Note : Free Trade Agreement, Import Export Model, Demand and Supply Module to keep in focus
Opinion : What if we create a whole shift in domestic production of certain product which is at equilibrium point in stock and to export it cross border and create a void in domestic territory ?
Lets take for instance the wheat as a commodity and production is at par with demand supply module (nor at surplus nor at deficit) under consideration for this case study
If we purchase the entire production of the wheat in a fiscal year at the MSP (Minimum Support Price) and export to the cross-border territories under FTA and Low Trade Barriers or Basically to the country where wheat production is in deficit to balance the trade at equilibrium with some premium added at the competitive prices. It will be a win-win situation for all of the supplier, receiver and the mediator as well.
But there is a catch.
There would arise a wheat crisis in the domestic territory if the scale of foreign trade would be of entire stock for a fiscal year. Indeed, this can be done at a marginal level (depends upon the size of the market where equilibrium of the prices of wheat is not altered in the economy). In response to this crisis, domestic markets need to import same commodity that is wheat from the cross-border territories which are in surplus of that commodity.
But the question arises why would have someone trade with us when there was an available alternative to importer in that same category which are at surplus. The reason is perhaps the better offered prices and political relations with that territory (which may be due to some other trade exchange between them)
This whole transaction nullifies each other and be at equilibrium only when trade at same prices or at FTA between the participating cross borders. If not and even a minor deviation in prices with respect to trade barriers and geo-political scenarios, it will benefit out only a few candidates out there and economy will tilt as per the adjusted inflation at each stage of production and transaction and considered not good for a whole and in the long run.
Now considered the case when this whole purchase of wheat stock production in that fiscal year is being traded at the MSP with marginal premium added being transact in domestic territory only.
It will surely drag down inflation in its niche category and in subsequent stages itself. The whole story for this theory to be workable is to reduce the margin for the mediator. The reduced margin problem can be overcome by a centralised network to operate this transaction that us due to economy of scale.
This centralised system but then reduce the unorganised group of many marginal mediators in between the transaction at each and every regional levels of transaction and may act as a threat to jobs reduction in total as total demographics of India (as in case) involves in Agricultural related activities is more than 54% (as per 2011 Consensus).
This theory basically induces the Deflation but Jobs Cut Scenario.
If the above case is considered, to intact the jobs as earlier when the above discussed theoretical model applies would be to only Upskill and involve in Value Addition to the Raw Commodities and Products which is another topic to discuss and requires economic upgradation.
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Disclaimer : The above stated Case Problem and Opinion are subject to personal views and approach from a Layman’s point of view and may not stands pragmatic in real world scenario and thus may differ from person to person in their way of solving it. Enjoy the joy of writing and a stimuli of brain to it.
Deepak Sharma | BSc. Physical Sciences (DU), MA Economics (IGNOU), PGC Strategy (IIMB)
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