India should not micromanage retail price tags

Take the case of packaged products whose packages must bear maximum retail prices (MRPs) and distribution networks are already loaded with inventory that shows old prices. In the fast moving consumer goods (FMCG) sector, a common strategy of using easily grasped ‘price points’ for low-priced items—say, ₹10 or ₹20—means that companies must enlarge their packs to pass on GST relief.

This reversal of ‘shrinkflation’ will take time. As reported, the department of consumer affairs has set a year-end deadline to clear old stocks. Till then, packs must display both the old price and its GST-led revision, the latter by means of stickers, re-stamping, etc. Marketers have also been asked to publish newspaper ads, send dealers notices and inform metrology authorities of their price tweaks.

As with auto showrooms being asked to put up posters of old and new prices by the ministry of heavy industries, the objective seems obvious: to raise the visibility of what we all gain from New Delhi’s Diwali bonanza. Across the retail landscape, dual price displays could also pressure businesses to drop prices in fair proportions.

So far, so straightforward. Even awkward interim prices like ₹9.40 need not be a retail problem now that UPI allows exact bank transfers. Yet, while the idea of dual-price displays clearly has its appeal, the extent to which consumer behaviour was taken into account is unclear.

For one, even buyers aware of GST rate changes may be unable to estimate the relief due, since the math involved is not easy. Rule-of-thumb efforts to match rate reductions with displayed price gaps could make people feel cheated; a GST rate drop from 12% to 5% is a 7-point cut, for example, but it translates to a price gap of 6.3%, as this tax applies to a lower base.

For another, two prices side by side, especially on small packages, could sow confusion among folks who remain clueless of these rate changes. It is for good reason that Marketing 101 advises a single price on every pack: buyers often have little time for details. It also conforms with the advice of keeping every market pitch single-minded. As the classic saying goes, throw two balls at someone, neither will be caught, but lob one and it’s an easy catch.

While campaigns could be run to give price cuts publicity and we can count on urban familiarity with dual tags at ‘sales’ held by large-format retailers, double tagging may confuse buyers across India in many categories of mass consumption. For the sake of adaptability, price display decisions are best left to those with an ear closest to the market—marketers, that is.

In any case, free market principles grant producers the liberty to price their output, with competition acting against overpricing. Further, firms must have the freedom to devise their own strategies for pricing, which may include premium plays and vary by demand readings. Cost-plus pricing is not the only game. Retail-level taxes—like overheads, input costs and tax credits—are just another variable in a complex formula. It is the job of market forces to optimize outcomes in the consumer’s favour.

Even if it’s only a one-off event, India’s switch to GST 2.0 must take care not to echo an era of price diktats and market distortions that we left behind with a closed economy.