referred as corporate initiative to assess and take responsibility for the company’s effects on the environment and impact on social welfare. The term generally applies to company’s efforts that go beyond what may be required by regulators or environmental protection groups.

CSR provisions as per Companies act 2013

  • In India, the concept of CSR is governed by clause 135 of the Companies Act, 2013.
  • As per the Company act 2013, the companies having Net worth of INR 500crore or more, or Turnover of INR 1000crore or more, or Net Profit of INR 5crore or more, during any financial year shall be required to maintain a Corporate Social Responsibility.
  • The Act encourages companies to spend at least 2% of their average net profit on CSR activities. The ministry’s draft rules define net profit as the profit before tax as per the books of accounts, excluding profits arising from branches outside India.

Problems

  • CSR is fundamentally an inspirational exercise, and it is very difficult to legislate aspirations. Laws only set minimum standards, but do not create an impetus for positive action. For example, it would be difficult to require that companies build “excellent” schools; the legal requirement can be met merely by spending money on education.
  • The law lists only a few genres of CSR activities like “eradicating extreme hunger and poverty”, “promotion of education”, and “social business projects”. This is much too vague to work as a legal definition.
  • The CSR law does not go far enough in reducing inequality and helping the disadvantaged. Without a coercive enforcement mechanism, it is unlikely that the law will result in widespread compliance and real effectiveness. In other words, “required” CSR will remain largely voluntary, but give the illusion of progress.
  • It is the government’s responsibility to determine high-priority needs of society and target public expenditure in those areas. It is unlikely that the allocation of resources reflects the democratic will of the Indian people.
  • Apart from this, there are certain events, awards or charitable contributions that are not considered CSR-compliant. For example-
  • An average marathon generates over a million kilometres of health-inducing running just on marathon day and probably tens of millions of kilometres in the previous few days of training, contributing significantly to preventive health. But this is not CSR.
  • Charitable contributions for helping the disabled will change the lives of millions of affected people, but are not considered CSR-compliant.
  • Many large companies have substantially contributed to training law enforcement agents, for example in cyber security, where the public sector’s knowledge is limited. That is not CSR either, even though it significantly enhances the financial and economic security of the country.
  • India is urbanizing fast, and will witness the largest migration worldwide into urban centers over the next 20-30 years, yet “sustainable urban development” and contributions to enhance urban public transport systems are not CSR-compliant.

Way ahead

  • CSR is a controversial idea with many executives, academics and officials on both sides of the issue. Thus, it is not surprising that the Indian law does not clearly define CSR for the purposes of expenditures. Laws only set minimum standards, but do not create an impetus for positive action.
  • However Indian practice of CSR is an important component of sustainability or responsible business, which is a larger idea, a fact that is evident from various sustainability frameworks.
  • CSR in India has traditionally been seen as a philanthropic activity and in keeping with the Indian tradition, it was an activity that was performed but not deliberated. However, over the time a national character encapsulated within it embedded in the idea of trusteeship.

Question– How CSR reforms can be remoulded to make them more societal and considerate?