02/11/2007(The Hindu Business Line), Mumbai - Some disturbing trends are coming to the fore as far as the vegetable oil sector is concerned. Imports have been under open general licence for about 12 years now. From time to time, the Government uses the customs tariff mechanism to regulate imports.

Customs duty cuts
In recent years, in order to prevent invoice manipulation, vegetable oils have been subject to a tariff value on which the applicable rate of customs duty is charged. The rates of customs duty on various vegetable oils (mainly palm group of oils) have been progressively reduced.

From the high of 80 per cent, basic customs duty on crude palm oil has been slashed to 45 per cent, while duty on refined palmolein is currently at 52.5 per cent (down from high of 90 per cent).

On crude soya bean oil, basic duty has been reduced by five percentage points to 40 per cent. Duty on sun oil too is down to 45 per cent and on refined sun oil by 50 per cent. The duty cuts were necessitated because international market prices of various vegetable oils had spurted in the 12-15 months, making imports expensive and adding to domestic inflation.

Indeed, effective rate of duty on various imported oils is considerably lower than what the aforesaid numbers would suggest.

Tariff values have remained frozen for more than a year now, while market prices have firmed up. Therefore, in effect, the duty paid on imported oils is considerably lower. This has led to a huge loss of revenue.

Disturbing developments
Some recent developments are truly disturbing. First, the ban on import of palm oil through Kochi port.

The decision has been taken purportedly to prevent palm oil from entering the State and competing with coconut oil. It would be naïve to believe that imported palm oil will not enter the State if not allowed through Kochi port. A lot of imported oil still flows into the State from other ports.

It is perhaps a palliative the Centre has given to local opponents of imported palm oil.

Taking a cue from Kerala, the Andhra Pradesh Government is reportedly toying with the idea of banning sale of imported oil in the State. This would be a dangerous precedent if acted upon. It would also contravene the World Trade Organisation (WTO) provisions that disallow discrimination between indigenous and imported oils. Market is also agog with reports of the Gujarat Government examining imposition of controls on imported oils. Both Andhra Pradesh and Gujarat are in the process of harvesting their kharif oilseeds crop (mainly groundnut); and the governments there would surely want to be seen supporting growers. State Government initiatives to impose local restrictions on marketing of imported oils are sure to distort the market. They cast a shadow on the free trade policies of the Central Government.

What emerges from the latest development is that there is disconnect between the perception of the Central Government and that of some State Governments. The Centre is concerned about ensuring consumer-friendly prices, while the States are keen to support oilseed growers, at least in the short run.

This difference in perception needs to be reconciled. There is no sanctity attached to rates of customs duty. Just because the rates have been slashed, there is nothing to restrict the government from raising the duty depending on the exigencies of the situation.

However, if the Finance Ministry is uncomfortable with the thought of a duty hike (after all, we want to eventually align our customs duty with ASEAN levels), there is strong case for raising the tariff values on vegetable oils to reflect current market prices.

The Centre should set off a dialogue with various State Governments to seek their views on oilseed and oil market prices, and to ascertain their comfort level.

Hike in tariff value

A hike in the tariff value of various vegetable oils is perhaps the need of the time. For too long has the Finance Ministry kept the tariff values unchanged. It may have been a smart move some time ago; but it is now outliving its utility. It is time to review and revise the tariff values of various imported vegetable oils so as to reflect current international market rates. This will support domestic oilseeds prices and help avoid the distortions that actions of some State Governments may impose on the market.

In 2002, the Centre took a disastrous decision to stop supply of cooking oil through the public distribution system (PDS). Open market prices during 2001-2002 were consumer-friendly because the international vegetable oil market was going through a bear phase.

The policy makers failed to understand that change is the only constant factor in the commodity markets. From 2003 onwards, world prices gathered upward momentum and for last one year and more, the market rates have hit the roof.

Large sections of consumers who were dependent on cooking oil supply through the PDS have been left high and dry for last four years or so. Customs duty cuts have brought them little cheer as open market prices have continued to gallop. Inflation hurts the poor the hardest. The Centre has so far remained insensitive to the cooking oil needs of the poor. States concerned about high edible oil prices and are desirous of supporting consumers can take a cue from Tamil Nadu Government.

The State government organises sale of edible oil in consumer packs through the public distribution system. This makes cooking oil accessible to poor people.