State Trading (2)

STATE TRADING

GAGAN BHALLA 06 MBAMEHAK RAMDEV 17 MBA

DEFINITION There is no precise definition of State trading. There are various types of government participation in foreign trade, all of which can be defined as State trading. For example, in the centrally planned economies the entire foreign trade is nationalized and is, therefore conducted directly by government departments or government owned corporations.

On the other hand, there are countries which are essentially free enterprise economies but export and import of specific commodities are entrusted to government trading organizations or departments. For example, imports of raw un-manufactured tobacco is a State monopoly in France.

The third variety of State trading is found in mixed economies like India. In India, State participation in foreign trade is mostly done through government departments. The government owned trading corporations are, however, commercial entities registered under the Companies Act and have the same rights and obligations as any private sector firm.

CANALISATION

State trading is often associated with canalization. It means establishment of state monopoly in foreign trade. In other words, the item that is canalized can be imported or exported, as the case may be, only by the designated state trading agencies. The emphasis is on the control of foreign trade flows rather than on the ownership of the organization or agency conducting it. State trading agencies may also trade in products which are not canalized, in addition to the canalized items.

CANALISATION OF IMPORTS

State participation in imports is generally motivated by some other considerations:

• To reap the advantage of bulk buying.• To mop up any excess profit which the private sector firms might enjoy in import business.• To ensure proper internal distribution of the imported items and to maintain stable domestic price level.

ADVANTAGES OF BULK BUYING

There are essentially three elements which can be associated with the advantage of bulk purchase. First, a bulk purchaser may get better discount and trading terms. Secondly, since the bulk purchaser will be a monopolist, the possibility that prices of commodities, in short supply can be pushed up by competitive bidding by the Indian importers, is eliminated. Thirdly, since the international markets of many importable items are monopolistic, State trading will give rise to countervailing power which may mitigate to some extent the ill effects of the monopolistic market structure

Mopping up of Excess Profits

In a situation where demand for imports exceeds the supply of imports, there is bound to be a premium on imported materials. If the import license is issued to an importer, the premium will accrue to him. Further, ‘the extent of the premium will be determined by the market forces. The higher is the excess demand for imports, the higher will be the premium.

MAINTENANCE OF INTERNAL DISTRIBUTION

If foreign exchange availability poses no problem and the import trade is completely free, internal distribution of imported items at fair and equitable prices will not create any problem. But since such conditions generally do not prevail in a developing country, sporadic scarcity of imported items will occur. ‘To avoid these problems, it may be necessary to handover the import of essential items to government trading organisations which can plan the import operation in such away that a steady in flow will be. maintained. This will avoid sudden scarcities and consequent spurt in domestic

IMPACT OF CANALISATION

The impact of canalisation of import through state agencies has resulted in savings in foreign exchange on imports on account of bulk purchases and also on account of bulk shipments and in supply of raw materials to consumers in the country at reasonable rates. Other advantages are stated to be :

• Import and distribution in a planned and phased manner• Long term supply arrangements• Self generation of foreign exchange through special link arrangements• Equitable distribution in India through associations

HS code/Exim Code

Item Description

Policy Condition Relating to the policy

Import under SIL / Public Notice

Sub Heading Description

1001100020 Other than seed quality

Canalised Import through Food Corporation of India.

Wheat and meslin

1201000090 Other Canalised Import through State Trading Corporation and Hindustan Vegetable Oils Corporation

Soya beans, whether or not broken

31022901 Ammonium sulphonitrate

Canalised Import through Minerals and Metals Trading Corporation of India Limited.

Mineral or chemical fertilisers, nitrogenous

38231100110 Palm Stearin excluding crude palm stearin

Canalised Import through State Trading Corporation of India Limited.

Industrial Monocarboxylic fatty acids; acid oils from refining; industrial fatty alcohols

38231100120 RBD Palm Stearin

Canalised Import through State Trading Corporation of India Limited and Hindustan Vegetable Oil Corporation Limited.

Industrial Monocarboxylic ustrial fatty alcoholsfatty acids; acid oils from refining; ind

Objectives of State Trading

A country may undertake state trading to achieve one or more of the following objectives:i. To achieve its political objectivesii. To boost its export tradeiii. To enlarge domestic planning programmes by purchasing products required to fill a gap in the plans and by controlling outside economic forces that may affect the plansiv. To improve the country’s balance of international paymentsv. To control foreign exchange

vi. To maintain national security and defense by furthering military preparedness and by preventing potential enemies from receiving strategic materialsvii. To acquire specific products either because they can be obtained at lower cost or because they are scarce at home or abroadviii. To advance domestic interests by improving bargaining power in trade or by protecting trade against foreign competition.

• Recent Policy Stance on State Trading• Government of India’s policy on State trading has

undergone a change from 1985 onwards. State trading imports have been restricted to

only very sensitive items, such as crude petroleum or in those cases where economies of bulk procurement are clearly evident.

• Similarly in the case of exports, canalisation should be used only when very specific social objectives are to be achieved. As a result, the number of canalised items, both export and import, has been progressively reduced.

(i) State Trading Corporation of India Limited (STC) :

• STC was set up on 18th May, 1956, primarily with a view to undertake trade with East European Countries and to supplement the efforts of private trade and industry in developing exports from the country.

• Spices Trading Corporation Ltd.(STCL) , having its headquarters at Bangalore, is a subsidiary of STC. STCL Ltd., having its headquarters at Bangalore, is a subsidiary of STC .STCL is involved in trading of spices, value added spice products, agricultural commodities, fertilizers and pesticides.

• Principal Items of ExportsAgricultural Commodities Manufactured goods

Wheat, Rice & sugar Chemicals, Drugs & Medical Disposables

Spices & Cashew Engineering & Construction Material

Tea & coffee Consumer products

Tobacco & rubber Textiles garments

Opium , groundnuts Leatherware

Castor oil Processed foods

Jute goods

• Principal Items of Imports

Agricultural Commodities Manufactured goods

Edible Oils Hydrocarbons

Sugar Gold & Silver

Wheat Scientific instruments

Fatty acids Instruments for police and hospitals

pulses

STC's PERFORMANCE:• The Corporation achieved a turnover of the

order of Rs 20,000 crore during 2010-11 with an improved trading profit of Rs 178 crore.

• The Profit Before Tax (PBT) during the year amounted to Rs 80 crore.

(ii) MMTC Limited • The MMTC Limited (Minerals and Metals Trading

Corporation) was created in 1963 as an individual entity on separation from State Trading Corporation of India Ltd. primarily to deal in exports of minerals and ores and imports of non-ferrous metals.

• In 1970, MMTC took over imports of fertilizer raw materials and finished fertilizers. Over the years import and export of various other items like steel, diamonds, bullion, etc. were progressively added to the portfolio of the company.

(iii) PEC Limited : The Project and Equipment Corporation of India Ltd.

(PEC) was carved out of the STC in 1971-72 to take over the canalized business of STC’s railway equipment division,

The main functions of PEC Ltd. includes export of projects, engineering equipment and manufactured goods, defence equipment & stores; import of industrial raw materials, bullion and agro commodities; diversification in export of non-engineering items eg. coal & coke, iron ore, edible oils, steel scraps, etc.; and structuring counter trade/ special trading arrangements for further exports .

(iv) Export Credit Guarantee Corporation of India Limited (ECGC) :

• ECGC , established in 1957 , is the premier organization in the country which offers credit risk insurance cover to exporters, banks, etc.

• It provides:(a) a range of insurance covers to Indian exporters

against the risk of non-realization of export proceeds due to commercial or political causes

(b) different types of guarantees to banks and other financial institutions to enable them to extend credit facilities to exporters on liberal basis.

(v) India Trade Promotion Organization (ITPO) :• Following the merger of the Trade Fair Authority of India (TFAI) and

the Trade Development Authority (TDA), India Trade Promotion Organisation (ITPO) came into existence in 1992.

• ITPO is the premier trade promotion agency of India and provides a broad spectrum of services to trade and industry so as to promote India’s exports.

• These services include organisation of trade fairs in India and abroad, Buyer-Seller Meets and Contact Promotion Programmes apart from information dissemination on products and markets.

• With its Headquarters at Pragati Maidan, New Delhi and regional offices at Bangalore, Chennai, Kolkata and Mumbai, ITPO ensures representative participation of trade and industry from different regions of the country in its events in India and abroad

• THE WAY FORWARD:• The Corporation has drawn up a Business Plan for

the next three years taking into consideration its strengths, past performance and current international and domestic trade scenario.

• The Corporation has identified a host of countries in the Latin America, Africa and Asia as the potential markets for developing business.

• Strategies proposed to be pursued by the Corporation include enlargement of supply base through marketing

tieups,leveraging import assistance for generating additional export opportunities, increased participation in tenders under Government of India aid/grant programmes,utilization of port based infrastructure, export of tea under own brand name, undertaking contract farming abroad,domestic trading on STC's own account in items like soya seeds, chana, mustard seeds, etc.

• Corporation shall continue to lay added emphasis on developing business of existing items, such as, bullion, coal, fertilizers, ferrous & non-ferrous metals, minerals

& ores, edible oils, pulses, etc.

• Thus, the Corporation plans to double its turnover from the present level of about Rs 20,000 crore to Rs 40,000 crore by the end of the year 2013-14 with significant improvement in profitability.

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