By Henry Foy

MUMBAI (Reuters) - 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 publicised. 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 the Ministry of Health and Family Welfare and a key proponent of the policy.

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India to give free medicine to hundreds of millions