The report of the Committee on Category II Drugs was commissioned in January 1987 following the Indian government’s announcement in December 1986 to streamline the pharmaceutical industry’s pricing and ensure quality control while fostering growth. Initially chaired by Dr. Y. K. Alagh and later by Dr. Vijay L. Kelkar, Chairman of the Bureau of Industrial Costs and Prices, the committee was tasked with identifying essential drugs to include in category II, excluding those in the National Health Programme, and setting limits on maximum allowable postmanufacturing expenses. Members included Y. K. Alagh (Chairman, BICP); M. A. Patel (Commissioner, Food and Drugs Control Administration); V. Ramalingaswamy (ex-Director General, Indian Council of Medical Research); M. S. Murthy (Adviser (Chemicals)); Director (Drugs) Department of Chemicals & Petrochemicals; and two representatives of the Ministry of Health.
Drug price control in India dates back to 1962, with significant revisions in 1970 and 1979, regulating 347 bulk drugs and around 4,000 formulations, later extended to about 15,000 including different pack sizes. The objectives were to simplify the price-control system and make it more effective, stimulate the production of essential drugs, ensure reasonable returns for producers, and guarantee the availability of essential drugs at reasonable prices, especially for weaker sections and remote areas.
The findings highlighted the complexity and inefficiency of the price-control regime, which divided bulk drugs into three categories with specified markups: 40 percent for category I, 55 percent for category II, and up to 100 percent for category III. The report noted significant delays in price fixing, adversely affecting domestic capabilities and consumer welfare. Delayed price revisions eroded profitability, leading to shortages of essential drugs, particularly in rural areas. Additionally, about 20–25 percent of drugs in India were found to be substandard at the time of administration. The pharmaceutical industry, less capital intensive but facing high raw material and utility costs (up to 85 percent of retail prices), was discouraged by the pricing regime from engaging in domestic production, favoring imports instead.
The report recommended revising the price-control system by reducing the number of controlled drugs and focusing on essential ones. It suggested introducing flexibility for automatic price revisions based on input-cost changes, facilitated by a Price Revision Committee. Quality-assurance measures included establishing state-level and regional testing laboratories and enforcing the use of registered pharmacists for drug dispensing, allowing them to charge a prescription fee. Periodic prescription audits were also recommended to ensure proper prescribing practices. Fiscal measures proposed waiving central and state levies on essential drugs to reduce consumer prices and advocating subsidies on essential drugs required for long-term treatments such as tuberculosis and leprosy.
To implement these recommendations, the report called for immediate revision of formulation prices to prevent production slackening and also called for continuous monitoring of essential-drug availability by the government. Encouraging new technologies and the introduction of new drugs, exempting them from price control for the first five years, was also emphasized. The proposed changes aimed to shift production from nonessential to essential drugs, ensuring that the pharmaceutical industry could meet the health needs of the population while maintaining economic viability.
The Drug Price Control Order of 1987 significantly reduced the number of bulk drugs under price control from 370 to 142. It consolidated pricing categories to two, providing higher maximum allowable postmanufacturing expense (MAPE) of 75 percent for both categories, up from 40/55 percent previously. New drugs brought under price control also received a liberal 75 percent MAPE. Industrial-licensing norms were relaxed, improving conditions for multinational companies. While this improved profitability, around 75 percent of the pharmaceutical industry remained under price control.
The 1994 Drug Policy further liberalized pricing criteria and abolished industrial licensing for all bulk drugs. Capacity expansions were allowed, with supply and competition expected to increase. Foreign direct investment up to 51 percent was permitted across the sector, with higher limits considered case by case. However, five bulk drugs were reserved for the public sector until 1998. These policy changes aimed to boost the pharmaceutical industry’s growth and competitiveness while reducing price controls.
The report identified delays in price fixing, shortages of essential drugs, and high production costs as key challenges in the pharmaceutical sector. It recommended focusing price controls on essential drugs, introducing automatic price adjustments tied to input costs, and strengthening quality control through expanded testing facilities and prescription audits.
