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Goodbye to Govt-to-Govt trade

TEJINDER NARANG
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India was unable to sell rice to Bangladesh a couple of years ago because of pricing issues.
India was unable to sell rice to Bangladesh a couple of years ago because of pricing issues.

Private trade is better able to adapt to constantly changing market conditions.

In May-June 2012, when grain inventories touched 80 million tonnes, Indian authorities expressed their intent to conclude Government to Government (G to G) deals for export of wheat to some African and West Asian countries.

No nation has responded, though competitive wheat export on private account has touched 1.3 million tonnes since September 2011, after the prohibition on wheat shipments was lifted.

Thailand till last year was the world’s largest exporter of rice, shipping around 10 million tonnes — almost 33 per cent of the global exports of rice. These days, the Thai Government is offering its overpriced rice for export on G to G basis in international forums.

But it can find no takers, because of the 45 per cent slump in Thai rice exports, while inventory under the Government-sponsored “paddy pledging programme” has exceeded 20 million tonnes, or 12.5 million tonnes of milled rice.

THAILAND’S PREDICAMENT

The Thai government has crowded out the private sector from paddy procurement. The net effect is that Thai rice is internationally expensive by $150-250/tonne. This is due to the Thai government’s obsession with paying the farmer an equivalent of $480/tonne for paddy, against the MSP of Indian paddy of $227/tonne.

The Thai establishment is now attempting to dispose of paddy to “private trade” through tendering, for which offers “below” market price were received recently. A tender was passed over the end of June, and another tender may be issued.

In October 2011, Bangladesh finalised G to G import of 0.2 million tonnes wheat from Ukraine in multiple parcels at $280-320 CIF “liner out” conditions (including cost of discharging at port).

After an initial shipment of 80,000 tonnes, the deal floundered mid-way when Bangladesh realised that importing at a high price of $320 was commercially inappropriate, when Indian private trade was offering grain at much below $320. Meanwhile, wheat prices have again shot up since the middle of June 2012.

INDIA’S ExPERIENCE

In 2010-11, the Indian Government agreed to supply three lakh tonnes of rice and two lakh tonnes of wheat to the Government of Bangladesh through STC/PEC from FCI stocks. However, there could be no agreement on the pricing and other commercial terms, because FCI prices required acute subsidisation to structure the deal.

Considering the sensitivity on food matters, GOI refused concessional rates. Bilateral negotiations were terminated. Bangladesh, nevertheless, sourced grains from international traders.

In 2008-09, the Ministry of Food, GOI, initiated discussions on G to G criteria for import of 0.5 million tonnes of pulses from Myanmar.

Myanmar demanded an advance amount in US dollars before effecting supplies, while keeping the pricing open as per its commercial convenience. The proposition fell through. Later, Indian PSUs imported Myanmar pulses via Singapore traders at market prices on Government account.

India has been chasing Iran for a wheat deal to offset crude imports, under rupee payment. Pakistan is pursuing Iran for a similar wheat deal to barter urea.

Wheat-related phyto-sanitary concerns of Iran have stalled commercial activity on a G to G basis, while it has contracted more than 3 million tonnes wheat from US/Australia/Russia through MNCs. Indian trade is profitably exporting other commodities such as basmati rice, sugar, soymeal and tea to Iran and offsetting crude payments partially.

OUTMODED METHOD

The above examples suggest that G to G deals are offered when a country cannot sell its product on internationally competitive terms. In the era of “world wide web” of the Internet, transparency of pricing and contractual terms cannot be kept opaque. Overpriced commodities cannot be bought. Cargoes priced below market datum cannot be sold even by state agencies.

Behind the façade of Government deals, private trade is active most of the time. Buying nations are overcautious and unless it is advantageous, deals cannot be formalised. Since traders offer deals on marked to market values, they are neither cheap nor expensive. So no questions can be asked.

China does not undertake any G to G business. Neither Indonesia nor South Africa offers coal on G to G basis. Australia and the US do not make such unworkable propositions either. Russia sells grains at market-determined prices, though they were the hub of socialism not too long ago.

Egypt, the world’s biggest wheat buyer, annually imports 8 million tonnes from all origins against bids received from private entities. The price volatility of commodities does not augur well with the inflexibility built into Government deals.

BARTER DEALS

However, there is a fine distinction between G to G understanding and barter/counter-trade, or offset mechanism.

Iran’s acceptance of 45 per cent rupee payment mechanism for its crude oil is a “reciprocal” benefit that it foresees when US sanctions are imposed with full force.

Likewise, Malaysia concluded a counter-trade deal with India for building a rail line by IRCON, in return for supply of palm oil to MMTC.

The contract lived through 1999-2003, but each time palm oil price fixing with Malaysian counterparties remained a controversial grey area.

Structured counter-trade or counter-purchase mechanisms, formally called “Special Trading Arrangements”, are also padded with questionable facilitation or intermediation costs that come out of the national exchequer.

The barter (Trade Plan) agreements with former Soviet Union and East European countries from 1960 to 1990 were mutually beneficial at that point of time.

India “imported” defence equipment in rupees as NATO-compatible armaments were not available to our armed forces.

All deals were “secret” and commodities such as rice, coffee, tea etc, could be “exported” in rupees at a premium to the Soviet bloc. Similarly, their technology of producing steel, aluminium and copper was not acceptable to the Far-East or West, while India was a ready market for them.

Soviet Union also supported India in the UN Security Council against Pakistan. It was a win-win situation for both sides.

Those circumstances have ceased to exist; transparency is the rule of law; media, newswires and web technologies have demolished “secrecy”; audit and vigilance are overactive, and therefore any state-sponsored deal should be shunned with a barge pole.

It is time to say ‘goodbye’ to all Government to Government mechanisms on trade matters — whether on commercial terms or barter of some sort.

(The author is a grains trade analyst.)

(This article was published on July 11, 2012)
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