The idea of State trading enterprises isn’t dead – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/opinion/the-idea-of-state-trading-enterprises-isnt-dead/article65636620.ece

In a post-Ukraine world, canalising agencies could once again become relevant — provided they are market savvy

So Adani isn’t omnipotent after all. When only two bids were submitted for state-owned coal miner Coal India Ltd’s first ever global tender for the import of 6 million tonnes of coal, split between the east and west coasts, it was widely expected that India’s fastest growing conglomerate would be a shoo-in. As it turned out, an Indonesian firm appears to have pipped Adani to the L1 (lowest price) spot, although there can still be many bureaucratic slips between the cup and the lip.

But the interesting thing about the CIL tender is not the fact that Adani is not winning yet another government contract. The interesting thing is the import tender itself, and what it might mean for India’s future import strategy.

Not that India or CIL are in danger of running out of coal reserves. The emergency imports were ordered to help tide over the acute shortage of coal faced by power producers, as they battled to cope with record surges in demand amidst surging temperatures in a sizzling Indian summer.

CIL was chosen as it is already the principal — if not the sole — supplier of coal to most of the power plants running on domestic coal and would have the necessary logistics capability to ensure that the imported stocks, when they reached Indian shores, would be quickly and efficiently distributed to the end-users.

The government had also simultaneously allowed other bulk users to import coal directly, but clubbing the requirements into a single large order and a single large buyer gives that much more leverage with potential suppliers.

In fact, this was the idea behind the setting up of state trading enterprises in India, and India’s long era of “canalised” imports, when imports of specific items were allowed only through specified (usually state-owned) entities, who then redistributed to end-users. This was how the State Trading Corporation and the Minerals and Metals Trading Corporation were born, for instance.

Canalisation was largely done away with the first set of trade reforms which kick-started the reforms process in India in the 1990s. Although imports of certain goods are still canalised — wheat, rice, petroleum products, urea and for some unfathomable reason, coconut and copra — the era of the state trading enterprise in India is largely over. As Sanjay Chaddha, former additional secretary, Ministry of Commerce, said in a recent article, they are the “dinosaurs” in India’s trading landscape.

Dinosaurs they may be conceptually — state trading enterprises now exist only in controlled economies, with China leading the pack — but as recent developments have shown, they are by no means irrelevant as an idea. In fact, the spectacular success of Japan’s large trading houses — at one point, the top nine ‘ sogo shosha’ controlled half of Japan’s two-way foreign trade — demonstrates that concentrating demand into a few or a sole agency — provided the product is a general item or commodity which does not require customer-specific tailoring (the reason why engineering goods are seldom canalised) — helps increase negotiating and pricing power.

The reason that the STE experiment in India went sour is not because the idea was conceptually wrong. In fact, as recently as last month, the government was reported to be working on bringing all petroleum refiners together to import crude in order to offset some of the spike in crude prices post the Russia-Ukraine conflict.

Market intelligence

It effectively failed because of inefficiency, lack of proper market intelligence resulting in failure to wring the potential price advantage out of suppliers, bureaucracy and red tape in the import process which often led to the telegraphing of intentions well in advance to suppliers and hence adverse price movements, and lack of logistics capacity to efficiently reach the imported products to smaller MSME buyers at a decent price and with reasonable dispatch. Even though the share of state-owned enterprises in China’s imports has declined from over 50 per cent two decades ago to around 20 per cent now, China still uses the bulk buying through STEs for strategic imports of energy, some food items, as well as rare earths and minerals, civil aircraft, aircraft engines and other high-tech manufactured items.

India has the possibility to go in for a canalised or bulk import strategy on many of its key imports. Crude is an obvious one (currently, only refined petro-products are canalised), fertiliser other than urea, edible oil (we are the world’s largest importers), coal, even the gold, pearls and raw gemstones which power India’s gems and jewellery exports.

What we need is to bring in private sector efficiency into the process, particularly in securing market intelligence about present and future supplies and price movements, logistics and distribution capacity and rapid decision-making to cash in on quick-fire market changes. All these are solvable problems, requiring more political will to empower these entities rather than anything else. One can also look at strategic public-private partnerships for such imports and, more importantly, their pricing and distribution in the domestic market post import, particularly to disaggregated and small MSMEs.

Or, we could take a look at the Japan-Korea model of allowing large private sector  sogo shoshas or  chaebols to operate in India. Large Indian conglomerates like the Tatas, Reliance, Adani, etc., can — provided adequate safeguards against cartelisation and price/supply manipulations are put in place — are pretty much readymade candidates for this.

This can also work in the other direction — exports, particularly for agricultural produce, where cutting out the numerous middlemen alone will help Indian farmers earn more. Far from being dinosaurs, in the post-Ukraine world, STEs are an idea whose time has come — again.

The writer is a senior journalist

Published on July 13, 2022

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