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India: Towards a healthy future?

Apr 10, 2007

The Reserve Bank of India (RBI) Governor, Dr. Y.V. Reddy in his Economic Outlook in March 2007 highlighted the four challenges that the Indian economy faces at present - poor physical infrastructure, fiscal consolidation, agriculture and delivery of essential public services such as education and health. In this write-up, we concentrate on state of affairs in the country's healthcare system and discuss ways to tackle the challenges over a period of time.Healthcare services are important to an economy as they play a significant role in reducing the mortality rate and enhancing the quality of life. While much has been said about the poor state of the country's infrastructure, revenues from the healthcare account for 5.2% of the GDP and the sector employs over 4 m people (Source: IBEF). Against this backdrop, the poor state of the health infrastructure in the country, therefore, becomes an important issue that needs to be addressed.

India's per capita health expenditure in absolute terms is considerably lower in comparison to countries such as China, Brazil, Malaysia, Russia, UK and the US. That said, if we consider the per capita healthcare expenditure (as % of per capita income) the picture is slightly better as can be evinced from the table below:

India: Low healthcare spending (2004)
CountryPer capita incomePer capita healthPer capita health expenditure
 (US$)expenditure (US$)as a % of per capita income
UK35,703 2,853 8.0%
Brazil 3,352 256 7.6%
China 1,280 70 5.5%
Russia 3,960 212 5.4%
India590 28 4.7%
Malaysia 4,615 176 3.8%
Source: World Bank, World Health Organisation

Pharmaceuticals and hospital servicesaccount for 75% of the total healthcare market. The government spending on healthcare (as % of GDP) is as low as 0.9% (In the developed markets of US, UK and Japan the healthcare spend by the government is above 7%). This is abysmal given the fact that the healthcare infrastructure in the country leaves a lot to be desired. This also accounts for the lower life expectancy in India as compared to the developed nations. Some of the issues that need to be addressed are as follows:

Price control issue: The Indian government is looking to bring more drugs under price control, the main objective being to reduce the prices of medicines in a bid to make them available to the common man. In our view, it is not the price that is an entry-barrier for the common man. India has been a low price market for more than decade now and there has been no tangible benefits. Based on our interaction with pharma companies, there is a pertinent need to invest heavily in rural medical infrastructure, including the quality of medical education institutions, to be able to make a meaningful difference in the long-term.

Public healthcare scenario: The responsibility of providing healthcare in the country rests with the central, state and local governments. While the public health programmes have been successful in eradicating diseases such as smallpox and reducing the incidence of diseases such as leprosy and polio, the fact of the matter remains that the public sector accounts for 20% to 25% of the total healthcare expenditure (accounting for nearly 1% of GDP).

This is the lowest in the world and ahead of only five countries namely, Burundi, Myanmar, Pakistan, Sudan and Cambodia (Source: CRISIL). Besides this, public health management is saddled with a host of problems, which include resource crunch, political interference, inflexibility and other bureaucratic roadblocks. As a result, the focus has been increasingly shifting towards private healthcare. While private healthcare is expected to witness major traction in the future, the government needs to also play an active role in improving the quality of healthcare services going forward.

Hospitals: While the population of India has been on the rise, the growth in healthcare infrastructure has not managed to keep pace with the same. To put things into perspective, there are just 1.1 beds for every 1,000 Indians as compared to around 4.3 in countries such as China, Korea and Thailand, which indicates that huge investments need to be made if the situation has to improve going forward. As per CRISIL, investment of Rs 670 bn will be required by 2011 for ramping up the healthcare infrastructure, of which only one-fifth is expected to come from the government.

To sum up...

As compared to the developed world, in India, around 80% of the healthcare payments are borne by individuals out of their own pockets. This percentage stands at around 10% to 30% in the developed markets. This means that increased penetration of health insurance in India will play a critical role in boosting the growth of the healthcare market in the country.

While the government is planning to increase public spending on health to at least 2% to 3% of GDP over the next five years from the current 0.9%, which is a positive sign, execution of the same remains an issue. At present, of the total healthcare expenditure, around 75% is accounted for by the private sector, which we believe will contribute to the growth of the healthcare market in India in the future. Nevertheless, the government needs to lay increased emphasis on ensuring that medicines and healthcare services are 'accessible' to the country's population at large in the longer term.

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