The Hindu Business Line : The rationalisation buzz for edible oil industry in Budget season

THE edible oil industry is always in the news — for the right reasons or otherwise. With consultations on the next Budget proposals under way, industry and trade bodies have begun to jockey for what they project as rationalisation or removal of anomalies.

Without doubt, the vegetable oil sector is beset with innumerable issues: structural, fiscal and trade policy. The associations have maintained a studied silence about addressing the structural issues, such as low productivity of oilseeds, fragmentation of processing capacity, lack of modernisation, suspect product quality, skew in per capita consumption and so on.

Fiscal imposts, price and trade-related issues continue to dominate the agenda of the associations, many of which seem to think the industry's structural problems are none of their concern. Pressure on the Finance Ministry to remove perceived anomalies has intensified. Importers who are also refinery owners are in the forefront.

An important demand of the industry bodies is to raise the duty on refined palm oil/refined palmolein from the present 75 per cent, so as to create a higher differential with crude palm oil (65 per cent) and discourage the import of refined oil.

The demand to raise duty on refined oil is inherently unjustified. The current duty differential of 10 percentage points is sufficient to protect the interest of refiners. The claim of value-addition within the country is not sound. Refiners simply process the crude oil and convert it to refined oil.

On the other hand, the direct import of refined palmolein keeps the edible oil prices in check. It fosters healthy competition between merchant-importers and refiner-importers. Importantly, it does not allow refiners to dictate the market, but compels them to become operationally more efficient.

If refined palmolein import is made unattractive with higher duty, there will be an even larger import of crude palm oil than at present and all the consequent problems associated with such imports, including disposal of stearine.

Among others, a little-known body based in Tamil Nadu calling itself the All-India Edible Oil Manufacturers, Traders and Consumers Association has now drawn the attention of the Government in the form of an advertisement to what it believes are the pending issues of the edible oil industry.

According to the association, customs duty on refined palm oil and palmolein should be raised to 100 per cent as there is no domestic usage of palm stearine, which is a by-product (actually, it is a fraction) of palm oil. It is common knowledge in trade circles that palm stearine is routinely mixed with vanaspati as there are no ready outlets.

Large stocks of palm stearine are lying all over the country, threatening to hurt consumer interest if used for food purposes. From the point of view of consumer welfare, enforcement of food laws and pace of supplies to the market, import of refined palmolein, rather than crude palm oil, should make sense.

An unfortunate and ill-considered decision that the Government took three years ago was to discontinue the supply of refined palmolein through the public distribution system (PDS). Given factors such as the volatility of the global vegetable oil market, unsteady domestic production, high open market prices and low per capita usage by vulnerable sections of the population, it would be both politically expedient and socially desirable to re-start supply of refined palmolein through the PDS. It would also help control inflation. The State Trading Corporation of India has enough experience in handling import of refined palmolein and supply to State Governments for sale through ration shops.

In a candid admission of what is going on in the marketplace — natural products are degraded or altered to suit Indian specifications and this has serious revenue implications — the association has asked the Government to correct the anomaly and revert to natural specification. Of serious concern is the continuing import of crude palmolein, a product that is not produced anywhere in the world in commercially significant quantities. It is Union Government which lent legitimacy to this spurious cocktail of oil, a degraded form of refined palmolein, imported to beat the existing customs duty structure, that is a lower rate of duty on crude oil.

In addition to the existing anomaly in the customs duty structure — import of vanaspati, a finished product, can be done at 30 per cent duty while vanaspati's popular raw material crude palm oil bears 65 per cent — the association has also highlighted the problems arising out of a free trade agreement with Sri Lanka. It has demanded imposition of a condition that 75 per cent of Sri Lankan domestic oil should be used for manufacture of vanaspati for export to India at concessional duty — a suggestion that merits consideration.

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The rationalisation buzz for edible oil industry in Budget season