G Chandrashekhar

Edible oil demand: Plan projections go awry

Updated on: Jun 20, 2011
BL21GC

BL21GC

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BL21_GC_new_bw.eps

Edible oil demand has been underestimated by 25-30 lakh tonnes a year, as incremental incomes are spent on cooking oil.

Like in so many other cases, the Planning Commission has been far off the mark in estimating the demand for edible oil during the ongoing Eleventh Plan (2007-2012), the terminal year of which we entered in April.

Projections for demand of edible oilseeds and edible oil in the country for the years 2007-08 to 2011-12 were made by the Working Group constituted by Planning Commission.

This group also considered the results of the 55th Round of National Sample Survey (1999-2000). The consumer expenditure survey conducted periodically includes estimation of consumption of edible oil.

Based on a behaviouristic approach, the group projected the annual requirement of edible oil calculated from projections of annual requirement of oilseeds. These projections, it now turns out, are grossly underestimated.

Indeed, in each one of the first four years of the Eleventh Plan, India's vegetable oil imports aggregated far higher than the Plan projection. Clearly, in 2006, it looks like the Working Group had little idea about ‘income elasticity of demand'.

Underestimating demand

Rising incomes over the last four-five years have put more money in the hands of a large number of consumers. Given the existing low level of per capita consumption, especially among a majority of the population, it is only natural that a large part of incremental income is spent on food products, including cooking oil. Changes in food habits have to be factored in, too.

The serious underestimation of demand brings to question the credibility of the so-called behaviouristic approach followed by our planners and estimates of consumption as per the NSS.

The table clearly shows how far off the mark the Plan projections of edible oil demand have been. It is, of course, unclear if the policymakers actually rely on Planning Commission numbers for policymaking, or simply overlook them.

Even assuming that total imports till October 2011 reach 80 lakh tonnes, it would take total availability for the year to 167 lakh tonnes, largely unchanged from the previous two years. In other words, edible oil demand has been underestimated to the extent of 25-30 lakh tonnes a year.

Speculative trading

No one can argue against the common sense premise that the volume of edible oil import would and should depend on market demand. However, under Indian conditions, economic logic often takes a backseat. In India, the volume of edible oil imports is a function not only of demand, but also of speculative trading positions as well as the credit period and payment cycle.

One can say, in the last three years or from the time crude edible oil imports were allowed at zero-duty (refined oil at 7.5 per cent duty), 10-15 per cent of import volumes were the result of speculative trading positions (anticipating duty hike and so on) rather than or genuine market demand.

Another feature that results in forced import (even if the domestic market does not need it) is the vicious credit cycle which forces importers to strike new deals without concern for the domestic market conditions. When the importer reaches the end of the credit period for a particular consignment he imported and it is time for him to remit the value of the consignment to the overseas supplier, he undertakes fresh imports so as to generate funds for meeting the payment obligation arising out of the previous consignment.

Tangled web

This way the credit cycle perpetuates itself. Many Indian importers are already in the midst of this tangled web. Hypothetically, if edible oil import on credit terms is stopped for whatever reason, there is serious risk that many importers will sink without a trace because they are in no position to liquidate their liabilities without doing additional business, whether the market demands it or not.

Indian importers survive and continue to be in business with the sanguine hope that the country will forever continue to import edible oil and seldom become self-sufficient. So, the import cycle continues.

The Planning Commission's demand projections for the Eleventh Plan are nothing but assumption of fixed increase in demand year after year. The assumption is that demand will expand by 5.3-5.5 lakh tonnes a year.

This kind of projection is hardly credible because demand for food products is driven by increase in incomes and other factors, and will seldom move in a straight line.

It is necessary that the shortcomings witnessed in projections made during the current Plan period are not repeated in the 12th Plan on which Planning Commission is working at present. Instead of following a straight line method for projecting demand, it would make sense to build scenarios based on projections of overall and agricultural growth.

In the next five years, if the benefits of economic growth begin to flow to those who have been left out so far, the demand for food products, including edible oil, is sure to surge.

Increase in demand is a healthy sign; but it must be equitable. It is necessary to ensure that the really needy, the poor and the undernourished, are able to access food at affordable prices.

Published on July 12, 2011

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