The Hindu Business Line : Vanaspati woes

The Government's policy flip-flop on edible oils, in general, and vanaspati (hydrogenated vegetable oil), in particular, is fast turning out to be a case study of how not to manage an important segment of the food processing sector. Less than six months after vanaspati imports under the Indo-Sri Lankan Free Trade Agreement were channelled through the National Agricultural Cooperative Marketing Federation of India, and justified in Parliament, imports have been decanalised and a cap of 2.5 lakh tonnes at zero-duty has been set under tariff rate quota. Nothing has changed in recent months to warrant the volte-face.

The vanaspati story actually goes beyond imports from Sri Lanka. Official and unofficial imports from Nepal and Bhutan in addition to Sri Lanka are as high as six lakh tonnes a year representing half the domestic vanaspati production. These cheap imports distort domestic market conditions in terms of costs as also concentration of arrivals in some regions. Ironically, most overseas suppliers are none else but ingenious Indian businessmen who have found a way of servicing the Indian market from outside the country; something they could not do staying within. There are also serious issues relating to Rules of Origin and value-addition norms. These are loaded against the domestic market. Much of the vanaspati coming from Sri Lanka is produced in that country from duty-free imported palm oil; palmolein, when imported into India for production of vanaspati, bears 70 per cent Customs duty. The Government may have blundered in rushing through the FTA without realising the full implications. Worse, there is suspicion that it is now succumbing to lobby pressure.

In edible oil imports too, the rationale for tariff value — originally intended to prevent invoice manipulation and protect revenues — is fast losing relevance. Lately, tariff values on edible oil imports do not reflect market prices. Despite a sharply rising international market, the government has kept tariff values unchanged. There is a case for revising upwards the tariff values to reflect the market realities. Concerns over rising edible oil prices should be addressed by reducing the basic rate of Customs duty. The vegetable oil industry, comprising oil mills, solvent extraction units, vanaspati producers and refineries, is no doubt operating under uncertain market conditions, but by not addressing structural issues, it has not exactly helped its cause. Fragmented capacities, low capacity utilisation and falling asset values call for urgent remedial action. But policymakers seem content tinkering with price and trade-related issues from time to time. Needed are growth-oriented policies that encourage investment and modernisation.

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