The Hindu Business Line : Who gained from duty cut on palm oil?

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Who gained from duty cut on palm oil?

G. Chandrashekhar

Mumbai April 17 Did the Finance Ministry over-react by cutting customs duty on palm oil or is there a larger design to equalise basic customs duties on palm oil and soyabean oil? Is there any internal or external pressure to do so? Importantly, who specifically has benefited from the duty cuts made in the last three rounds?

These are questions agitating many stakeholders and observers of the country 's vegetable oil sector.

Opinion is gaining ground that the Union Government was in utter panic and showed undue haste to reduce the rate of duty on palm oil, not knowing how prices would move in the near future.

There is also suspicion that a lobby is actively working to influence tariff decisions.

Even as the market is completely intrigued by the sudden duty reduction of 10 percentage points on crude palm oil announced last Friday (lowering basic duty to 50 per cent), the commodity ironically shot up by $30 a tonne after the announcement.

From $700 a tonne on April 13, offers made on April 16 when the market opened after the weekend were at $730 a tonne. In other words, the impact of duty cut did not percolate to the intended beneficiary, the Indian consumer.

Considering that crude palm oil was quoted at $580-590 a tonne by mid-March, the price rise is seen somewhat unnatural and possibly driven by infusion of large speculative funds in the market and of course, the strong holding power of producers and sellers.

How long will palm oil exporters continue to peg prices higher is of course a million dollar question. But considering that peak production season for palm oil has commenced from April and that supply pressure from South American soyabean crop would begin to be felt sooner than many think, there is reason to believe, the current high prices of palm oil may not sustain for long.

Importantly, Indian importers have contracted for huge parcels of soyabean oil.

The estimated volume is about 3 lakh tonnes and first consignments are expected to reach Indian shores in May.

The decline in soyabean acreage in the US is already factored in. Weather, of course, would play a crucial role in determining the price direction for the global vegetable oil market over the next 4-5 months.

Importantly, at $700 plus, crude palm oil will cease to be of economic interest for bio-diesel production.

According to bio-diesel industry representatives, import demand for this segment has already begun to dry up.

Also, European activists continue to rake up - rightly or wrongly - serious environmental issues against planting of oil palm.

Alarmingly, once again, the overseas market participants seem to know every move of the Indian bureaucracy.

Although the announcement of duty cut was made on Friday evening, market participants in Singapore, Malaysia and Indonesia had strong and clear indication of the shape of things to come earlier in the day itself, and had braced themselves to face the situation.

The Bursa Malaysia went up by 50 points on Friday in anticipation of the Indian move.

Tariff values frozen since July last year are most undesirable. The unchanged tariff values are not only artificially low and does not reflect the market conditions, the differential between palm and soya oils is completely out of sync with market reality.

This may be a smart way of influencing the market, but surely a dubious way; and therefore not sustainable for long.

Indian duty reduction has not benefited the Indian consumer at all.

On the other hand, overseas suppliers have skimmed the advantage.

It does not speak highly of India's tariff-related decisions in the recent past - from the point of view of rationale and timing.

New Delhi must come clean on the issue of customs duty on imported vegetable oils as it has not benefited consumers and led to loss of revenue.

Rupee value of duty lower

With the duty cut and unchanged tariff values, actual rupee value of customs duty on palm oil is lower than on soyabean oil. This is despite the fact that on soyabean oil, the duty is 45 per cent and on palm oil 50 per cent.

Applying 51.5 per cent (basic customs duty plus 3 per cent education cess) duty on crude palm oil tariff value of $447 a tonne, the revenue would be $230.20 a tonne equivalent to Rs 10,100 a tonne. A duty of 45 per cent on degummed soyabean oil with tariff value of $580 a tonne would result in revenue of $261 equivalent to Rs 11,450 a tonne.

The duty paid on palm oil is thus lower than on soyabean oil, despite the fact that currently degummed soyabean oil is cheaper than crude palm oil by at least $10 a tonne and bears a lower rate of duty. This should be seen in the background of a $150 a tonne price difference between degummed soyabean oil and crude palm until a few months ago and was a point of agitation for palm oil producers.

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