The Hindu Business Line : Why flog insignificant issues on import of edible oils?

SHOULD edible oil importers be unduly concerned about the twin-issues of carotenoid content in palm oil and tariff values on edible oils that they claim are hurting their business? A look at the import data shows there has been no let up in edible oil imports necessitated by a supply gap in the domestic market.

As per latest figures from Solvent Extractors' Association of India, arrivals last two months were close to six lakh tonnes each.

Of this, crude palm oil and crude palmolein together constituted over 50 per cent. Crude de-gummed soyabean oil too accounted for a significant share. It is business as usual, as is obvious from the import data.

The fact of the matter is that whatever be the rate of customs duty, tariff value or carotenoid content, vegetable oil imports into the country are inevitable in order to bridge the rising domestic consumption needs.

Unfortunately, much of the policy and duty-related confusion in the edible oil sector is of the making of the trade itself, although the role of the Government too in confounding the confusion cannot be understated.

In August last year, the Government stipulated minimum carotenoid content in crude palm oil (500 parts per million). This was to ensure there was no evasion of duty through misdeclaration of cargo quality.

Under the current duty structure, fully processed or refined palm oil attracts higher duty of 75 per cent ad valorem, while crude palm oil bears 65 per cent duty. In order to take advantage of lower duty on crude, some importers started to import refined palm oil/olein slightly degraded so that the quality specifications fall below that of refined oil and declare it as crude.

It is now understood that a large part of crude palm oil/olein that enters the country is unable to meet the carotenoid condition and is, therefore, charged the higher rate of 75 per cent. The complaint appears to be not against carotenoid condition per se, but against the levy of higher rate of duty on consignments not meeting the stipulation.

In other words, it is the payment of a higher rate of duty that pinches importers and so, they want the quality specification reworked.

But, it is strange that importers are complaining. Actually they have nothing to lose. It is only incidental that many importers have set up refineries to take advantage of the differential in rate of duty between crude and refined oils.

After all, an importer or a refiner is one who brings the oil into the market, converts it into an acceptable form for the consumer and sells it at the market rate. An importer is concerned with parity between domestic price and landed cost of imported material, while a refiner is concerned with refining margins and possibly some premium on branding.

For the importer or the refiner, the rate of duty the imported goods bear is immaterial because it is recovered from the market, that is, eventually from end consumers. Incidentally, the Government gets higher revenue.

The issue of tariff value is no different. There is no reason why importers have to keep making noises from time to time about revision of tariff value? One of the arguments is that uncertainty over revision of tariff values leads to speculation.

Commodity markets in general and edible oil market in particular are speculative. To what extent Government's tardy response in revising the tariff value increases the level of speculative activity in the market is debatable. In any case, the price risk arising out of market changes can be hedged in the futures exchange.

Government's action of fixing tariff values and stipulating quality (carotenoid) standards was in specific response to serious suspicion of invoice-manipulation and misdeclaration of quality of imported goods.

One way to overcome the issue of quality would be to keep uniform rate of duty for both crude and refined oils. Fears that large quantities of refined oils would flow into the country and hurt refining activity are exaggerated.

For instance, in case of soyabean oil, the rate of duty on both crude and refined is the same at 45 per cent.

Despite this, refined soyabean oil import volume is rather limited. It was less than 30,000 tonnes in the last two oil years, while crude soyaoil inflow was over 11 lakh tonnes. Similarly, even after reduction of duty on refined palmolein and narrowing of the duty differential, inflow of refined oil has been modest.

On its part, the Government cannot escape culpability in fostering the current sorry state of affairs on the edible oil market. It started with recognising and lending official sanction to the import of a dubious product described as crude olein by fixing a tariff value on it.

Instead of acknowledging its mistake and correcting it, the Government is continuing with the mistake and encouraging unhealthy trade practices.

In the matter of fixing tariff values, there is no reason why the system cannot be transparent. Nothing prevents the Finance Ministry from announcing tariff values on the first of every month; and if need be change/revise it anytime during the course of the month as deemed appropriate. This would mean one complaint less from importers and trade associations.

It is really a pity industry and trade associations flog issues that are of no great significance and ignore structural problems. No one discusses the numerous non-trade non-price initiatives that the edible oil sector needs but are not forthcoming, while traders and policymakers blame each other for the ills of the sector.

Strategies to raise oilseeds productivity, exploit oil palm and minor oilseeds potential, consolidate fragmented processing capacities, raise per capita consumption of oils and fats, reduce the skew in existing consumption pattern, risk management etc are the real issues that deserve to be discussed.

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