The advisability of talking over imports of certain specified items was first considered by the Government of India in 1948. The context was the abnormal increase in the price of East African cotton of which India was a bulk importer. The margin between the prices at which the import was negotiated by the Government and the domestic price thereof was so high that a suggestion was made that the Government of India should directly import the East African cotton so that margin between the domestic price and the c.i.f price could accrue to the Government. The Government however took a decision not to take over import trade in East African cotton. Since then State trading in imports was discussed by various committees and by 1956 the Government had come to the conclusion that there should be government corporations which were to be entrusted with the function of import of specific items. Two factors persuaded the Government that canalization of imports for some items was necessary. The first factor was the gradually increasing trade with the socialist countries. Private traders in India had not the expertise in dealing with the Government trading organizations in these countries, and therefore, faced problems while negotiating export-import contracts. Since under the rupee payment arrangement exports and imports have to balance the Government of India have the responsibility to see that the import plan is fulfilled. A State trading organization, through which imports could be canalized, would be an effective instrument to achieve this result. The second factor was the artificial scarcity created by small importers who had been given import license to make abnormal profits.
The State Trading Corporation of India (STC) was set up by the Government of India in 1956 which was designated as the sole import agency of such items as the Government may decide from time to time. STC, however, would import other items as well apart from the canalized items. The functions of the STC as given in the Memorandum of Association are as follows:
1. To organize and undertake trade with the state trading countries as well as other countries in commodities entrusted to the company for such purposes by the union Government from time to time and to undertake the purchase sale and transport of such commodities in India or anywhere else in the world.
2. To undertake at the instance of the Union Government import and/or internal distribution of any commodities in short supply with a view to stabilizing process and rationalizing distribution and
3. To generally implement such special arrangements for imports-exports, internal trade and/or distribution of particular commodities as the Union Government may specify in the public interest.
Very high margin of profit earned by the importers of certain consumer commodities like cassia, betelnuts, cloves, etc., for which adequate foreign exchange could not be allocated due to tight foreign exchange position prompted the Government to take the decision of complete import canalization of items where either the speculative profit or profit due to a wide disparity between the domestic demand supply position was likely to be high. The success of the State canalizing agency in arranging bulk import of items, initially canalized, such as raw silk, caustic soda, soda ash, etc at favorable prices also gave the Government more confidence in enlarging the sphere of import canalization.
By canalizing the import of speculation items, the Government manage to appropriate the profit which otherwise would have gone to the quota holders. The profit made in these operations helped the government to pursue another policy objective, viz., export promotion. The State Trading Corporation was directed by the Government to push up export of items which are difficult to sell, and therefore may involve financial losses.
In order to offset the losses on export of difficult-to-sell items, import of certain scarce commodities such as betelnuts, cloves, copra etc are canalized through the State Trading Corporation. When imports of these items are canalized through the STC, the corporation mops up a portion of the large profit which is available on these commodities.
The maintenance of an equitable distribution of imported materials as well as to keep the interest of the unorganized sector of the industry in fact is also the consideration which forces the Government to use the instrument of import canalization.
Post liberalization after 1991 STC is playing a minor role and private enterprises are allowed to import most of the items except banned ones either for actual use in manufacturing or for trading.