A real estate developer takes 25% of the basic selling price of an apartment from prospective buyers, even when construction hasn't even started. The buyers, many times, borrow this money from banks paying 8-9% p.a. interest. The developer starts construction with the money received from the buyers, and keeps asking for more payments as construction progresses. The developer takes the full price of the apartment before possession is handed over to the buyer. Developers in India, on an average, usually earn a gross profit margin of 25-30%. This implies the buyers are borrowing money to fund the builder's profits. And this is an illustration of an ethical developer who is complying with all rules and regulations and ensuring timely delivery.
A commission agent (Adhati) in a vegetable mandi goes to villages at the time of sowing, gives some advance to the farmers, so that when the crop is brought for sale in the mandi, the farmer uses his services for selling. The advance is interest-free and unsecured and is usually adjusted from the sale proceeds. If the crop fails, there is high probability that the farmer will not be able to return the advance money. This is usual practice in most mandis.
There are several manufacturers, enjoying a dominant position in the market, who work on a negative working capital basis. They insist that their customers pay much in advance to ensure timely supply of goods. Companies like Asian Paints, Maruti Suzuki, and several FMCG giants have perfected this model—collecting from customers before paying suppliers, essentially running their operations on other people's money.
Most lawyers insist on their clients paying in advance before they appear in courts. Their remuneration is usually independent of the outcome of the court proceedings. In many cases, lawyers charge even when the court hearing doesn't take place.
E-commerce platforms take 15-30% commission from sellers but offer 30-60 day payment cycles, effectively using sellers' money to fund their operations. Meanwhile, customers pay upfront, giving these platforms a comfortable float to manage.
These are some examples of "trade deals" in the normal course of business between two parties, where one party enjoys a clear advantage over the other. The party with stronger bargaining power—whether it's capital, market access, or legal expertise—dictates terms. The other party accepts because the alternative is worse: no apartment, no market access, no legal representation.
The Water Flows Where It Must
Bilateral international trade deals are no different. Two countries negotiate the terms of their mutual trade, considering their economic and strategic strengths and weaknesses. The primary objective behind every such deal is usually to benefit from one's strengths and minimize one's weaknesses. Any deal that doesn't benefit both parties (though not necessarily to the same extent) is unsustainable and may fall apart in due course.
The US has technological superiority, capital markets, and consumer spending power. India has a young workforce, growing middle class, competitive manufacturing in select sectors, and a massive services export capability. Both countries have something the other needs. The question isn't whether trade will happen—it will, because water finds its path. The question is on what terms.
As some wise person once said, "trade is like flowing water. It finds its path and flows to fill the space available."
The India-US Trade Deal: Beyond the Noise
Disregarding all the conspiracy theories and political rhetoric with regard to the proposed India-US bilateral trade deal, I believe that Indian-US bilateral trade shall grow and benefit both countries. It is undeniable that it may benefit one country more than the other. It is also possible that the deal is less beneficial (or even harmful) for some businesses and consumers but benefits a larger number of businesses and consumers.
Consider the facts: India-US bilateral trade stands at over $190 billion annually. The US is India's largest trading partner. Indian IT services, pharmaceuticals, textiles, and engineering goods find significant markets in the US. American technology, defense equipment, energy products, and aircraft find ready buyers in India. This trade exists not because of government benevolence but because it makes economic sense for businesses on both sides.
There is not sufficient evidence available to indicate that any of the previous BTAs has adversely affected the Indian economy overall. It is possible that some smaller businesses and farmers might have been impacted negatively, but that is mostly a problem of adaptability and government support, not the trade deal per se.
India's FTA with ASEAN, signed in 2009, was criticized for flooding the Indian market with cheap imports. Yet, India's trade with ASEAN has grown from $55 billion in 2010 to over $130 billion in 2023. Indian pharmaceutical exports to ASEAN have grown significantly. Yes, some sectors faced pressure, but others thrived.
Similarly, concerns about American agricultural products, particularly dairy, flooding Indian markets ignore ground realities. India is the world's largest milk producer with production costs that are globally competitive. The real challenge isn't American competition but our own supply chain inefficiencies, lack of processing infrastructure, and fragmented farm holdings.
Winners and Losers: The Uncomfortable Truth
I see the proposed BTAs with the US, the EU, and the UK as a growth stimulus for competitive Indian businesses, professionals, and farmers. The marginal and small farmers and micro and small businesses may need government support (financial, technical, and protective) for adapting to the new market dynamics.
Let's be clear: some sectors will face headwinds. Small-scale dairy farmers without processing capabilities, low-tech manufacturers competing on cost alone, and businesses dependent on protectionist policies will struggle. But that's not an argument against trade—it's an argument for better transition support.
Conversely, Indian IT professionals, pharmaceutical manufacturers, automotive component makers, textile exporters, and agricultural producers with scale will likely benefit. The question for policymakers isn't whether to sign the deal, but how to support those who'll face transition costs.
Just as the real estate buyer accepts unfavorable payment terms because the alternative is no apartment, India will negotiate from a position of relative strength in services and select manufacturing, while accepting pressure in agriculture and traditional manufacturing. The US will push for market access in agriculture and technology, while accommodating India's strengths in services and generics.
The Path Forward
Trade agreements don't create prosperity—they channel it. Like water flowing downhill, trade will happen where economic logic dictates. The agreement merely defines the riverbed.
The real work begins after the deal is signed: skilling workers for new opportunities, supporting businesses through transition, upgrading infrastructure, and ensuring that the gains from trade are broadly distributed, not concentrated in a few hands.
Will address this topic again once more details are available about the India-US bilateral trade deal. Until then, remember: the water will find its path. Our job is to ensure it irrigates the fields, not just fills someone else's well.
No comments:
Post a Comment