Free Trade Agreements – Vital for Logistics Industry and Economic Growth

Free Trade Agreements – Vital for Logistics Industry and Economic Growth
– Dr.GBRK Prasad, Mentor and Advisor, Cargomen Logistics

The recently signed agreement between India and UAE is a path breaking novel approach and goes many steps ahead in promoting harmonious world trade. Though in scope, it is relevant to the two signatories, but it lays foundation and inspiring for other countries also to come to the negotiating table and agreed upon mutually.

Currently if we see the trade scenario, Pharma is a major earner of revenues for India through its export base. Adding to this is Covid situation boosts also multiplies export revenues for its Indian made vaccines. India has exported US$ 3.89 billion of bulk drugs & drug intermediates in FY20 and US$ 4.43 billion in FY21. So, the decision makers should work out  a strategy leveraging the export potential of Pharma to tying up with other imports from Major producing countries. Countries across the globe which have strategic advantage built through their dedicated efforts like India in Pharma Industry as well as China, should plan to identify partner countries for promoting trade in Agricultural products as well as items of personal consumption across the globe.

Fortunately or unfortunately, the equation of producer versus marketer to consumers is currently drawn in favour of either of them should be restructured in a way to benefit the consumer. This is essentially the free trade principle on which global trade has survived for past so many decades. Earlier the data on cost to producer stage to cost to consumer studies are not predominantly known select economists or experts. But now through internet technologies enables us to check and verify the prices stage wise and select what is good for consumer. For example, price of Amazon products stage wise can be analysed to see how trade is developing across product groups. Recently I have a chance to look and set up pricing for a product to get fixed for sale in Amazon. The subject item is sold by producer at Rs. 100 becomes say when Amazon sells at Rs. 150. There is 50 percent extra cost due to distribution and logistics efficiency of Amazon. This makes it imperative to streamline and see solutions to reduce this difference over a period of time year on year basis. Amazon is particularly good at developing solutions and showing the path both to producers and consumers.

In India, historically supply chain and logistics has played a key role which was always favouring the marketer. With trade getting centralized through companies like Amazon, this balance is slowly coming in favour of producer. This is imperative to do study when companies like ITC or organized sector got into making Items of daily consumption, availability improved and prices have also come down and producer has started earning more money for his labours.
Second important angle which is important depends upon foresight of Government Authorities in promoting global trade is emphasis on reducing the duty structure. Customs duty needs to comes down as a strategic tool to promote internal consumption levels by availing them at cheaper prices. This will give boost to the economy in many folds. If import levels or export levels go up in a country due to reduction of duties, there will be secondary benefit of employment generation in logistics sector and distribution sector. About 90% of India’s goods exports to the UAE are likely to be covered by the FTA. It will help create about a million jobs in India.

To the best of my knowledge, connecting to airports, seaports; enables movement of goods as result of FTA and this starts accruing good results in employment and wage earning potential indirectly to common masses of the country. Therefore, Government Policy makers should identify sectors and classify them as agriculture, manufacturing, distribution and logistics, etc, and see how FTA agreements with many countries can be used to drive internal consumption of masses and as well employment generation also. They should avoid looking at revenue as to how government will be affected in its spend expenditure base. There should be published study to be shared as to how per capita income can go up by reducing government revenues by duty reductions both in direct and indirect taxes. Did we assume liberalization would work in a way to promote employment and per capita income levels? It was a good move to drive productivity improvement across sector of economy. So there should more and more FTAs with multiple partner countries to stimulate both partners economy by facilitating global trade.

What is not noticed in signing FTAs more  is the decision makers may follow which items should be encouraged for less duty structure. This approach helps, I feel items which are imported with less duty and again reprocessed and reworked for export should be given maximum encouragement. These group of items bring double benefits to economy. Similarly, next set of items which have bias for more domestic consumption should be encouraged for less duties for spin off benefits accruing as these will improved per capita income standards and generate more employment opportunities directly and indirectly. For example, gold imported from UAE and then processed into jewellery and then exported to countries has multiple benefits to unfold. Similarly, intermediates and API imports and processing to export formulations is a success story in Pharma industry. So, the Government can take bold initiatives to reduce duties on such products without fear of Revenues reducing and so on.

Global Trade and diversifying role of Logistics Service Provider

With the changing business trends, global trade and economic development, how has been the role of a logistics service provider (LSP) diversified? Read here.

– Dr GBRK Prasad, Mentor and Advisor, Cargomen Logistics

As Internet breaks the barrier of physical distance, global trade happens due to continuous and efficient interaction of producer, logistics service provider (LSP) and customer. The point of production or manufacturing can be vastly at a distant place, whereas the LSP provides a service to producer to move to customer place. So the point is to view the role of LSP and see how best he can optimize and bring both the producer and consumer together by faster means.

LSPs role in B2B

All of us have seen a world where Amazon, Swiggy, etc and similar companies serving and improving service levels to a standard never heard of earlier. In this context, LSP provides services to both these two sectors: B2B and B2C.
Now this article looks at how and what best B2B segment can be better served by LSPs considering what their peers have done in B2C segments likes of Amazon, Swiggy, etc. The key differentiator will be in having right metrics to measure the service levels and constant effort to improve the same considering what is happening in global space including B2C. The key focus is on service levels as well as cost of services. These two parameters have inverse relation to each other and therefore require a balancing act by the management.

Right Infrastructure is the key

The art of management of LSP is really tricky and the key factor that measures success of a LSP is in having right infrastructure. For instance, if a LSP serves Pan-India basis transport of goods from producer to customer as a C&F agent; the question is what should be the transport budget for a big size company of stature. For say, Rs 250 crore is the transport budget. Then the next question is having a right rate contract for 2 years period with well defined movement matrix from production site to warehouse site or customer site in a matrix form. Deploying assets of movement of vehicles and owning or leasing at right places is very important.

Government’s role is vital

As companies have evolved their working rhythm over a period of years and fine tuned it, new LSP bidding for business have to play cards well by choosing right asset mix and skilled and efficient labour force. What is not realized is LSP business is game winner for political votes as it generates employment opportunities for masses over the country. This earning capacity is unmatched and ensures growth of economy. LSP business is much more employment generative. Amazon for example has 1.6 million on roll. Can you imagine this figure for other manufacturing company of this scale?

So my article focus is that Central /government finance minister, in this budget realized and stressed importance of Gati Shakti, clearly highlighting priority for LSP business, but corresponding incentives are not there in tax benefits for more employment generating companies. Investment is given incentive in taxes but employment and paying salaries also should get tax benefits, and I feel that right incentive scheme will galvanise both employment as well as generate profit for LSP businesses.

Air transport needs to be encouraged

Another parameter that government can influence is to encourage transport of goods by air. As this has galvanizing influence to move goods in shortest possible time to destinations across India, it is better that government reduces tax element in total air freight gradually over a period of time and not treat it as luxury. Government can do a sensitive analysis how much revenue increases by reducing the tax element gradually. This measure alone can trigger an economic growth beyond double digits which is what we really need. The two parameters can be linked and government should encourage balanced development of the nation through right incentives and punitive measures for promoting LSP businesses.

(The author has beneficial relationship with Cargomen Logistics India Private Limited.)