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Trade deficit not a monster! Here’s how to turn it into a blessing in disguise

India is still struggling to make it self sufficient in the indigenous production of numerous products, intermediary goods, raw materials including components and bound to import for producing the final product. (PTI photo)

By Sanjay Jain

Bid adieu to the threat of trade deficit as there are numerous ways to convert such threat into opportunity contributing to the growth in the GDP of the country leading to generate employment, better utilization of resources and optimal collection of revenue in terms of direct and indirect Taxes along with dividends.

Trade deficit is an economic situation in which the Imports are greater than the Exports from a country leading to loss of opportunities of employment and resources in Trade & Industry. India is still struggling to make it self sufficient in the indigenous production of numerous products, intermediary goods, raw materials including components and bound to import for producing the final product. Thus forced to pay the hefty custom duties, making the input cost dearer, leading to underutilization of capacity, which in turn have a cascading effect on all sort of factors of production and lesser revenue generation by all the stakeholders including Govt. The optimal capacity is marginalized due to dependency on costly import of Inputs.

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This problem may be addressed by making imports cheaper in terms of Duties. If the Inputs which are not being produced in India are made cheaper by reducing the Import Duties to its minimal, it will motivate the Industry to enhance the Production Capacity due to the increased margin of profits, leading to enhance the employment generation, incremental deployment of direct and indirect resources, substitution of Import of the final product, bigger market size, more GST collection, better Income Tax payments and dividends to the Investors. There will be an auto hedge between the loss of revenue from the reduction in Import Duties and the cascading benefits, as mentioned, and a big booster for MAKE IN INDIA initiative of the Govt. Hence the Monster image of Trade Deficit can be proved in blessing in disguise.

There are so many items and intermediary products India don’t manufacture and Industry is bound to import the same to fulfil the need of producing the final product like Automobiles. Auto grade steel is one of the major examples.This special type of steel is not being manufactured by the local steelmakers and the automakers are dependent on countries like Korea and Japan in a big way. The automobile sector is one of the largest industry vertical deploying huge manpower, both skilled and unskilled along with other factors of production but unfortunately is in all-time red these days, consequently large scale lay offs, closing down of dealerships, temporary shut down of plants sort of symptoms are being noticed. It has a visible impact on the crushed or underutilized installed capacity of the Industry leading to a clear deterrent to MAKE IN INDIA movement. India has a great potential for exports of Automobiles like Cars, Trucks and Two-wheelers. So many Indian and multinational big players are exporting the same to different regions of the globe.

Therefore, there is an opportunity for other mid and small size players to grab the international market too. The rationalization of the Import Duties on the raw material & intermediary products, not being manufactured in India, maybe one of the major contributor to boost the morale of the Automobile Industry and to motivate them to develop the sustainable production capacity, making the MAKE IN INDIA dream true. The EV is a sweet dream but the country can’t afford to ignore existing Non-EV sector, deploying such huge resources of the country and in turn generating the big Revenue. The trade deficit, on this count, will have an auto hedge by an increase in production and revenue leading to growth in GDP.

The Pre Engineered Steel building (PEB)is another industry to suffer on the consumption of steel factor. The steel used in this industry is cheaper outside India and, therefore, producers are tempted to import the same.PEB is a wonderful substitute of traditional concrete buildings in industrial & infrastructure sector. It is marking its presence in a very rapid manner due to its faster construction and commission coupled with lower cost, environment friendliness with good realizable value if scrapped in future. The entire steel used is recyclable.PEB is also having great export potential. Therefore, rationalization of Import duties on Steel used in this industry will have the same effect as in Automobiles and trade deficit will be auto hedged by more exports & better utilization of the factors of production including the new employment generation on import activities.

The trade deficit is therefore not always an unfavourable situation, if the goods, forced to be imported, due to their non-availability in India or being dearer, carve out the path for better capacity utilisation and employment generation. Therefore, the need of the hour is to make a trade-off between the trade deficit and the growth in GDP.

(Author is an advisor in the field of Business, Economy and Taxation. The view expressed are personal)

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Source: Financial Express