What is Trade Margin Rationalization?

What is Trade Margin Rationalization? -UPSC

GS paper 3

Basically, under the proposed Trade Margin Rationalization regime, manufacturers would be authorized to offer a limited price margin for the entire trade channel

Trade margin is the variation between the price at which the manufacturers (indigenous /overseas) sell to the trade and the price to patients (MRP). The marketplace is skewed where suppliers induce hospitals to buy and push their brands based on profit margins and not on basis of cost savings on the procurement cost by a hospital.

The central aim of the Trade Margin Rationalization in medical devices should be to help purchasers. It must also allow rationalized profits for traders, importers, distributors, and wholesalers and retailers and create equity for the domestic industry vis-à-vis foreign manufacturers.

There should be clear objectives for any policy interference so as to avoid distress (to consumers), distrust (in the industry), and disruption (to market).

The Government must ensure that the importers of medical devices are not kept out of the move to cap trade margins. Aren’t  MNC importers traders?

You can’t have importers having an irrational 200 percent margin, as was indicated in a National Pharmaceutical Pricing Authority (NPPA) report investigating trade margins on catheters and guidewires and the rest of the supply chain only has a 35-50 percent margin as is being recommended by MNC importers lobby.

Everyone in a supply chain has intermediate costs and value addition. It needs to be determined what value addition, if any, importers do and what’s a rational margin for them.

Merchants in order to evade customs duty argue that intermediate costs like R&D and clinical evaluation are not part of the import landed price. However, they also induce hospitals with higher MRP. This tactical marketing warfare has cost the consumers dearly and harmed ethical marketing.

The State may consider capping trade margins along the whole supply chain of devices at a maximum of 85 percent. This will help in reducing the MRP of medical devices to less than half of the current prices while not being unreasonably detrimental to traders and hospitals.

Additionally, companies will be encouraged to attract clients on competitive features and hospitals will start buying on evaluating the cost of purchase and quality, instead of considering margins to be made on higher MRP.

  • Price controls can be done in a calibrated manner through:
  • One percent Goods and Services Tax (GST) on MRP as a tax-based disincentive;
  • Capping trade margins to a rational level;
  • Price caps on a few priority devices.

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