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G. Chandrashekhar

Food Secretary to meet industry, trade representatives today

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Mumbai Jan. 22 Concerned over food prices-driven inflationary pressure, the government has set-off consultations with industry and trade representatives to ascertain causes of price action and explore remedial measures. The Food Secretary is slated to meet representatives of the country's vegetable oil sector on Tuesday to find out what is driving edible prices higher and whether the ensuing rabi oilseed crop harvest would bring any relief.

Among others, pulses and edible oils — two essential food products in perennial short supply — have clearly contributed to inflation that is admittedly in excess of 6 per cent at the wholesale level. Indeed, at the retail level, inflation is double-digit.

The worst affected are of course poor and vulnerable sections of the population, especially in rural areas where there is demand compression because of low-income growth and rising prices. What are the options before the government in respect of edible oils, the essential food of mass consumption with a high weightage in the consumer price index?

Reality check

First of all, we need to recognise the realities. Domestic oilseeds output in the ongoing 2006-07 oil year (November-October) is down by nearly 20-24 lakh tonnes, representing a loss of no less than 8 lakh tonnes of oil. In other words, from the previous year's production level, domestic shortage has widened. This has to be met through larger imports.

In 2005-06, our imports aggregated 44 lakh tonnes. In the immediate context, rapeseed/mustard crop would be down from last year by about 12 lakh tonnes and the crop size can be broadly estimated at 60-62 lakh tonnes.

The only silver lining to an otherwise bleak scenario is the stock of about 10-12 lakh tonnes with National Agricultural Cooperative Marketing Federation. Indian vegetable oil market is significantly integrated with the global market. Our import dependence is as high as 40-45 per cent.

Because of the strong bullish trend in global vegetable oil market (palm oil and soyabean oil prices have escalated by over 20 per cent in the last four months because of bio-diesel demand) our domestic prices are expected to remain firm.

The twin effect of widening domestic shortage and rising international market is further exacerbated by tremendous speculation in the futures exchanges. Clearly, too much money is chasing limited supplies of several essential food products. High prices have had absolutely no impact on production. Under Indian agricultural conditions, supply response to prices is extremely limited. Lastly, the Agriculture Ministry and the Technology Mission on Oilseeds (TMO) under it must accept moral responsibility for the utter failure to address structural issues of the agricultural sector in general and oilseeds in particular, in recent years.

Govt intervention

So, what can the government do at this point of time? First is that consumers, especially poor consumers, need to be supported at any cost. The government must immediately revive supply of edible oil through the Public Distribution System PDS. This step will bring relief to poor and nutritionally challenged consumers.

The second: Reduce customs duty on palm oil. This is inevitable if the government is serious about checking price rise. However, a reduction in duty should be accompanied by an appropriate hike in tariff value of imported oils so as to reflect market reality.

It is absolutely inappropriate to keep the tariff values unchanged when market prices are dynamic and rising. Obviously, by how much the current rate of duty should be cut would depend on what price level the government would be comfortable with.

The third: Discourage too much speculative activity on the bourses. The so-called price discovery in a shortage economy has helped neither the grower nor the consumer. It has only enriched speculators. Four weeks from now when the harvest of rapeseed/mustard commences on a sizeable scale, edible oil prices may soften. By early April, flow of soyabean from South America will also exert some downward pressure on prices.

Yet, going forward, India's southwest monsoon forecast and onset of rains would be crucial determinant of prices. There is also the possibility of some downward correction in global vegetable oil market should crude continue to remain at the current levels or weaken further.

More Stories on : Oilseeds & Edible Oil | Insight | Economy

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