The Hindu Business Line : Agricultural growth to spur edible oil demand

WILL India's pent up demand for edible oil be unleashed in the new crop year beginning November when the kharif harvested oilseeds start flowing into the market? Most likely it would, going by the past experience and emerging market forces.

It is known that in India, demand for essential food items is sensitive to changes in prices and incomes. Edible oil is no exception and demand for it is both income-elastic and price-elastic.

Population growth of around 1.8 per cent and income growth of between 5 and 6 per cent per annum should continue to drive demand up. Average annual GDP growth rate during the Ninth Plan period was 5.4 per cent.

Important, however, is the contribution of agriculture and allied activities to total GDP. Nearly 70 per cent of the population is known to depend on farm-related activities for livelihood. A healthy rate of growth in agriculture is sure to put additional incomes in the hands of a large section of population and generate demand.

Given the existing low level of per capita consumption, increases in income — especially in rural areas through remunerative agricultural prices — invariably lead to higher demand as a large part of incremental income is spent on consumption of essential foods.

Likewise, as the country's import dependence is as high as 45-50 per cent, international vegetable oil prices as well as rates of customs duty impact prices and in turn demand. The table alongside makes interesting reading. The numbers compiled by the Ministry of Agriculture provide a clue to the behaviour of the edible oil market.

Domestic oilseeds output was unsteady last three years because of aberrant weather in parts of the country. Not only was annual production far short of the target, fluctuation year-to-year was too wide for comfort.

A wide variation in domestic output resulted in fluctuations in indigenous vegetable oil production. Under normal demand conditions — propelled by income and population growth — edible oil imports ought to have displayed a buoyancy; but during last three years they remained trapped in the 42-43 lakh tonnes range and even in the year of worst drought, did not break loose.

Stagnant demand and at times even compression of demand during last three years is attributable to the twin effects of decline in rural incomes because of drought conditions and higher international prices.

It is well known that in three out of the last four years — 1999 to 2002 — the country suffered dry conditions in some parts or the other. While in 1999 and 2000, the monsoon failed in the western and central regions — Rajasthan, Gujarat, parts of Maharashtra, Madhya Pradesh — the year 2002 was the worst with 14 States hit by drought.

Setback to agriculture resulted in fall in rural incomes in three out of last four years. 2001 was the only year when the monsoon was somewhat satisfactory.

Statistics of quantum and value of vegetable oil imported during the last three years provided by the Ministry of Food and Consumer Affairs should throw some light on the price aspect.

Interestingly, global vegetable oil market went through a bear phase during 2000, 2001 and almost until mid-2002. Low import prices should have resulted in a significant expansion in imports; but that did not materialise primarily because the Government raised the rates of customs duty on imported oils rather sharply in March 2001.

High fiscal impost together with depreciating rupee made imports more expensive and lifted the overall vegetable oil prices in the country, leading to a negative growth in consumption.

According to the Ministry of Food and Consumer Affairs, demand for edible oil in the country during 2001-02 was 103 lakh tons, which declined to 94 lt during 2002-03.

Demand for edible oil should show a significant expansion in the coming season. With satisfactory rainfall so far, the overall agricultural production prospects look reasonably bright. Higher farm output means more income in the hands of a large section of population and thereby more demand.

In addition, global vegetable prices are likely to take a downturn with large oilseeds crops likely to be harvested in the US, China and India, while world palm oil output is expected reach unprecedented levels, contributed especially by Malaysia.

Lower international vegetable oil prices, a firm rupee (that makes import so much cheaper) and higher farm incomes should provide a potent combination to give a big boost domestic consumption of all food products including edible oils.

A strong recovery in indigenous oilseeds crop (projected at 130 lt for kharif 2003 versus 85 lt in kharif 2002) should provide sufficient raw material for indigenous edible oil production.

Come October, oilseeds crushing activity should start rather briskly across the country. In the availability of indigenous oils, there will be considerable improvement from last year. At the same time, a matching growth in demand for this essential commodity should provide processors and traders with attractive business opportunities.

Policy makers in New Delhi have to exercise utmost caution in the matter of regulating imports. They must ensure that the benefit of bigger crop this season flows to the grower. Care has to be taken not let low international prices affect the domestic market.

Political and international pressures on the Government to follow an import-friendly policy cannot be ruled out. Elections in some States are expected later in the year. For the Government, the last quarter of 2003 will provide a true test of character.

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