The Hindu Business Line : Revisiting the edible oil policy

India is the world's largest consumer of edible oils, importing approximately 50 per cent of its requirement. Until 2003, higher import duties on refined edible oils hiked the prices of imported products to a higher level than the domestic product. While the subsequent scaled-qdown import duties on palm oil saw a surge in imports in June 2003, the duty on crude palm oil remained unchanged. This and the differential excise duties on edible oils are anomalies to be rectified if consumers' and industry's interests are to be protected.

THE Budget session of Parliament is on and various sectors are lobbying hard to get their voices heard using various means, including advertisements. One such ad on the edible oils policy calls upon the Government to save the livelihoods of 1,00,000 people, among whom are a large number of farmers.

India is the world's largest consumer, and hence importer, of edible oils. It imports approximately 50 per cent of its requirement, and 70 per cent of the imports are palm oil. Until 2003, higher import duties on refined edible oils hiked the prices of imported products to a higher level than the domestic product.

The 2003-04 Budget scaled down import duties on refined palm oil from 92.5 per cent to 70 per cent. Around the same time, Malaysia and Indonesia, the two largest producers of palm oil, faced a glut in their markets.

Between November 2002 and May 2003, the average volume of refined palm oil imports to India was 4,200 tonnes a month. But in June 2003, volumes shot up to 66,000 tonnes.

This policy adjustment caused another problem. While the import duty on refined palm oil was reduced, the one for crude palm oil remained unchanged at 65 per cent.

According to the Indian Vegetable Oil Processors Association, in January 2004, the cost of imported refined palm oil was Rs 37,527 per tonne, while the process of converting crude palm oil to refined oil cost Rs 39,101 per tonne — a net price difference of Rs 1,575 per tonne of refined palm oil, implying negative value addition.

Another concern is the differential excise duty on edible oils. At present, excise duty on refined edible oils is Rs 1,000 per tonne and on vanaspati (hydrogenated vegetable fat produced by combining crude palm oil with hydrogenated palm oil) it is Rs 1,250 per tonne.

However, the Government has exempted large import-based refineries in the Kutch region of Gujarat from paying any excise duty under the Kutch Reconstruction Package Scheme, introduced after the Gujarat earthquake.

The estimated capacity of such large units is 12,000 tonnes per day, whereas only 26 per cent of the installed vanaspati manufacturing capacity is utilised at present.

The All India Committee of Oil Trade and Industry (an umbrella body of oil and vanaspati producers of Rajasthan, Haryana, Punjab, Uttar Pradesh and Andhra Pradesh) has raised serious concerns on such a policy: "Since these larger units which are coming up will not have to pay any excise duty they will initially lower prices for their products and, thus, drive out the existing smaller units, eventually forcing them to close down," the body argues.

Another cause of agony is the gradual increase of imported vanaspati from Sri Lanka taking advantage of zero import duty as per the Indo-Sri Lanka Free Trade Agreement. Due to substantial investment in Sri Lanka in edible oil processing units, imports may increase to a level that will harm the domestic industry. Further, it is alleged that such imports from Sri Lanka are not following the norm of 35 per cent value addition in the country of production and that the real value addition less than 10 per cent.

In the past when the Indo-Nepal Trade Protocol was signed in 1996, the Indian edible oils industry suffered heavily due to duty-free imports of vanaspati via Nepal. Subsequently, in 2002, a new treaty was signed restricting duty-free import of edible oils to 100,000 tonnes per annum.

What would be the response of the Government to find a path in which everybody (domestic producers, importers, farmers, consumers) would gain? The previous government claimed that it resorted to changes in import duty to create a sobering effect on domestic edible oil prices, so that consumers benefited.

However, many small producers of edible oil are lobbying with the government to increase tariff rate (import duty) differential between crude and refined palm oil. According to the Solvent Extract Association of India, the 27 per cent duty differential before the 2003-04 Budget had resulted in investment in several new and small projects, generating substantial local employment.

Amid such lobbying, in early 2004, the Revenue Department commissioned an independent study. It recommended a hike in import duty on refined palm oil by 5 per cent from the present rate, which would result in a 10 per cent duty differential between crude and refined palm oil (at present, it is 65 per cent and 70 per cent, respectively).

It appears that the 10 per cent duty differential is the best option before the Government and it should be continued. The long-term objective should be to strive for more efficiency in domestic production.

But the efficiency argument should also be balanced with public interest, which involves different actors, with divergent interests, such as small producers and poor consumers.

Along with this, the Government may consider adopting the middle ground as far as excise duty is concerned. It can be reduced from the present rate of Rs 1 per kg on edible oil (Rs 1.25 on vanaspati) to Rs 0.50 per kg on both. This will ensure the reduction of excise burden on the domestic industry, and also help maintain some level of incentive for several projects which are underway in Kutch (Gujarat) due to the excise duty incentive.

According to many experts, there is an emerging consensus for prioritising efficiency over protection. It is argued that even if there is no import duty differential between crude and refined edible oil, the latter will always be expensive in the Indian market. This is because there is a $30 per tonne in-built price differential in the world market of crude and refined edible oil. Now, if we add import duty to this, there will approximately $50 per tonne price differential in the domestic market.

If foreign players (dealing in refined edible oil business) can make profits with $30 per tonne differential, there is no reason why Indian producers cannot be more competitive with a $50 per tonne differential.

Finally, the impact of free trade agreements is yet to unfold. It is premature to say that because of duty-free imports of refined edible oils as per the FTAs, the domestic industry is suffering. There is no conclusive proof and in-depth studies are required to establish such linkages.

Such studies will be of immense value for policy-making, as India is poised to sign several FTAs in the near future. It will help in developing a model to analyse the implications of the FTAs on specific sectors as also the consumers, and that will help policy-makers take decisions on the basis of hard facts. Thus, it will also substantially reduce the intensity of lobbying by the so-called interest groups.

(The authors are with CUTS International, Jaipur. They can be contacted at: citee@cuts-international.org)

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