State trading enterprises: the dinosaurs of the trading park

The recent announcement of the budget for the successful divestment of Neelanchal Ispat Nigam Ltd (NINL) plant at ₹12,100 crore relieves MMTC Ltd, a state trading company which owns 49.7% stake in NINL. MMTC can now repay its huge debts and become a debt-free company. This, after being plagued by huge loans and negative cash flow for a very long time. But there is the broader question of the relevance and role of a state trading enterprise (STE).

Historically, English and Dutch trading companies have explored new markets to sell their country’s products and source raw materials. Any competition was snuffed out by government-backed military action. The tools of trade then were simple – pure mercantilism – which paved the way for colonialism.

In post-independence India, income inequality, regional imbalances in economic development, weak industrial base and lack of infrastructure left little room for a large private entity to play a significant role in international trade. . Imports were necessary and STEs were formed in the 1950s-60s to meet the needs of a fledgling nation.

Charged with ensuring the constant availability and price control of basic commodities, STEs organized the imports of many mass consumer items – mainly wheat, pulses, sugar and edible oils as needed. Even globally, around 75% of state trading enterprises notified to the World Trade Organization (WTO) under Article 17 of the General Agreement on Tariffs and Trade (GATT) are involved in the trade of agricultural products.

Despite their exceptional performance, these STEs are now considered obsolete. The digital evolution has made real-time market information easily accessible. State trading enterprises have been overtaken and overtaken by more nimble market operators. The tricks of the trade have also changed. A product- and market-specific real-time information network now provides competitive advantage. However, instead of focusing on adding value in supply chains, state trading enterprises continue to focus exclusively on the category of “restricted” and “prohibited” items under the policy. of foreign trade, thus limiting their own scope and scale.

Another trend, both in government and in the private sector, is that many large Indian producers have started importing their own raw materials in bulk through their internal trading arms based on real-time market information. , such as the import of crude oil and coal. directly by the oil and electricity companies. When a jack-of-all-trades is the only channeled importer of a good, the domestic buyer does not get the product cheaper and faster than if those companies themselves imported it directly.

Given the trend towards dechannelling, STEs have tried to diversify. However, instead of expanding export markets for SMEs through aggregation or providing value-added trade information services for imports, they have made inroads into unconnected territories such as steel manufacturing. Unfortunately for them, the core competency of running such volatile and cost-competitive businesses simply could not be outsourced. Here they needed “red ocean strategies” – competing in existing industries – in contrast to the comfort of channeled firms’ uncontested market space. Over the years, the debts of STEs have continued to grow.

While the relevance of STEs has always been questioned in free-market democracies, it has been championed by state-controlled economies. Even in the first case, the role of large business entities has evolved and transformed. They have since evolved into repositories of the best market information, enabling their role as large aggregators, reaping economies of scale and scope.

In Japan, the original zaibatsus – the large family-controlled commercial behemoths – have been replaced by sogo shoshas, ​​which are not family-controlled but owned by large conglomerates. Their role in expanding exports and contributing to Japan’s post-war economy is evidenced by the staggering 55% of Japan’s imports and 48% of its exports being accounted for by just nine of the largest trading companies.

In India, even the rationale for STEs is being questioned. Having failed to scale, they must wonder about identifying the added value they can bring to the table, value based on their inherent strength and expertise. The mindset of depending only on the government for channeled government-to-government (G2G) activities has been their undoing.

They must leverage IT solutions to gather market intelligence and offer services that add value to the business profitability of companies that source materials from global supply chains. They can also emulate the Japanese example of acting as export aggregators for MSMEs. Only then can they escape extinction.

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