Open Forum

New Delhi, 1 June 2011

Unfair Trade Mark-Up

NURTURE FRESH COMPETITION

By Dharmendra Nath (Retd. IAS)

Trade mark-up on goods we purchase is not merely a question of some people’s livelihood. It involves bigger questions relating to the economy as a whole and its future. It has important upstream and downstream effects on both growth and employment in the society.

Outside of taxes and handling expenses, the difference between what the producer gets and what the consumer pays constitutes trade mark-up. It comprises retail mark-up and in addition wholesale mark-up. As the two mark-ups are quite substantial their economic significance is at least as much, if not more, than that of the cost of production.

As consumers we know what pay, but we have to admit that general information on producer prices – the price which the producer gets - is very limited. Yet we keep hearing that the producer gets only Rs 2-3 a kg out Rs 10 or 20 a kg we pay as consumers. Thus, trade mark-up often far exceeds the producer price and constitutes a major component of what the consumer pays. Hence, it is important not only to concentrate on it but try to contain it.

Established trade channels of wholesalers and retailers have been in existence almost for ever. Over the years, they have come to monopolise the distribution network and as a result tended to maximize profits. Now the approach has taken the shape of a deliberate exercise. Its proponents constitute a powerful lobby in the society and politics too.

The sufferers are both the producer and the consumer at the two ends of the spectrum as also the larger common good. It works like this: Since the producer gets a low price his incentive to invest and produce is reduced. Therefore the supply side suffers. Due to high prices, the consumer curtails his consumption and as a result the demand side also suffers. There is, thus, a double jeopardy resulting in slowing down of growth and consequently reduced employment in the society.

High trade margins therefore are virtually a speed-breaker in the path of our progress and deprive the economy of the opportunity of realizing its growth and employment potential. The important question thus to ask is: How can we make an article’s price approximate to its marginal cost of production, i.e. the cost of production of the last unit produced?

As we know, the established players are well-entrenched hands and they will keep on doing what they have been doing as long as they are the only guys in the field. The rigmarole of wholesale and retail chain will never automatically streamline itself to sub serve the common good. This can be accomplished only under some pressure, which can come from competition. We have, therefore, to create competition for them as a matter of public policy.

Not long ago, wholesale margin on goods declared essential used to be fixed at 2 per cent and retail margin at 4 per cent under the Essential Commodities Act 1955. Today, no one is prepared to accept this. That age is distinctly over.

But even if we put that aside, cost plus pricing was the widely accepted norm once. We used to pay for an item its production cost plus a reasonable margin over and above. That too no longer applies. People are moving out of that mind set. Price is losing its long- standing relationship with cost.

Today’s market management systematically teaches the theory of finding out and then charging what the market can bear. Price is thus based on the need of the consumer. In other words, pricing today aims to exploit the consumer’s vulnerability. The concept of what the market can bear and the search for maximizing profits has revolutionized the field completely. The market scene has drastically changed which calls for a policy response from us.

This change basically derives from the economic theory’s concept of consumer surplus, which is the difference between what the consumer pays and what he could have paid as per his need. Today’s market is out to appropriate most of it, thus making it a trader’s surplus rather than the traditional economist’s consumer’s surplus.

How else can we handle this situation except through greater competition? Business has made a move and it is for us to see how we are going to respond to it. So, what is going to be our response? Here competition comes in as a convenient tool and an important policy instrument. Competition is non-intrusive. No one evades it. Nothing else is as transparent.

However, competition should not mean just adding more of the same, or more of what already exists. It should also cover welcoming fresh initiatives and new ways of doing business. In brief, it amounts to creation of new types of competition. And, our approach should be multi-dimensional.

Malls and department stores offer a choice. They stand for an alternative style of doing business. But they represent only one of the possibilities. Others may include internet marketing, which cuts trading costs even further by reducing unnecessary movement of goods and build up of inventories.

In our search we may not shun foreign investment and foreign know-how relevant to these fields. Trade is global and complex and there may be things which we can surely learn from others.

Importantly, trade related questions are many. These are very intriguing too. How large-scale, long-term supply contracts can be negotiated? How inefficiencies of the supply chain can be reduced? How wastage can be avoided? How suppliers can be paid more promptly so that they can put the money to productive use more promptly? How some middlemen can be cut out? How inventories can be reduced so that cash and space are freed for other uses? How producers and consumers can be served faster and better? How accounting can be improved to facilitate tax compliance? After all, this too is an important angle.

Clearly, by throwing the market open to competition we can at least ensure that these and similar other questions are addressed on a regular basis. We should, therefore, nurture competition and have an open mind on trade channels of the future.  The occasion undoubtedly calls for the introduction of new paradigms.  ---INFA                         

(Copyright, India News and Feature Alliance)