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)
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