Our Bureau

Mumbai, June 21

IT is a strange case of Indian producers of vanaspati located in Sri Lanka competing with vanaspati producers in India.

Several Indian companies that have set up vanaspati manufacturing facilities in Sri Lanka export the product to India to enjoy the double benefit of liberalised imports into India and Sri Lanka's licensing condition that the entire production should be exported to India.

Already reeling under the pressure of excessive level of installed capacity (48 lakh tonnes versus the current production of 14 lt), idle capacity of over 70 per cent, sluggish demand growth, competition from cheaper liquid oils and widespread sickness, the domestic vanaspati producers have to contend with the challenge of large imports from the southern neighbour.

Strangely, from being a major producer, Sri Lanka is a net importer of vegetable oil, a key raw material for manufacture of hydrogenated oil (vanaspati). However, the island nation is now in a position to export about 2.5 lt of vanaspati to India under the free trade agreement between the two countries signed in March 2000.

According to Indian Vanaspati Producers Association (IVPA), vegetable oil imports into Sri Lanka are duty-free if the finished product (vanaspati) is exported. Value-addition norms do exist but are observed more in the breach, the association has complained.

A joint team of Government officials and industry representatives that visited Sri Lanka found that in addition to six production units already in operation and two units under installation, more licences have been given for new plants.

These units enjoy several concessions, including full tax holiday for periods ranging from 3-12 years; duty-free imports of raw material (usually palm oil from Malaysia/Indonesia) during the lifetime of the project; duty-free import of capital goods; and 100 per cent ownership of assets by foreigners.

IVPA asserted that there is absolutely no case for allowing import of even one tonne of vanaspati given the current dismal status of the Indian industry and large idle capacity. The industry believes that even the value-addition norms (35 per cent) are being flouted, as the actual value-addition in Sri Lanka is only about 18 per cent.

It is unclear what the response of the Government is. Without doubt, the free trade agreement with Sri Lanka is hurting domestic interests. What is clear is that it was entered into in a great hurry, perhaps overlooking several aspects, including origin certification, strict compliance with value-addition norms and so on.

IVPA said it does not want any protection but can meet the competition if provided with a level-playing field. Ironically, crude palm oil when imported into India as raw material for vanaspati attracts 80 per cent duty, while imports of vanaspati (finished goods) attract much lower duty.

A significant part of exports from Sri Lanka land at the southern ports, creating unsettled conditions for vanaspati producers in the region, while imports from Nepal hurt those in the North, a double-side attack for local producers.

(This article was published in the Business Line print edition dated June 22, 2005)
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