Indian Government Cuts Customs Duty On Crude Palm Oil To 27.5 Per Cent: Here Are Its Pros And Cons

The Union government yesterday (26 November) announced a duty cut of 10 percentage points to 27.5 per cent on imports of crude palm oil in a move that is seen as double-edged.

The lowering of duty, effective from today, from the previous 37.5 per cent is being viewed as a move to cool surging edible oil prices in the country by a section.

But those aligned with the oilseed crushers see this as a panic reaction to the rise in cooking oil prices which is purely due to global reasons than anything to do with any domestic development.

Surge In Cooking Oil Prices

What has triggered the move to cut the duty on crude palm oil? The major reason is that cooking oil prices have surged between 13 per cent (groundnut oil) and 29 per cent (sunflower oil) across the country.

For example, data from the Union Consumer Affairs Ministry show that groundnut oil ruled at Rs 184 a kg yesterday compared with the same period a year ago, while soybean oil ruled 19 per cent higher at Rs 125 compared with Rs 105 a year ago.

Similarly, sunflower oil quoted at Rs 151 (Rs 117 last year), mustard oil at Rs 156 (Rs 121) and palm oil Rs 112 (Rs 87).

B V Mehta, executive director of Solvent Extractors Association of India (SEA), the apex body of oilseed crushers in the country, said that edible oil prices have surged mainly on global factors such as drought affecting Brazil soybean and Argentina not showing any interest to sell.

The government seems to have been worried over lower imports of edible oil last year, particularly palm oil, according to analysts.

Edible Oil Imports At Five-Year Low

SEA data for the 2019-20 oil year (November-October) showed that edible oils import, most of which is used for cooking, dropped to a five-year low last season to 13.52 million tonnes (mt) as the hotel, restaurant and catering sector was affected by the lockdown announced by the Indian government to tackle the novel Coronavirus.

Among the oils imported, shipments of refined, bleached and deodorised (RBD) palmolein dropped sharply to 0.42 mt against 2.73 mt a year ago.

Imports of palm oil, in particular, were hit after the Union Government imposed a five per cent safeguard duty on RBD palmolein and palm oil in September last year.

From 8 January this year, the Centre also brought under the restricted list import of RBD palm oil, curtailing its shipments into the country.

In addition, the Narendra Modi government discouraged palm oil imports from Malaysia in view of its strained bilateral relations with the Mahathir Mohamad government, which was ousted in February.

An agricultural trader, currently based in Malaysia and not wishing to identify, sees the Indian government move to cut palm oil duty as a smart merchandise trade strategy.

A Move To Sell Indian Sugar, Rice?

“Malaysia and Indonesia will stand to benefit primarily from the duty cut by India. This seems a smart strategy since both the countries have been reaching out to New Delhi to buy sugar and rice,” the trader said.

“Indian sugar has good demand in South-East Asia, particularly Malaysia and Indonesia. But shipments are not taking place since exporters are waiting for the Union government to announce incentive like last year,” said a sugar trader from Mumbai.

Last year, the Centre offered an incentive of Rs 10,300 a tonne for exports of 60 lakh tonnes sugar. The incentive, costing the exchequer Rs 6,200 crore, resulted in India shipping out a record 57 lakh tonnes of sugar.

As the industry is awaiting an announcement of incentive, sugar exports have come to a standstill. This has actually pushed up global sugar prices nearly 5 per cent in the last one month.

“Even an incentive of Rs 5,000 per tonne can help,” said D K Sharma, wholetime director of Awadh Sugar and Energy.

Analysts see the move to cut duty on crude palm oil as one to encourage both these countries to buy sugar and rice.

India's Advantage In Global Rice Market

“Malaysia and Indonesia are looking to buy Indian rice in view of shortage in countries such as Thailand and Vietnam,” said a rice exporter.

Blessed with ample stocks, India has been aggressively selling rice this year in the global market. Until October this fiscal, over six million tonnes had been sold, surpassing shipments the whole of last fiscal.

The higher stocks with India has also helped it to offer rice at a very competitive price, at least 10 per cent lower than competing nations such as Thailand and Vietnam.

Edible oil is price elastic and if prices rise, then consumption drops, according to analysts.

While the Indian government probably might not see any major impact in view of surging edible oil prices, it can expect both these nations to buy Indian rice and sugar that are being offered at a very competitive rate in the global market.

The other worry for the Modi government could have been the rise of retail inflation to a six-and-a-half-year high of 7.61 per cent due to costly vegetables such as onion and potato besides eggs.

Why Oilseed Crushers Are Worried

However, the move has left the edible oil crushers worried and upset. The industry sees the duty cut as a move that could discourage oilseed growers.

At a virtual meeting held with Sushanshu Pandey, Department of Food and Public Distribution Secretary on 17 November, SEA stressed the need for a long-term policy to promote oilseed cultivation rather than adopt short-term measures such as Customs duty hike or cut.

In a statement on Wednesday (25 November,) the Soybean Processors Association of India, referring to rumours on duty cut, called for maintaining the (old) duty structure in the interest of oilseed farmers and industry.

The oilseed industry favours a higher Customs duty structure that will encourage growers as it will be served better to get raw materials. The industry had been pleading with the Centre to maintain the old duty structure as it had ensured that farmers got the minimum support price fixed by the Centre or even more this year.

According to Ministry of Agriculture data, mere rumours of the duty cut move have brought down prices of oilseeds such as groundnut, soybean and sunflower.

Drop In Domestic Groundnut, Soybean Prices

In Gujarat’s Gondal Agriculture Produce Marketing Committee (APMC), groundnut prices dropped to Rs 4,750 a quintal yesterday against 25 November price of Rs 4,830. The minimum support price (MSP) for groundnut is Rs 5,275 a quintal.

In Madhya Pradesh’s Ujjain APMC, soybean prices dropped to Rs 4,211 a quintal yesterday from Rs 4,411 earlier this week. The MSP for soybean is Rs 3,880.

Sunflower prices, whose MSP is Rs 5,885, are ruling currently around 3,800 a quintal, down Rs 200 this week in Karnataka’s Bagalkot APMC.

“The government seems to have panicked at the rise in edible oil prices. It should have considered it pragmatically,” said an oilseed crushing industry executive.

His view was that families generally purchase four litres of oil every month and the rise would have led to a Rs 100 increase in their edible oil bill.

“Concern during festivals is understandable. The festival period is over and the rise should not have worried families,” said the executive.

The Indian government’s move seemed to have helped crude palm oil futures contracts from January to June gain by 15 Malaysian ringgit (Rs 272.50) to 30 Malaysian ringgit (Rs 545) with January deliveries rising to 3,325 Malaysian ringgit (Rs 60,465) a tonne.