The Hindu Business Line : Govt can revive supply of edible oil through ration shops

The bull-run is continuing as is evidenced by crude palm oil prices, which have risen from the levels of around 2,000 Malaysia ringgit (MYR) a tonne to above MYR 2,600 a tonne levels currently.

While CPO market has risen by 40 per cent — from $570 a tonne in January to $820 a tonne early-June — soyabean oil too climbed, but less impressively, from $650 a tonne to $760 a tonne during the same period.

The domestic impact of the international price spike has been somewhat muted by a strong rupee in recent months.

Importantly, the Government has kept tariff values (price at which customs duty is calculated irrespective of invoice value) on various edible oils unchanged since July last year.

Duty cut

What effect will a further reduction in duty have on domestic and international prices? Little, if any, according to experts.

Recent duty cuts on palm group of oils have not helped Indian consumers in any way, it is claimed. If true, then a further cut is unlikely to bring any benefit.

It may be prudent to examine if a duty cut on soyabean oil would make sense.

Currently, crude degummed soyoil is cheaper than crude palm oil by around $40 a tonne (a complete reversal of the situation obtained a year ago when CPO was quoting at a $100 discount over soyaoil).

Currently, customs duty on soyabean oil is 45 per cent. A 10 percentage point reduction in soyaoil duty would make soyaoil much cheaper.

This could put pressure on palm group of oils. Of course, the palm market is moving on the basis of its own fundamentals plus huge speculative interest in the wake of enormous demand from bio-diesel sector.

But at current high prices, diversion for bio-diesel is becoming increasingly unfeasible.

Palm oil market

With a fairly significant market share, India can still influence the palm market, albeit not as much as it used to say until two-three years ago.

But India' s strategic move to favour soyabean oil over palm oil for duty reduction is likely to send clear signals to the palm market.

Together with a reduction in soya oil duty, India must revise upwards the tariff values of all oils, which again will send out a signal.

Of course, one cannot wish away the critical importance of palm oil for India, especially favourable logistics and short supply time.

Yet, when prices are unfriendly, a fine balancing act between competing oils is required.

Why not edible oil through PDS? It is often said that Governments do the most rational thing, but only after exploring other possibilities. It looks like Indian policymakers are still exploring other possibilities.

Unlike wheat and pulses whose rising prices led to deep consumer resentment, edible oil prices have not evoked sharp reactions.

This is because well-to-do consumers are in a position to absorb the price rise. High edible oil prices hurt the poor rather severely.

In most cases, high prices have led to demand compression, especially among the vulnerable sections of the population, a section that suffers from under-nutrition and desperately needs to consume more oils and fats.

PDS & Edible oil

Revival of edible oil supplies through the PDS is the definite way forward.

To start with, vanaspati imports from Nepal and Sri Lanka should be channelled through a state agency and exclusively earmarked for PDS.

This will reduce unfair competition that domestic vanaspati industry faces from these imports and make available low priced imported vanaspati for PDS buyers.

In addition, refined palmolein can be imported at zero-duty, exclusively for PDS.

Imports can be arranged through, for instance, State Trading Corporation of India, which has requisite experience in handling such imports and distribution to State Governments.

To ensure planned arrivals and uninterrupted supplies, imports will have to be centralised.

The duty forgone in this case would of course be revenue sacrifice.

But it is a price worth paying for reining in open market prices, augmenting supplies and supporting poor consumers.

Demand for edible oils usually rises manifold during the festival season that lasts from August till October. That leaves the Government only a few weeks to get cracking. Will it?

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