It all started when I was thinking about the cost of the iPhone 3G. Whenever we discuss about electronics, the first thought that comes to mind is that it is cheaper in the USA. So, we try to get someone from the US to buy the product when they come to India. Of course, we need to avoid customs while doing this, so that we retain the advantage of the lower cost without additional customs duties.
Of course for those of you who think its nice bringing in stuff from US, you are actually smuggling goods illegally. Then there are some clauses that state you can bring in goods worth upto Rs. 20,000 duty free from abroad.
Anyway, so, let us say, that an electronic item costs 20k in US and the same in India. I feel that does not mean that the product will be met with the same acceptance levels in both India and US. There has to be a pro-rated system of evaluating the costs of products. While an item costing $1000 might be cheap in the US, the same item costing Rs. 45000 is not considered cheap here. Since the buying power of the people here is much lesser.
Lets take a simple salary structure. Based on what I have heard from friends, they can get around $3000 per month during even internship or lets say, doing some really low paying job. Now an item of $1000 is a third of the months salary. For an entry level IT employee in India working in an MNC, the salary would be around Rs. 30,000 pm. So an item of the same rate, converted to India Rupees, will be costing almost 1.5 times a single months salary. On what will this person survive if he/she buys this item. Hypothetically, if the same item is sold at Rs. 10000 in India, then the value could be said to be the same as that of the item in US.
However this is not realistically possible. As the oft used adage goes, India is a land of contrasts. Many sections earn around Rs. 10,000 per month, where the IT guys in big MNCs earn well over Rs 50,000 pm. Bringing the product costs down, will only lead to the flooding of the market thanks to the buying power of the IT folks. The other thing is that the product, if manufacture in the US, with a margin of say 50%, would costing $500. This is roughly Rs. 22,500 in India, which is still quite costly. The manufacturer cannot possibly sell the product for any lesser even if he forgoes the R&D, shipping and octroi costs. Finally the last and the worst side effect would be that India will become the base for smuggling goods out. People can buy things dirt cheap here and sell them at incredible profits abroad.
Incidentally, that is exactly what is happening right now with this entire outsourcing business. Goods are produced cheap in India and they are being sold with huge margins abroad. Why shouldn’t/doesn’t the govt. cash in on this?
I belive the Govt. should take steps to improve the buying power in India and strive to improve the economy. I read in some forward, that the economy of the developed nation is growing because people buy. Its a cycle. People spend money, companies make money, the companies pay out more money to their employees, the govt. gets a share of the money, the govt. invests the money back into the country, the people are happy and they spend more. It goes on like this and I belive in this philosophy. But somewhere, that chain is broken in India.
1) Companies find ways to keep their money and not give it to the Govt – Tax sops and holidays
and stuff.
2) If the Govt. gets money it goes into the coffers of the politicos and not of the nation.
3) People are irritated with all this and either don’t spend money, or instead spend money in the US and help improve their economy.
This corruption has to be tackled somehow and I have no hopes that the state of corruption will improve anytime soon. But, in my opinion, the economy can be boosted in this way.
1) Remove all import duties on goods coming in from abroad. No customs/octroi etc. Unless the product coming in, is in direct competition to a product being produced indigenously. In that case, levy full duties on the product. If someone is interested in big brands and wants to show off his/her brand power, then he/she should be prepared to lighten his/her pockets too. Else, be happy with brands produced within India.
2) Of course, the brands produced here should be good quality and the Govt. should see to it that this happens. Set up small-scale and medium-scale industries that not only provide employment, but also churns out good quality goods at a fast rate. Promote companies to come to India and set up shop, provided that they provide sufficient employement to the lower/lower-medium class. Give sops to these companies to lure them in. But…
3) These companies cannot produce goods cheap and sell them abroad. India has showing itself as a strong buying power and the companies should now realize that they needn’t come to India only to produce goods cheaply, but actually to sell first-grade good here. Instead of the seconds that they keep selling all the time. Any goods exported out will be taxed heavily so that these companies don’t just exploit our country and indirectly share their profits with India.
A good way to do this would be to give the companies land at low costs, provide high quality infrastructure, and bring out a condition that makes India one of the cheapest places to produce goods and yet produce them with great quality. Such goods should be sold in India primarily, and should the company want to sell it abroad(which they will if they want to keep their margins) then they have to pay the Govt. in the form of taxes/duties.
This way the goods brought in from abroad will be at the same rates as it is when brought abroad. Companies can afford to reduce their margins while selling it here with the assurance that the cheaper costs here will not affect market dynamics. Companies will feel good setting up industries here and won’t mind sharing some profits with the country thanks to good infrastructure and increased buying power.
Finally a possible way to prevent/reduce goods being smuggled out. Check the manufacturing/sale date of goods(this has to be sealed onto the product during purchase) costing more than say Rs. 5000, and if it is less than a year or 6 months, then it has to be declared and this should be marked on the return tickets/passports. Older goods can be taken out since it would have been used anyway and won’t find a market abroad. A possibilty for clothing could be to force the companies to brand their products different when they have been manufactured for sale in India. Like Van Heusen India, or Peter England India. So when such a product is being sold abroad through illegal channels, it will loose the brand value. The companies can of course brand their original names on goods that are manufactured especially for export.
These are just my opinions to help improve the economy of India. Ideas like this or variations could be the way forward to help boost the economy and get a grab on the burgeoning inflation. Again, this would also help bridge the economic divide in the country by providing a lot of employement especially in the manufacturing and agriculture sectors where a stark divide is present.