Commodities

As duty on palm oil turns contentious, Delhi must act

G Chandrashekhar | Updated on December 31, 2019 Published on December 31, 2019

In the aftermath of a sharp rally in palm oil prices (from $550 to over $720 a tonne) over the last two months, a controversy over the rate of Customs duty on imported palm group of oils has broken out between the Delhi-based Indian Vegetable Oil Producers Association (IVPA), representing vanaspati producers, and the Mumbai-based Solvent Extractors’ Association of India (SEA), representing the oil import lobby.

IVPA has demanded a reduction in the Customs duty on crude palm oil on the ground that vanaspati producers are able to obtain raw material (palm oil) at reasonable rates. In turn, Indian consumers will be able to continue to access the cooking medium at affordable prices and idle capacity in the refining industry will be utilised.

However, SEA has opposed any duty reduction on the ground that it would hurt domestic oilseed growers.

Traditional rivalry

History of the last 30 years tells us this is not the first time that the vanaspati industry and oil importers are on the opposite sides of the table; nor is it likely to be the last. While vanaspati producers want to access critical imported raw material (palm oil) at low prices, the import lobby is always happy with rising domestic prices of imported oils as that would ensure windfall gains. It is well-known that this market is substantially speculation driven.

The interesting part is that currently domestic stocks of imported oils are an estimated 15-17 lakh tonnes. Any reduction in duty will reduce the market price of this inventory and reduce the profit margin. No wonder, there is opposition to any duty reduction.

Price rally

Palm oil prices at the origin —– Malaysia and Indonesia — have rallied by a third in the last two months because of anticipated lower production growth, higher Chinese demand and ambitious Indonesian biodiesel blending programme. As the world’s largest importer, India contracts for about 90 lakh tonnes of palm oil annually, costing close to $6 billion.

The Indian government is keen to reduce the growing dependence on imported oils. This calls for placing judicious restrictions on import volumes as also regulating the import trade by closely monitoring import contracts, type of oil, prices and arrival period.

Again, over the last 25 years, changes in import duties have made no difference to the domestic oilseed growers. Trade bodies use growers’ name to advance their own trade interests. The government has often succumbed to lobby pressure and made irrational changes in duty which merely enabled speculators make windfall gains.

Transparency needed

While frivolous tinkering with duty must stop, there is felt-need for greater predictability in duty changes. Appropriate trigger points must be fixed on the high and low side of price band, a breach of which should trigger pre-determined tariff change. This will increase predictability and transparency in the vegoil trade and help reduce speculation.

At the same time, the strident price rise in the international market is for real. Higher edible oil prices have the potential to add to the already firming inflation expectations in the country, and the situation worsens because of a weak rupee.

So, it would make sense to allow vanaspati manufacturers to import their raw material at a slightly lower rate of duty under ‘actual user’ condition. Such a measure would help the industry and not compromise oilseed growers, given the limited volume of import.

It is critical that policymakers look at the entire oilseeds-based sector holistically and come up with end-to-end solutions that would advance the interests of all stakeholders. Augmenting domestic production should of course be the bedrock of the policy for this sector.

It may prove to be daunting but there is no escape. The first step would of course be judiciously curtailing imports of edible oil. For too long this country has adopted the facile option of imports with disastrous consequences for domestic oilseed growers.

The writer is a policy commentator and agribusiness specialist. Views are personal

Published on December 31, 2019
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