The Hindu Business Line : Edible oil: Important to keep the PDS supply flowing

The decision to revive edible oil supplies through the public distribution system is among the best things to have happened in the Indian food market in recent times.

PDS supplies of edible oil must continue as imports through government agencies and supplies through the public distribution system help keep private trade in check.

G. Chandrashekhar

Two suggestions from the recently concluded World Oilseeds and Oils Conference 2008 in Singapore deserve to be commented upon: One, the Indian Government should stop import of vegetable oils through parastatals and, two, it should re-impose Customs duty on imports. Both suggestions deserve to be ignored in the present context.

Hemmed in by rising international energy and food prices, as well as soaring domestic inflation — contributed largely by food products including cooking oils — the Government was forced to take, in March this year, the drastic decision to allow crude vegoil imports at zero-duty and refined oils at 7.5 per cent. This was, of course, in addition to several monetary, fiscal and administrative measures to contain the overall rise in commodity prices.

Despite such a dramatic step — unthinkable until even a year ago — domestic cooking oil market continued to strengthen on cue from the international market. Edible oil prices rose beyond the reach of poor people, most of whom are nutritionally-challenged and calorie-deficient. To contain consumer unrest, the Government intervened to ensure delivery of cooking oil to vulnerable sections at affordable prices.

The decision to revive edible oil supplies through the public distribution system (PDS) is among the best things to have happened in the Indian food market in recent times. It followed strong and repeated recommendations from policy researchers and others including Business Line.

Notwithstanding all its perceived weaknesses, including suspected leakage, PDS still does deliver essential foods to a large number of the really needy. It makes food accessible and affordable for the poor in rural areas. Indeed, the then government in 2001 decided rather ill-advisedly to discontinue edible oil supplies through PDS because of the low open market prices then, little realising that commodity markets by very nature are volatile and prices never stay frozen.

Parastatals like STC, which have long experience in handling edible oil, have now been asked to undertake imports of crude and refined oils for supply to State governments. It is the latter’s responsibility to lift what is allocated and ensure supplies through designated shops.

Social responsibility

The suggestion that State agencies must now be asked to stop imports because open market prices have fallen is misplaced and goes against the very rationale of restarting PDS supplies. Indeed, PDS supplies of edible oil must continue with greater vigour, if anything. The policy-makers cannot abrogate their social responsibility to support poor consumers.

As a matter of fact, imports through government agencies and supplies through PDS help keep private trade in check. Trade margins are currently under pressure. Without healthy competition or countervailing force in the form of public sector imports for PDS supplies, consumers will be at the mercy of large refiners and traders, a situation the country went through in the last 5-6 years.

The trade made enormous profits in the last two years in a steeply rising market; and, most unfortunately, poor consumers paid a heavy price. With festival demand still to run its course, there is no urgency to disturb the status quo. There is need, however, to regulate the trading operations of the government agencies and allow them to take trading decisions dynamically as the market warrants.

Given the recent fall in open market prices, the subsidy element of Rs 15 a kg may be suitably pared down or withdrawn. At current prices and looking at price prospects over the next three months, refined oil at Rs 45 a kg would be perceived as consumer friendly.

Customs duty

In the same vein, the suggestion to re-impose customs duty on imported oils may not be in anyone’s interest. This also ignores ground realities in India including political compulsions. It is an exaggerated fear that oilseed growers will be hurt if duties were not raised.

Notwithstanding zero-duty crude oil imports, open market prices of oilseeds are sure to remain above the minimum support price (MSP).Yes, prices may not reach the unprecedented levels of last year; and it would be unreasonable to expect such a spike again. Yet, growers will not suffer poor prices, for sure.

For instance, even if soyabean prices were to decline to Rs 20,000 a tonne from last season’s peak of Rs 28,000 a tonne, it would still be attractive to growers as the MSP is Rs 13,900 a tonne. Which other business gives a 50 per cent return, except of course palm oil? Importantly, and admittedly, high open market prices of oilseeds in the past year brought remunerative incomes to growers; but this has not translated into large area expansion. Overall, at about 170 lakh hectares, kharif 2008 acreage for oilseeds is little changed from the previous year.

It is worth remembering that the average Indian farmer’s ability to respond to prices is rather limited, in terms of crop choice or agronomy. Higher prices do not automatically translate into higher production. There is one fine distinction the government can make between private sector and public sector imports. Public sector imports for PDS may be exempt from customs duty in the public interest, while private sector imports may be charged. There is precedence for this. Section 25 of the Customs Act permits such an exemption in public interest.

Poll pressures

There is a political angle to prices and customs duty. A series of State-level elections culminating in general elections over the next several months is sure to keep the Government on its toes, particularly to ensure inflation is under control, food prices are consumer-friendly, supplies are adequate and nothing disturbs the perceived demand-supply equilibrium.

In the Government scheme of things, the priorities remain clear: the consumer comes first, the farmer next and the industry last. The industry could be mistaken if it believes New Delhi will do something as silly as re-impose customs duty on imports.

Governments are known to do the most rational thing, but only after exploring other possibilities. The Indian Government has acted rationally by reviving PDS supplies and abolishing customs duty. There is no need to upset this, for the time being.

A key factor in favour of the zero-duty regime is the weakening rupee that has, albeit to a limited extent, neutralised the effects of price fall. A weak rupee will continue to operate as an indirect tariff mechanism. It is important that the marketability of kharif oilseeds is improved.

For this purpose, the extant storage control restrictions should be withdrawn. Ban on oil exports may also be lifted. These measures will allow processors to access raw material in larger quantities and provide sufficient support to growers, in addition to a very substantial hike in MSP in the case of major kharif oilseeds groundnut, soyabean, sunflowerseed, sesamum and nigerseed.

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