The Hindu Business Line : Case for duty-free import of edible oils

The Centre has to respond quickly to rising edible oil prices, augment availability of cooking oil, ensure it reaches the needy and check speculative tendencies in the market. Duty-free import of oils and resuming their supply through the PDS would have a salutary effect on the market, says G. CHANDRASHEKHAR

The skew in consumption of edible oil means pervasive malnutrition, especially among women and children, that must be reversed.

The time has come for Indian policymakers to take bold decisions to support consumers. For too long have consumers, especially those from the economically weaker sections, been paying too high a price for an essential food item — edible oil.

India’s per capita consumption of edible oil has been rising in recent years; yet, at 12 kg, it is still less than what nutritionists recommend (16 kg). There is pervasive malnutrition, especially among women and children. Serious calorie and protein deficiency is a matter of record.

It must be stated that the per capita consumption number of 12 kg masks the reality. There is a skew in consumption of edible oil. There is disproportionately large consumption (20-25 kg per capita) among a third of the population, while a large number of persons at the bottom of the pyramid consume less than 5 kg per capita.

The government has so far done little to address the problems arising out of rising edible oil prices. While the financially resourceful sections can afford to pay any price for the cooking medium, poorer consumers are the worst hit; and it is the latter who suffer from calorie deficiency and are in need of oils.

The government discontinued supply of edible oil through the public distribution system (PDS) sometime in 2001-2002 in the mistaken belief that global edible oil prices would continue to remain low enough for even the poor to afford.

Commodity markets being what they are, world prices have been rising relentlessly the last three years and have doubled from the average levels of 2005. For reasons that seem unfathomable, the Central government has been rather reluctant to reintroduce the supply of edible oil through the PDS. So much for the government’s commitment to support the aam aadmi.

Relentless price rise

Specifically, vegetable oil prices worldwide have been soaring relentlessly in recent months, driven by a combination of demand-side and supply-side factors, including oilseed output decline in some major areas, and huge diversion of vegetable oil for bio-diesel production amid steadily rising food and industrial demand. The rising crude market has also added to the bullish sentiment.

The demand-supply mismatch has attracted huge speculative interest in the market, as a result of which prices have risen to levels believed to be not justified by market fundamentals. Currently, two major oils — palm-oil and soyabean oil — are traded at unprecedented levels of $1,050-1,100 a tonne.

The outlook is still bullish. There will be big competition for acreage among crops — wheat, corn and soyabean — in the upcoming planting season in the US. It is well known that the US is the world’s largest producer of soyabean, and the output levels there have a great bearing on international oilseed and oil market prices.

India is one of the largest producers and consumers of oilseeds and oils; but output in the country has been rather unsteady amid rapidly rising consumption demand, driven by income increases and population growth. With the gradual integration of the domestic vegetable oil market with the global market, Indian domestic prices take a cue from overseas price movements. Currently, popular cooking oils have gone out of reach of the common man, as a result of which there is demand compression. In the wholesale market, groundnut oil is priced at Rs 675 per 10 kg trading lot; mustard oil at Rs 545; and refined soyabean oil Rs 560, all prices excluding taxes. At the retail level, most oils are sold at about Rs 65-70 per kg.

A sharp rise in edible oil prices, coming on top a similar increase in grain prices — wheat and rice, in particular — has considerably eroded the already fragile purchasing power of the common man. In response to rising international prices, the government has, from time to time, reduced the rates of Customs duty on various oils. Yet, sharply rising commodity prices have meant little relief to consumers.

Augment availability

What should the government do under the circumstances? Its options are limited. There is an urgent need to respond to rising edible oil prices, augment availability, deliver cooking oil to the really needy sections, check speculative tendencies in the market and control inflation as edible oil has a high weightage in the consumer price index.

The beneficial effects of duty reduction and the appreciating rupee have largely been neutralised by rising prices. Currently, crude palm oil is subject to the basic duty of 45 per cent and soyabean oil 40 per cent, down from the earlier 80 per cent and 45 per cent respectively.

However, the rate of duty is applied on specified tariff value for various oils, and the tariff value has remained frozen for nearly two years at artificially low levels, representing merely 50 per cent of the actual import price.

In other words, the effective rate of duty paid by importers is less than 20 per cent. Add to this, the appreciation of the rupee by 10-12 per cent in last one year. The low tariff value and the firming rupee have combined to further reduce the real effective duty to less than 10 per cent.

As the global market outlook is still bullish and the country needs to check inflationary conditions and discourage speculation, there is need for quick augmentation of cooking oils through enhanced imports. One sure way to make an impact on the domestic market is to allow both crude and refined oils at a uniform rate of duty — say, 5 per cent.

A differential duty structure has kept traders out of the import business, as a result of which the entire edible oil market is controlled by a handful of large refiners who import crude oil. Speculators exploit the time lag between crude imports and marketing of refined oils. This window of speculative opportunity should be closed.

Scrap Customs duty

Indeed, there is case for complete abolition of Customs duty on various edible oils. Duty-free import of oils would have a salutary effect on the market by encouraging crude oil imports by refiners and refined oil imports by traders. Given the high international prices, the adverse impact, if any, of duty-free imports on domestic oilseeds and oils would be negligible.

No doubt, the domestic oil lobby would oppose any such move and use oilseed growers as a front for the purpose. But its arguments lack merit. Indian oilseed prices are already high, at around Rs 20,000 a tonne, representing a big premium over the minimum support price. Importantly, high oilseed prices do not translate to higher production. The prospect of rapeseed/mustard crop of Rabi 2008 considering reduced acreage is hard evidence. On the other hand, consumers continue to pay a high price for their daily oil needs.

It may also be time for the Centre to restart edible oil supplies through PDS. New Delhi’s argument that State governments are free to import is specious. Why not extend the same logic to other commodities, like wheat? Inflation control and food security are concerns of the Central government and, therefore, it is duty-bound to support consumers from the weaker sections.

The effect of zero-duty vegetable oil import on domestic market prices should be salutary. The policy may continue until global prices correct down to reasonable levels, a prospect that appears unlikely any time soon.

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