State Trading in India

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 Government Food Agency of Japan regulates the import, export and internal distribution of rice, wheat and barley. Similarly, Japan Monopoly Corporation which is a State body has the exclusive rights of tobacco importation. The Australian Wheat Board has the exclusive rights for exports of wheat. There are many such instances all over the world. 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.

Rationale of State Trading:

State trading is resorted to for a number of reasons. In the centrally planned economies, foreign trade as a matter of State policy is nationalized. Foreign trade in those countries is to be conducted by State trading organizations because otherwise the central planning mechanism will not function properly. In the developed free enterprise economies, State trading sometimes is practiced as a source of revenue. That is why it is found that trade in products like alcohol and tobacco is subject to State monopoly. Similarly, trade in drugs and arms and ammunition is managed through State bodies in the interest of health and national security of the country. State trading in a number of agricultural products is quite common because State intervention is necessary to avoid fluctuations in the prices and preventing deterioration in the income of the agricultural producers.

State trading however, is more commonly practiced in the developing economies. The reasons behind this are varied. First, such countries may not have adequately developed private sector trading bodies which can effectively participate in international commerce and also protect the national interest. Secondly, the private sector bodies, though possessing adequate trading expertise, will be solely motivated by profit consideration. However, it may be necessary from the national standpoint to promote new export items and cultivate new export markets even by sustaining short terms losses. This can be done only by government bodies having a development role and which are backed by the government so that the financial losses do not hamper the pursuit of long term objectives. Thirdly, the centrally planned economies have emerged as important export markets for a large umber of developing countries including India. Since the foreign trade of these countries is invariably conducted through State trading organizations, it is found that government trading bodies are in a better position to negotiate with their counterparts in the certainly planned economies.

Canalization of Imports:

State participation in imports is generally motivated by some other considerations. These are: (1) to reap the advantage of bulk buying, (2) to mop up any excess profit which the private sector firms might enjoy in import business, and (3) to ensure proper internal distribution of the imported items and to maintain stable domestic price level.

Advantage 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 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.

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