India hikes import duties on edible oil, but questions remain

Satyapal Menon | The Dollar Business India’s edible oil sector continues to be in a conundrum, with the government having to resort to short term measures yet again. The recent announcement by the government to increase the import duties on crude edible oils from the earlier 2.5% to 7.5%, and on refined edible oil from the earlier 10% to 15% calls for some introspection, since the decision, though ostensibly flaunted as a measure to protect the interests of farmers, is actually a myopic and insufficient solution. The government took the decision this week following repeated requests by several organisations such as the Soybean Processors Association of India (SOPA) and the Indian Vanaspati Producers Association (IVPA) to prevent a surge in edible oil imports at a time when the harvest is at a peak in India. The Solvent Extractor’s Association of India (SEA) had also, in a memorandum submitted to Prime Minister suggested, “As a remedy to the current situation, we would like to suggest the government to increase import duty on crude vegetable oils from 2.5% to 10% and refined vegetable oils from 10% to 25%." This according to them would safeguard the interest of farmers by ensuring remunerative price for their produce in the next Kharif harvest season, the association stated, adding, “Moreover, the additional revenue generated by customs duty can be ploughed back into increasing oilseed productivity.”  Here is the paradox. India is the largest producer of oilseeds, accounting for around 15% of the world’s oilseeds area, but it is also a top importer of edible oils due to the ever widening gap between demand and supply. This is evident from the near plateau in production growth and the peaks in imports. According to Solvent Extractors' Association, India’s import of vegetable oils during 2013-14 oil year (November-October) reached a record level of 11.82 million tonnes compared to 10.68 MT for the same period of last year, up by 11.7%. Import of edible oil increased to 11.62 million tonnes during 2013-14, up from 10.39 million tonnes in the previous year, while that of non-edible oils declined to 0.2 million tonnes from 0.29 million tonnes during the period. The oil year 2013-14 and the beginning of 2014-15 witnessed the Indian markets being flooded with imports from Indonesia and Malaysia, which were keen to offload the surplus at reduced export duty. The move by the two exporting countries has led to a plunge in edible oil prices in India. The government’s move to increase the import duty on edible oil imports is likely to reduce losses for farmers for now and help crushers who are struggling to get sufficient oilseeds to run at full capacity. It is obvious that an increase in oilseeds output in the domestic sector is the only solution to redeem their existence. On the other hand, the increase in crude edible oil imports comes as a setback for those in the industry who market this category of edible oil. Either way, the important question is whether the increases in import duties would achieve the objective to promote increase in output in the years to come? Can jacking up the imports do what years of consistent and persistent attempts to increase edible oilseeds production could not achieve? Would this bridge the chasm between supply and demand for edible oil in India? The contention that the revenues from the import duties could be ploughed back to increase the minimum support price (MSP) holds no water, since there is a clear mismatch between the revenues accrued through the import duties and the earnings to the farmer from increased MSP. While it is doubtful who the gainers would be from such measures, the loser due to such measures are the consumers who have to now dig deeper into their pockets with edible oils becoming dearer and dearer. What is needed is a holistic approach and a long term solution. Instead of relying on changes in import duties as a reaction to policy changes in other countries and treating MSP as a panacea, the government must take concrete steps at strengthening the domestic production of edible oil in India. Since the demand for edible oil is expected to remain at a much higher level than the supply in India, the government should consider measures such as crop insurance, price guarantees, adequate storage capacities, and facilitate processing units. These could help transform the sector and reduce India’s reliance on edible oil imports.    

This article was published on December 26, 2014.