India's new liberalised drug-pricing regime, which is being announced this month, will cause drug prices to increase in the long term, although they are expected to remain unchanged in the first year, according to a recent government report.

Under the new system, the price of drugs not included on the country's essential medicines list will be set by market forces. The 354 ingredients that are classified as essential will have more relaxed price controls based on cost and market share, although a new formula will be implemented to decide if an ingredient is monopolistic. Ingredients with an annual turnover of INR250mn (US$5.55mn) and a 50% market share, or those with a 90% market share and turnover exceeding INR100mn (US$2.22mn), will be subject to price restrictions.

The Indian government and the drug industry have been in a protracted battle over price cuts in recent months. Rising inflation in the country, which reached a four-year high of 8% in September 2004, has caused manufacturers to increase their prices in order maintain profit levels, moves which the government has tried to restrict.

Drugmakers are expected to welcome the new proposals as a move in the right direction, although many are calling for the liberalisation of prices to go even further, coupled with further efforts to reduce illegal copying of drugs. Meanwhile, the government has pledged to implement the new reforms gradually in order to protect consumers from sharp price increases.