June 10, 2021

Asia

INDIA: Implications of Modi’s U-turn on vaccination policy

BY Aditi Phadnis

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Report Contents

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( 4 mins)
  • Despite centralizing all vaccination procurement and distribution, the government will likely be unable to keep its promise of universal vaccination by end-2021.
  • Delays will spell a serious setback to the economy and signal political danger from alienated low-income groups.
  • A booming market is only a small part of the story.

Prime Minister Narendra Modi’s dramatic U-turn in India’s vaccination management policy is expected to have long-term fiscal and political implications. In an address to the nation earlier this week, Modi announced that the federal government was reversing its earlier decision of letting state governments manage vaccine procurement and restored the power to procure and distribute vaccines to the federal government. In addition, he announced that beginning 21 June, India would vaccinate everyone above 18 free of charge – those who opted to take the jabs at a private hospital would be charged a maximum of INR150 (USD2) for the administration of the vaccine, and the cost of the vaccine itself would have a cap. He also said the free food grain scheme for low-income groups would continue until November.

Administrative compulsions and politics have prompted the government to take these somewhat drastic decisions. In India, health management is the provenance of state governments. In theory, the federal government is trampling on the states’ rights by vesting itself with the right to procure vaccines. But in the last several weeks, state governments’ efforts to float global tenders for vaccines have met with procedural problems. At least two vaccine suppliers have refused to deliver jabs unless the federal government indemnified them. Reports that state governments have sold vaccines to private hospitals, diverting them from government facilities, led to criticism they were profiteering from the public health crisis. All this has led to delays in meeting vaccination targets.

The Modi government has also come under pressure from the Supreme Court, which has asked searching questions about procedures followed in vaccine disbursal and pricing criteria, terming the current policy “arbitrary and irrational.” As a result, the federal government has decided to step in and take things into its own hands. It has already told the Supreme Court that India’s entire population will be vaccinated before the year is out. However, this is patently unworkable. At a rate of 1.8mn doses a day, it will take India 2.8 years to inoculate 75% of its population. Increasing the average to 5mn daily, it would still take nearly a year for India to vaccinate the above-18 population.

Economic and political costs

Obviously, free vaccination and free food will entail a cost. With vaccinations costing around INR 450bn up from INR350bn budgeted for earlier, extending the free foodgrain scheme till November will involve an additional expenditure amounting to INR1.45tn. This cost comes as the Reserve Bank of India (RBI) has already pared GDP growth for FY22 to 9.5% from 10.5%. The cost of the free vaccination could result in additional expenditure of 0.4-0.5% of GDP and derail the fiscal deficit target of 6.8% of GDP in FY22 (year ending March 2022). This could weigh on India’s sovereign ratings prospects when they are likely due for a review towards the end of the year or early next year.

India had set aside INR1tn as receipts from disinvestment. With the best- performing market in all the EM countries, this target could be within striking distance, but only if the government moves faster. The privatization of state-owned carrier Air India is moving at a snail’s pace. The sale of the profitable state-owned Bharat Petroleum Corporation Limited (BPCL) is yet to happen though the government gave its nod more than 18 months ago.

With a booming stock market, the Finance Ministry reckons it can make up the deficit from asset sales. But what is worrying the government is the impact of the pandemic on India’s political economy, specifically on the informal sector, which is not a participant in the ongoing stock-market-driven euphoria and is mostly unorganized. Free food to this section of the economy is just one part of the story. It is low-income groups that fuel consumption and drive demand. They also represent a huge chunk of voters. Unless the government acts to stimulate demand and consumption, India’s growth story could face a serious setback.

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