Edible Oil Raj Oil Mills

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Date:22/01/2008URL:http://www.thehindubusinessline.com/2008/01/22/stories/2008012250070800.htm

BackCase for duty-free import of edible oils

G. CHANDRASHEKHAR

The Centre has to respond quickly to rising edible oil prices, augment availability ofcooking oil, ensure it reaches the needy and check speculative tendencies in the market.

Duty-free import of oils and resuming their supply through the PDS would have asalutary effect on the market, says G. CHANDRASHEKHAR

The skew in consumption of edible oil means pervasive malnutrition, especially among women andchildren, that must be reversed.

The time has come for Indian policymakers to take bold decisions to support consumers.For too long have consumers, especially those from the economically weaker sections,

been paying too high a price for an essential food item edible oil.

Indias per capita consumption of edible oil has been rising in recent years; yet, at 12 kg,it is still less than what nutritionists recommend (16 kg). There is pervasive malnutrition,especially among women and children. Serious calorie and protein deficiency is a matterof record.

It must be stated that the per capita consumption number of 12 kg masks the reality.There is a skew in consumption of edible oil. There is disproportionately largeconsumption (20-25 kg per capita) among a third of the population, while a large numberof persons at the bottom of the pyramid consume less than 5 kg per capita.

The government has so far done little to address the problems arising out of rising edibleoil prices. While the financially resourceful sections can afford to pay any price for the

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cooking medium, poorer consumers are the worst hit; and it is the latter who suffer fromcalorie deficiency and are in need of oils.

The government discontinued supply of edible oil through the public distribution system(PDS) sometime in 2001-2002 in the mistaken belief that global edible oil prices would

continue to remain low enough for even the poor to afford.

Commodity markets being what they are, world prices have been rising relentlessly thelast three years and have doubled from the average levels of 2005. For reasons that seemunfathomable, the Central government has been rather reluctant to reintroduce the supplyof edible oil through the PDS. So much for the governments commitment to support theaam aadmi.

Relentless price rise

Specifically, vegetable oil prices worldwide have been soaring relentlessly in recent

months, driven by a combination of demand-side and supply-side factors, includingoilseed output decline in some major areas, and huge diversion of vegetable oil for bio-diesel production amid steadily rising food and industrial demand. The rising crudemarket has also added to the bullish sentiment.

The demand-supply mismatch has attracted huge speculative interest in the market, as aresult of which prices have risen to levels believed to be not justified by marketfundamentals. Currently, two major oils palm-oil and soyabean oil are traded atunprecedented levels of $1,050-1,100 a tonne.

The outlook is still bullish. There will be big competition for acreage among crops

wheat, corn and soyabean in the upcoming planting season in the US. It is well knownthat the US is the worlds largest producer of soyabean, and the output levels there have agreat bearing on international oilseed and oil market prices.

India is one of the largest producers and consumers of oilseeds and oils; but output in thecountry has been rather unsteady amid rapidly rising consumption demand, driven byincome increases and population growth. With the gradual integration of the domesticvegetable oil market with the global market, Indian domestic prices take a cue fromoverseas price movements. Currently, popular cooking oils have gone out of reach of thecommon man, as a result of which there is demand compression. In the wholesalemarket, groundnut oil is priced at Rs 675 per 10 kg trading lot; mustard oil at Rs 545; and

refined soyabean oil Rs 560, all prices excluding taxes. At the retail level, most oils aresold at about Rs 65-70 per kg.

A sharp rise in edible oil prices, coming on top a similar increase in grain prices wheatand rice, in particular has considerably eroded the already fragile purchasing power ofthe common man. In response to rising international prices, the government has, fromtime to time, reduced the rates of Customs duty on various oils. Yet, sharply risingcommodity prices have meant little relief to consumers.

Augment availability

What should the government do under the circumstances? Its options are limited. Thereis an urgent need to respond to rising edible oil prices, augment availability, deliver

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cooking oil to the really needy sections, check speculative tendencies in the market andcontrol inflation as edible oil has a high weightage in the consumer price index.

The beneficial effects of duty reduction and the appreciating rupee have largely beenneutralised by rising prices. Currently, crude palm oil is subject to the basic duty of 45

per cent and soyabean oil 40 per cent, down from the earlier 80 per cent and 45 per centrespectively.

However, the rate of duty is applied on specified tariff value for various oils, and thetariff value has remained frozen for nearly two years at artificially low levels,representing merely 50 per cent of the actual import price.

In other words, the effective rate of duty paid by importers is less than 20 per cent. Addto this, the appreciation of the rupee by 10-12 per cent in last one year. The low tariffvalue and the firming rupee have combined to further reduce the real effective duty toless than 10 per cent.

As the global market outlook is still bullish and the country needs to check inflationaryconditions and discourage speculation, there is need for quick augmentation of cookingoils through enhanced imports. One sure way to make an impact on the domestic marketis to allow both crude and refined oils at a uniform rate of duty say, 5 per cent.

A differential duty structure has kept traders out of the import business, as a result ofwhich the entire edible oil market is controlled by a handful of large refiners who importcrude oil. Speculators exploit the time lag between crude imports and marketing ofrefined oils. This window of speculative opportunity should be closed.

Scrap Customs duty

Indeed, there is case for complete abolition of Customs duty on various edible oils. Duty-free import of oils would have a salutary effect on the market by encouraging crude oilimports by refiners and refined oil imports by traders. Given the high international prices,the adverse impact, if any, of duty-free imports on domestic oilseeds and oils would benegligible.

No doubt, the domestic oil lobby would oppose any such move and use oilseed growersas a front for the purpose. But its arguments lack merit. Indian oilseed prices are alreadyhigh, at around Rs 20,000 a tonne, representing a big premium over the minimum support

price. Importantly, high oilseed prices do not translate to higher production. The prospectof rapeseed/mustard crop of Rabi 2008 considering reduced acreage is hard evidence. Onthe other hand, consumers continue to pay a high price for their daily oil needs.

It may also be time for the Centre to restart edible oil supplies through PDS. New Delhisargument that State governments are free to import is specious. Why not extend the samelogic to other commodities, like wheat? Inflation control and food security are concernsof the Central government and, therefore, it is duty-bound to support consumers from theweaker sections.

The effect of zero-duty vegetable oil import on domestic market prices should be

salutary. The policy may continue until global prices correct down to reasonable levels, aprospect that appears unlikely any time soon.

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