Updated: Aug 1, 2020
India has been a circular economy for centuries, thriving the believe of wealth as one of the major aspects of life. Today we see a different India which has a thriving economy but not meeting the financial expectations of the world. The major reason for such slow growth is because of the Indian society is in the midst of a never ending transition mode of socialist to capitalistic values.
One such outcome is the Maximum Retail Price or commonly known as MRP. MRP is printed on all packaged commodities that consumers purchase which was introduced in 1990 to prevent tax evasion and protect consumers from profiteering by retailers. Before the amendment, manufacturers could print either the maximum retail price (inclusive of all taxes) or the retail price (local taxes extra). When producers opted for the latter method, it was found that retailers often charged more than the locally applicable taxes. Thus, the amendment was made to introduce the compulsory printing of MRP on all packaged commodities. India is perhaps the only country in the world to have such a system, where it is punishable by law to charge a price higher than the printed maximum retail price. In most countries, the system of having a universally enforceable printed price is viewed as being akin to price fixing and is thus prohibited as being anti-competitive.
The practice of MRP in India creates the following dis-functionalities :-
MRP applies only to commodities and not services
Most essential commodities are not packaged like fruits, vegetables, rice and etc, thus, do not fall under the MRP rule
Many shops charge for ‘services’ that are not covered by the MRP, for instance, you often have to pay a ‘cooling charge’, when you buy cold bottled water or soft drinks
Packaged commodities are not usually sold at MRP
It is not uncommon to pay a price much higher than the MRP in movie theatres, high-end restaurants, tourist locations, airports and railway stations
Producers or manufacturers sometimes print an MRP so high that the product can be sold at an actual price, thereby making the printed MRP redundant in its ability to signal value. Automobile spare parts & tech products are the most obvious example of this.
MRP was the focal point for retailers to create uniformity but has resulted in a system which has deceived consumers in the name of stable prices & moved away from it original goal of consumer-centric pricing solution especially for the rural India. MRP has caused distress from the retailer to the consumer.
Retailers in remote locations and in villages often have to bear high transportation costs, which they cannot pass on to the end consumer, since they are legally not allowed to charge a price higher than the MRP. They, therefore, end up making losses. In order to avoid this, they choose not to stock many products, thereby reducing the choice available to consumers in these locations. If, however, they were allowed to determine their own price, they would factor in the transportation costs and charge a slightly higher price than what the MRP presently dictates. Eventually, seeing that there is a demand for these products and that a retailer is making super-normal profits, more shops will open up in that area. When the demand from retailers increases, wholesalers and manufacturers will create better facilities for distribution.
Manufacturers set the price at which a product will be sold to the end user which helps them to gain more control in market for pricing to the retailer & consumer hence the retailer should have a right to sell his products at any price consumer has the right to buy a product at a particular price, the retailer should have a right to sell his product at any price. . In doing so, the manufacturer gets to decide the profit margins of the retailer, which is essentially contradictory to a free market system.
If he charges a higher price, the customer is free to go to another store. Retail density in India is high enough for the market mechanism to function properly, as the OECD 2007 Report on India notes. Even in places that do not have high retail density, if retailers charge very high prices in the absence of an MRP, other retailers will soon enter the market and the resulting competition will eventually reduce prices.
The MRP system has existed in India without being questioned for too long now. It is time to give free markets a chance.
Written By Akhil Kapoor - Digital Psychologist