India has put in place a $5.4 billion policy to provide free medicine to its people, a decision that could change the lives of hundreds of millions, but a ban on branded drugs stands to cut Big Pharma out of the windfall.

From city hospitals to tiny rural clinics, India’s public doctors will soon be able to prescribe free generic drugs to all comers, vastly expanding access to medicine in a country where public spending on health was just $4.50 per person last year.

The plan was quietly adopted last year but not publicized. Initial funding has been allocated in recent weeks, officials said.

Under the plan, doctors will be limited to a generics-only drug list and face punishment for prescribing branded medicines, a major disadvantage for pharmaceutical giants in one of the world’s fastest-growing drug markets.

“Without a doubt, it is a considerable blow to an already beleaguered industry, recently the subject of several disadvantageous decisions in India,” said KPMG partner Chris Stirling, who is European head of Chemicals and Pharmaceuticals.

“Pharmaceutical firms will likely rethink their emerging markets strategies carefully to take account of this development, and any similar copycat moves across other geographies,” he added.

But the initiative would overhaul a system where healthcare is often a luxury and private clinics account for four times as much spending as state hospitals, despite 40 percent of the people living below the poverty line, or $1.25 a day or less.

Within five years, up to half of India’s 1.2 billion people are likely to take advantage of the scheme, the government says. Others are likely to continue visiting private hospitals and clinics, where the scheme will not operate.

“The policy of the government is to promote greater and rational use of generic medicines that are of standard quality,” said L.C. Goyal, additional secretary at India’s Ministry of Health and Family Welfare and a key proponent of the policy.

“They are much, much cheaper than the branded ones.”

Global drugmakers like Pfizer, GlaxoSmithKline and Merck will be hit. They spend billions of dollars a year researching new treatments and target huge growth for branded medicine in emerging economies such as India, where generics account for around 90 percent of drug sales by value, far more than in developed countries.

U.S.-based Abbott Laboratories, which bought an Indian generics maker in 2010, is the biggest seller of drugs, both branded and generic, in India, followed by GlaxoSmithKline.

BIG PHARMA BLUES

In March, India granted its first ever compulsory license, allowing a domestic drugmaker to manufacture a copy-cat version of Nexavar, a cancer drug developed by Germany’s Bayer, unnerving foreign drugmakers that fear a lack of intellectual property protection in emerging markets.

That enabled India’s Natco Pharma to sell its generic version of Nexavar at 8,800 rupees ($160) per monthly dose, a fraction of the 280,000 rupees Bayer’s version cost.

In another blow to Big Pharma’s emerging market ambitions, China recently overhauled regulations to grant authorities the power to allow domestic drugmakers to produce cheap copies of medicines protected by patents.