Relevance: GS-3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development, and Employment.

Key Phrases: Coal India Limited (CIL), Canalization of Imports, State trading enterprises

Why in News?

• Coal India Limited (CIL) has floated two large international competitive bidding e-tenders totalling 6 million tonnes for sale to domestic power plants.

Canalization of Imports:

• CIL was chosen as it is already the principal 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-user.
• This was the idea behind the setting up of state trading enterprises in India, and India’s long era of “canalized” imports, when imports of specific items were allowed only through specified (usually state-owned) entities, which were then redistributed to end-users.
• This was how the State Trading Corporation and the Minerals and Metals Trading Corporation were born, for instance.
• Canalization 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 canalized — 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.

The success of State trading enterprises in other countries:

• 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.
• 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 canalized) — helps increase negotiating and pricing power.
• Even though the share of state-owned enterprises in China’s imports has declined from over 50 percent two decades ago to around 20 percent now, China still uses bulk buying through STEs for strategic imports of energy, some food items, as well as rare earth and minerals, civil aircraft, aircraft engines and other high-tech manufactured items.

Why STE experiment in India went sour?

• It effectively failed because of
  • Inefficiency and lack of proper market intelligence failing to extract the potential price advantage out of suppliers
  • Bureaucracy and red tape in the import process which often led to the divulge intentions well in advance to suppliers and hence adverse price movements,
  • Lack of logistics capacity to efficiently provide the imported products to smaller MSME buyers at a decent price and with reasonable dispatch.

Conditions to act as canalizing agencies:

• State trading enterprises that act as canalizing agencies should satisfy two conditions.
  • The respective STE understands the world market dynamics for the product and can procure the same in bulk at a favourable rate.
  • Domestic buyers get the product in their hands cheaper and quicker than if they were allowed to import it themselves.

What strategy India should adopt?

• India can go in for a canalized or bulk import strategy on many of its key imports.
• Crude is an obvious one (currently, only refined Petro-products are canalized), fertilizer other than urea, edible oil (India is the world’s largest importers), coal, and even gold, pearls, and raw gemstones which power India’s gems and jewellery exports.
  • Recently the government was reported to be working on bringing all petroleum refiners together to import crude to offset some of the spikes in crude prices post the Russia-Ukraine conflict.
• What India needs is to bring private sector efficiency into the process, particularly in securing market intelligence about the 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.
• India 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.
• India could take a look at the Japan-Korea model of allowing large private sector sogo shoshas or chaebols(Chaebols are owned, controlled, and/or managed by the same family dynasty, generally that of the group's founder in South Korea) to operate in India.
• Large Indian conglomerates like the Tatas, Reliance, Adani, etc., can — provide adequate safeguards against cartelization and price/supply manipulations.

Conclusion:

• A lot of progress has already been made, and the list of canalized products has 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.

Source: The Hindu BL

Mains Question:

Q. How far do you agree that State trading enterprises could once again become relevant provided they are market savvy?