The history of State Trading Enterprises (STEs) in India dates back to 1956, when State Trading Corporation was set up, with a view to undertake trade with East European countries. During the pre-liberalisation era STEs played a stellar role in promoting Indian products across the globe and meeting domestic demand. But can they continue doing so in the near future? The Dollar Business analyses

Ahmad shariq khan | August 2016 Issue | The Dollar Business

There has been a simmering discontent amongst traders and manufacturers regarding the role of state trading enterprises (STEs) in post-liberalised India. Time and again, there have been allegations about STEs canalising import of raw materials. On export front too they have often been viewed as a hurdle. While policymakers keep talking about maximum governance and minimum government, STEs are, by their very definition, enterprises authorised to engage in trade that are owned, sanctioned, or otherwise supported by the government. STEs, however, have a role to play in the economy of any developing country to fulfill domestic demand of scarce commodities, as well as push the foreign policy agenda of the nation. Developed economies like France and Japan have been using STEs as the only authority to trade in restricted items like tobacco. Today, around the globe, STEs affect trade by influencing domestic and international prices. In the language of tariffs and subsidies, an STE that restricts imports into a country will have an effect on the domestic price just like an import tariff. Similarly, an STE that expands exports will have an effect on the price that
resembles an export subsidy.

The Farm Connection

Recently, with pulses prices hitting through the roof in India, the government had to call on MMTC Ltd. to import pulses to keep domestic prices under check. MMTC is just a case in point. STEs have been an important part of world agricultural trade for decades. Today, about 75% of the STEs notified to WTO under GATT Article XVII are involved in the trade of agri products. Over the years, numerous countries including India have used state trading enterprises to achieve their various trade-related goals. These goals relate to domestic price support, efficiencies in agricultural marketing, and affordable food supplies for low-income populations of the country. In addition, various governments also regulate agricultural marketing and trade through export subsidies, tariffs, quotas, administered domestic prices, and import restrictions such as quotas and tariff-rate quotas (TRQs).

STEs in India

Post independence, India was grappling with grave socio-economic problems including issues such as inequalities in income and low levels of employment, regional imbalances in economic development, weak industrial base, inadequate investments and infrastructure facilities. There were hardly any developed private bodies that could participate in international trade while keeping the national interests in mind. Imports was a necessity to fulfill the needs of an impoverished population, and STC was formed to fill up this gap. Since then these STEs have shaped country’s canalising policy. They have not just played an important role in meeting country’s demands for essential commodities, but have also been instrumental in expanding country’s exports to various corners of the world. Owing to their sheer size and the financial muscle of the government, these STEs have certain USPs that they bring to the table. For foreign customers, STEs offer a proven record of reliability for quality, price and delivery and long-term business perspective. For manufacturers from whom these STEs source products, the benefits include better price realisation along an access to a global network of techno-commercial information.

Diverse Expertise

Over the years, STEs have established their place in international trade as quality players. Today, these public sector undertakings trade with almost all countries of the world and have developed vast expertise in handling bulk international trade. While their ability of handling exports/imports of bulk agro commodities is their core strength, over the years, by virtue of their vast infrastructure and experience, these government undertakings such as MMTC and STC have successfully diversified into exports of steel, iron ore, molasses and imports of bullion, hydrocarbons, minerals, metals, fertilisers and petrochemicals etc.
Tasked with making sure the constant availability and control the price of essential commodities in the country, STEs have also arranged imports of items of mass consumption (such as wheat, pulses, sugar, edible oils, etc.) as and when the situation warranted them to.

Exports vs. Imports

Over the years, while many new export products have been included in STEs portfolio, including consumer goods among others, imports have been their mainstay. For instance, a quick look at FY2015-16 export-import figures (provisional) of State Trading Corporation (STC) reveals that of the total revenue that STC garnered in FY2015-16, of Rs.10,479.16 crore, the proportion of imports, exports and domestic sales were 83.36%, 10.60% and 6.04% respectively, and mostly traded in agri-commodities. This points to the fact that despite a diverse basket of products and corporatisation, STC has not largely been able to come out of its comfort zone of commodity imports.
Considering this though the relevance of STEs in exports is in question, from a corporate entity point of view and at a time when
India desperately needs exports to start climbing, their overall performance has also been rather dull.

New times, new issues

On the challenges faced by STEs, Ajay Sahai, Director General & CEO, Federation of Indian Export Organisations (FIEO) says, “In the last 25 years, since the first series of economic reforms in 1991, we have seen large private companies entering the field of exports and developing better capabilities to deal in products which are now under State Trading regime. Their emergence has challenged all the canalising agencies”.  As per Sahai, institutions such as STC, however, have been continuously evolving their strategy to remain in sync with the changing dynamics of the game. Private companies on the other hand have claimed of unfair treatment where STEs are involved in canalising trade.

To what purpose?

There has been a strong demand from growers and exporters to remove canalisation as, according to them, it is really not serving any purpose. A case in point could be onions. India exports about 1.2 million tonnes of onion every year. Earlier, exports of onion was restricted by the government and controlled through a single canalising agency. Later, following an increased production in the country, there was a continuous demand from major onion producing states in the country led by Maharashtra for decontrol of exports. Consequently, while the Directorate General of Foreign Trade (DGFT) freed onion export from 2003, the ‘No Objection Certificate’ was made compulsory for onion export shipments. This NOC and the commission charged by the STEs emerged as  bone of contention between the exporters and STEs, with many exporters raising issue of delays in issuance of NOC from STEs. Furthermore, according to Ajit Shah, President, Onion Exporters Association, “The canalising agencies did not use the money collected from the exporters to better the condition of farmers.”

Canalising agencies were also blamed for not being aware of the ground realities, resulting in losses to domestic producers and agri-commodity traders alike. If that was not the case then what explains the government’s sudden move (in August 2015), supposedly aimed at ‘keeping prices under control’ to raise onion minimum export price (MEP is the rate below which no traders are allowed to export) to $700 a tonne from $425 a tonne. As a result, in the global marketplace, the country’s exporters took a beating, as they lost business to traders from Pakistan who clearly outpriced them, offering onion to the world market at $300 a tonne. “Who would buy onion at $700 a tonne from India when the same quality product is available from other countries at $300 a tonne and less?” questions Shah.

Thereafter, in December 2015 (roughly just after five months), on objections raised by traders mainly from Maharashtra (which contributes about 80-85% of country’s total onion exports), the government first slashed MEP of onions to $400 per tonne from $700 a tonne and then removed the MEP altogether after a few days – but, by then, the damage had already been done. Such frequent policy changes by the Commerce Ministry pertaining to canalised producers, besides, the probability of inaccurate inputs being given to the Commerce Ministry relating to the on-the-ground market conditions, have done much harm to the country’s traders’ fraternity. Commenting on such Catch-22 situations, Ajay Sahai of FIEO says, “the government has a difficult task of striking a balance between the interest of exporters and consumers. If prices in domestic market are increasing abnormally, the option available with the government is to either allow duty-free imports to augment supply or restrict exports to meet the objective. The former may not be workable if international prices have also moved up leaving the government with the Hobson’s choice. Government has already removed several items from state trading enterprises (STEs) list and if there is rationale in removing more products from the list, I am sure government will do it going forward.”
Importing Trouble

A complaint from industry and trade has been regarding the pricing policy and the high service charges. Private sector players say that in case of some products, especially raw materials, the prices charged by the STC have been excessive. Another lacuna has been the absence of close liaison between industry and trade and other state trading agencies. At present, trade and industry have no means of knowing the basis on which the state trading agencies are fixing their prices. Players from fertilisers industry, a closely related industry to agri-sector, believe that if the government is sincere about doubling farmer’s income in next five years, it needs to do way with the canalisation in case of many fertilisers. “These [fertilisers] plays an important part in farm income. The goernment needs to implement the Nutrient-Based Subsidy (NBS) policy in letter and spirit for all fertilisers including urea immediately. Urea imports needs to be de-canalised”, tells S. S. Nandurdikar, Former Chairman, Fertilizer Association of India to The Dollar Business. Interestingly, as of now, manufacturers of urea can sell their products under a single brand. However, imports restrictions on urea are making, i.e. diammonium phosphate (DAP), urea’s rival in the market, manufacturers lose out on this critical branding and distribution advantage. “If we can project the demand and production more scientifically and factor the buffer stocks, we can easily conclude whether
exports of such products would create scarcity or not. If the answer is negative, such products can be considered for being taken out from STEs,” suggests Ajay Sahai of FIEO.

 

Living on Subsidy

Each year without fail, while we get to hear news that the government in a bid to increase availability and control the price of essential commodities, especially pulses and onions, had to import such items. But not many know that following such exercises, many a times, the country either ends up enjoying a surplus or had to suffer remunerative losses. Consider this, in September last year, the Centre had to okay the Food and Consumer Affairs Ministry’s proposal to reimburse Rs.113.4 crore of losses on pulses imported by PSUs such as NAFED, STC, MMTC, etc., between 2006 and 2011. The burden to the exchequer, this time, was borne by the Rs.500-crore Price Stabilisation Fund (PSF). Should not the STEs in question and the concerned ministry had done their homework more judiciously in the first place?

Private concerns

Aditya Sindwani, Director, BG Mercantile Pvt Ltd., an exporter, importer and supplier of ferrous metal scraps, ferro alloys, alloy steels, based out of Punjab, feels that canalising agencies, be it STC or MMTC need to have their policies centered around the interest of private players as well. “Gone are the days of License Raj. In today’s globalised environment, no country can do well without taking into consideration the priorities of the private sector. For executing global orders, they need us and we need them too. Time and again, we have submitted our recommendations to them. They must look into them so that a win-win proposition prevails all around,” Sindwani tells The Dollar Business. Also, since their is a monopoly – our STEs have been the sole importer and exporter of many commodities – inefficiencies have crept in the functioning of these canalising agencies (as it almost always happens in a monopoly). The result have been regular losses for both STEs and domestic buyers. While critics agree that there is a need for canalisation in certain products, they believe that before arriving at the list of the products that need to be canalised and STEs that will act as canalising agencies, the product and STEs should satisfy two conditions. One, the respective STE understands the world market dynamics for the product and is able to procure the same in bulk at a favourable rate. And second,  domestic buyers gets the product in their hand cheaper and quicker than if they were allowed to import themselves. With respect to exports, STEs should be involved only when there is a sharp decline in the export of a product and the government really believes that STEs involvement can help arrest the fall while promoting the product better and realising better value. Or, at best, STEs should only come into picture when the country’s foreign policy requires it to trade with a particular country that may not be in the radar of private players. A lot of progress has already been made, and the list of canalised products have reduced considerably over the last few years. However, policymakers need to look for ways to make STEs more efficient and better informed so that they participate profitably in international trade rather than acting as trade impediments, as considered by many.