Who needs the MRP?

Whenever we shop for packaged commodities today, after having spotted a product and even remotely considered buying it, our gaze instinctively falls on its MRP i.e. Maximum Retail Price. With two good reasons. Firstly, it informs us the amount we will have to shell out in order to buy it. Secondly, it is the dominant signalling mechanism, in the sense that it clearly signals the supposed, designated value of the product and how it compares with other similar products available for purchase. Helps us make a decision basically.

What we can safely establish is that the MRP is indispensable, in a sense, as far as almost any kind of shopping of packaged/branded products in India is concerned. But why just in India would we have a fixed price for a product across a country set by the manufacturer - this is basically how the world shops and consumes, right?

Not really. In fact, no one apart from Indians (and Bangladeshis) do.

I was rather confused when I came across this particular headline – 

My first reaction was, If we exempt retailers from displaying MRP, how else does this work then? What systems possibly do all other countries follow? Plus why not simply follow MRP?

Let’s have a look at the answers to these questions, delve in!

Why MRP?

The idea of compulsorily printing and making available a Maximum Retail Price on all packaged products and commodities was introduced in 1990. It is to be printed on the packaging only by the manufacturer or the original importer of the product. 

Compulsory MRP printing was introduced to prevent Tax Evasion. Prior to making that, manufacturers used to print a Maximum Retail Price with Local Taxes Extra. However, this means was exploited by many retailers in the way that they very often collected way more in the name of ‘local taxes’ that what was legally mandated. Hence this compulsory printing of Maximum Retail Price Inclusive of all taxes came about. Today, the MRP comprises of Raw material & Manufacturing expense, Excise , Franchise / PCD margin, Stockist margin, Retailer margin, VAT, Marketing expense, Manufacturers' margin, Cost & Freight, Miscellaneous charges and so on. The GST is the most recent inclusion on the list.

Among the reasons that can be made for continuing with the system of a manufacturer-mandated MRP is that it’s a system we are the most familiar with, it helps reduce tax evasion (at least on the retail side of things) and that in a country with such high levels of illiteracy and lack of awareness, it is best to mandate a fixed price as the benchmark in the larger interests of consumers across classes and markets. In essence, a standard set as MRP is also an assurance for the price of a product, very similar to a quality assurance.

Why not MRP?

There are several reasons so as to why India should do away with the current system of MRP which we follow and adopt more modern product pricing methods – 

·      Having a Maximum Retail Price for all retail products essentially entail criminality in case of non-adherence, unlike other similar systems used across the world. This in turn entails massive enforcement costs, raises the costs of doing business and inflates the costs of products overall.  

·      MRP is applicable only for packaged products and not for day to day essentials like fruits and vegetables or even services, a sector which is occupying an ever growing share of India’s economic output. Vegetables, rice, pulses etc are mostly unbranded and sold loose. The retailer thus has the freedom to choose the price, based on his costs and the demand and supply for those commodities. 

·     Even the branded, packaged commodities are not usually sold at their MRP. It is not uncommon to pay a price much higher than the MRP in movie theatres, expensive restaurants, tourist locations, airports and railway stations since shops there charge over and above the MRP for ‘services’ they provide alongside the product. These range from the costs of making that product available at that particular location to the implied charges for cooling levied on packaged drinks and beverages, for example.

·     Another absurd aspect of MRPs is how producers often print an MRP so ridiculously higher than what the cost of production is so that the product can be sold at prices of up to a 90 percent discount, thereby making the printed MRP redundant in its ability to signal value. Firecrackers and automobile spare parts are the most obvious example of this.

·      In the pre GST days, given the fact that India is a union of states and states could levy their own rates of specific taxation,manufacturers used to take into account the highest tax rate which was charged on the product by any state in India and then extrapolated it for all other states. Hence, even if the tax rates in one particular state used to be low, we had to pay a higher price because the tax rates in other states were higher. 

·     Having a legally enforceable, fixed MRP regime reduces the availability of goods in rural India and leaves our rural markets underdeveloped. Retailers in remote locations and in villages often have to bear high transportation and storage costs, which they cannot pass on to the consumers since they are legally not allowed to charge a price higher than the MRP. Therefore, in order to avoid making losses, they choose not to stock many products and thereby reduce the choice available to consumers. If, however, they were allowed to determine their own price, they could factor in the transportation costs and charge a slightly higher price than what the MRP presently dictates them to.

·     An India specific reasoning I can make is of the scope for confusion MRP entails on the enforcement side of things. When GST was being implemented, we often came across instances like these (and we still can and do in fact) – 

Whenever the indirect tax rates are changed, MRPs of literally every single product affected have to changed, irrespective of the fact if these products are in the factories or if they have reached market shelves already. The sheer scale of enforcement resources needed in order to ensure compliance with such changes is disruptive, mind boggling and wasteful. One reason why this happens is because of the fact that MRP is inclusive of all possible taxes, hence any change in their rates whatsoever necessitates this entire cycle of enforcement again.

If not MRP then what?

Product Pricing systems used in all other countries apart from India and Bangladesh range from a Manufacturer's Suggested Retail Price ( MSRP) , Recommended Retail Price (RRP) to the Suggested Retail Price (SRP) . 

Legally, the move to remove MRP in India is quite simple, as it requires only a notification. The Ministry of Consumer Affairs can, via notification, amend the Legal Metrology (Packaged Commodities) Rules, 2011 to remove retail sale price as part of the declarations required.

One idea which I would like to clarify here is that in non-MRP systems like Manufacturer's Suggested Retail Price ( MSRP) or Suggested Retail Price (SRP) and so on, it’s not like there’s no pricing indicator or benchmark at all for the consumers to refer to. The primary difference is that there isn't one single pre-decided and legally enforceable price point, unlike MRPs and hence they allow scope for moderate price variations locally depending upon a host of factors instead of creating illegal, parallel price points and non-adherence to law anyways. Plus, in India, we are conditioned to believe and follow the MRP as the price which we must and are legally bound to pay for a product. All the while knowing fully well that it’s the maximum amount which the retailer can charge us for it and not the minimum price for retailing. 

Coming to the point about rural India and its illiterate, under aware masses being cheated in the absence of an MRP - when the same consumers can purchase fruits, vegetables, rice and so on almost daily without an MRP, why cannot this be done for other retail products which would come with a reference price point anyways! Retail density in India is high enough to justify allowing genuine competition among retailers, which will result in lower prices for consumers. Plus in free markets, if one particular retailer prices the products too high, there’s always a second retailer willing to serve at lower, fairer price points. The market discovers a near standard in terms of pricing over time while incorporating the impacts of local, price influencing factors as well.

Anupam Manur rather aptly sums it up in an article (The Hindu, July 23rd, 2015) – “While the intention to protect consumers in a pre-liberalised India can be lauded, continuing the system today does not make any sense. The practice of MRP in India is unique, archaic and dysfunctional. 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 system for having a Maximum Retail Price on all packaged products across the country, introduced during the times of the economic crises of 1990s, has existed in India without being questioned for way too long now. It is time to give a chance to the systems which most of the world follows and adheres to, with good reasoning.

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