The Relevance Of MRP In Modern India
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Apart from the overlapping culture and history that India and Bangladesh share, there is one more thing that both countries can commonly claim: a maximum retail price (MRP) on products. Simply put, it is a system of pricing which is calculated by manufacturers and applied by retailers. Introduced in India in 1990, with the objective of protecting consumers and curbing retailer tax evasion, the concept of MRP has generated polarizing opinions.
According to the Indian Consumer Goods Act, 2006, a maximum retail price refers to the price at which the product shall be sold in the retail market, and this price shall include all taxes levied on the product. The policy makes it mandatory for manufacturers to print the MRP on the packages of consumer goods. Though the decision was taken as a pro-consumer move to increase customer awareness about product pricing and discourage suppliers from hoarding goods to drive up prices, in several situations, the concept of MRP has been criticized for being incompatible with the free market system. This is because it involves manufacturers deciding what profits retailers will make. Apart from this, retailers can easily get past the system by charging for ‘services’, such as cooling charges on cold drinks and mineral water, to state an example seen in many parts of India. Also, it’s important to note that MRPs are not mandatory for non-packed commodities like services, essential commodities sold loose or even for that matter packaged food sold in theatres, tourist locations, etc.
There have been longstanding debates in the country about the efficacy of MRP. Several companies, including European brands such as IKEA, Hennes & Mauritz AB and Decathlon, had pushed for exemption from marking MRPs on their products because the practice hinders their ease of doing business. The companies appealed to the government, and today, they along with other single-brand retailers such as Nike and Adidas, are exempt from printing the MRP of every product. However, multi-brand retailers and MSME businesses are still subject to the rule.
The purpose of a business is to make profit, and for that to happen, the revenue earned must be greater than the cost of operation. The input costs of a retailer can vary considerably by location, local policy and quality of service, amongst other factors. For example, a five-star hotel has to pay a lot more towards upkeep and staff salaries compared to a local restaurant in your neighborhood. Having mandates that keep both at the same profit margins makes operations uneconomical.
To turn the above example on its head, it has been found that having MRPs in place actually affects smaller businesses the most. Micro, small and medium enterprises (MSMEs), especially if located in remote areas or tier II and III towns, often lack access to proper distribution networks and incur heavier logistical costs than their counterparts in well-connected towns and cities. The opposite can be argued for real estate costs for retailers present in CBDs vs their counterparts in areas where real estate costs are lower. With MRPs, their profit margins suffer, and many mom-and-pop businesses that have become cornerstones of the neighborhood over the years, are forced to shut shop. To put in perspective the consequences: MSMEs make up 29 per cent of India’s GDP and contribute to 48 per cent of her exports, with over 110 million workers employed in this sector. Officially, there are about 9.02 million registered MSMEs, but there may actually be over 63.3 million, out of which 63 million or 99.4 per cent are micro enterprises. Safe to say, this is not a sector that the Indian economy can afford to overlook, and if the MRP system is hurting these businesses, we must at least consider how this can be avoided.
In most countries, there is no concept of MRP. Each retailer fixes the selling prices based on two aspects. First, the basic economic principle of demand and supply. Second competition, in any catchment, there exist multiple retail formats and no one is going to have pricing strategy which will drive away the shoppers.
Many countries, such as the US, choose not to have an MRP, as it is considered a restraint on trade and interferes with the ability of merchants to price their wares as they consider best for their business; it puts too much power in the hands of manufacturers. Is it wise for India to follow suit? Will consumers suffer if it is removed? Or will market dynamics ensure that an optimum level in pricing is achieved? One hurdle in abolishing the MRP system is ensuring information symmetry to less informed customers. The government would be required to invest a large amount of resources towards this end. However, with the increasing usage of smart phones, private players would soon jump in with solutions that can collate average retail prices for different locations.
The optimum long-term solution could lie on middle ground, that is, introducing a suggested retail price (SRP) or recommended retail price (RRP). Both these approaches give retailers more flexibility in their pricing, while also protecting consumers from being exploited. In high-cost locations, retailers have the option of charging above the SRP or RRP, while also letting customers know the premium they are paying. In most cases, consumers would have the option of going to a different vendor if the service level or pricing did not match their needs. Additionally, to protect the consumer, a structured price monitoring mechanism can be implemented by the Central government to publish the fair price of frequently purchased products at regular intervals.
Either way, it is about time for India to take a fresh comprehensive look at the MRP system and devise a solution that caters to the needs of both—the consumer and the retailer.