8/17/04, INDIA (Oilmandi) - India is the world's largest consumer ofedible oils, importing approximately 50 per cent of its requirement. Until2003, higher import duties on refined edible oils hiked the prices ofimported products to a higher level than the domestic product. While thesubsequent scaled-qdown import duties on palm oil saw a surge in importsin June 2003, the duty on crude palm oil remained unchanged. This and thedifferential excise duties on edible oils are anomalies to be rectified ifconsumers' and industry's interests are to be protected.

THE Budget session of Parliament is on and various sectors are lobbyinghard to get their voices heard using various means, includingadvertisements. One such ad on the edible oils policy calls upon theGovernment to save the livelihoods of 1,00,000 people, among whom are alarge number of farmers.

India is the world's largest consumer, and hence importer, of edible oils.It imports approximately 50 per cent of its requirement, and 70 per centof the imports are palm oil. Until 2003, higher import duties on refinededible oils hiked the prices of imported products to a higher level thanthe domestic product.

The 2003-04 Budget scaled down import duties on refined palm oil from 92.5per cent to 70 per cent. Around the same time, Malaysia and Indonesia, thetwo largest producers of palm oil, faced a glut in their markets.

Between November 2002 and May 2003, the average volume of refined palm oilimports to India was 4,200 tonnes a month. But in June 2003, volumes shotup to 66,000 tonnes.

This policy adjustment caused another problem. While the import duty onrefined palm oil was reduced, the one for crude palm oil remainedunchanged at 65 per cent.

According to the Indian Vegetable Oil Processors Association, in January2004, the cost of imported refined palm oil was Rs 37,527 per tonne, whilethe process of converting crude palm oil to refined oil cost Rs 39,101 pertonne — a net price difference of Rs 1,575 per tonne of refined palm oil,implying negative value addition.

Another concern is the differential excise duty on edible oils. Atpresent, excise duty on refined edible oils is Rs 1,000 per tonne and onvanaspati (hydrogenated vegetable fat produced by combining crude palm oilwith hydrogenated palm oil) it is Rs 1,250 per tonne.

However, the Government has exempted large import-based refineries in theKutch region of Gujarat from paying any excise duty under the KutchReconstruction Package Scheme, introduced after the Gujarat earthquake.

The estimated capacity of such large units is 12,000 tonnes per day,whereas only 26 per cent of the installed vanaspati manufacturing capacityis utilised at present.

The All India Committee of Oil Trade and Industry (an umbrella body of oiland vanaspati producers of Rajasthan, Haryana, Punjab, Uttar Pradesh andAndhra Pradesh) has raised serious concerns on such a policy: "Since theselarger units which are coming up will not have to pay any excise duty theywill initially lower prices for their products and, thus, drive out theexisting smaller units, eventually forcing them to close down," the bodyargues.

Another cause of agony is the gradual increase of imported vanaspati fromSri Lanka taking advantage of zero import duty as per the Indo-Sri LankaFree Trade Agreement. Due to substantial investment in Sri Lanka in edibleoil processing units, imports may increase to a level that will harm thedomestic industry. Further, it is alleged that such imports from Sri Lankaare not following the norm of 35 per cent value addition in the country ofproduction and that the real value addition less than 10 per cent.

In the past when the Indo-Nepal Trade Protocol was signed in 1996, theIndian edible oils industry suffered heavily due to duty-free imports ofvanaspati via Nepal. Subsequently, in 2002, a new treaty was signedrestricting duty-free import of edible oils to 100,000 tonnes per annum.

What would be the response of the Government to find a path in whicheverybody (domestic producers, importers, farmers, consumers) would gain?The previous government claimed that it resorted to changes in import dutyto create a sobering effect on domestic edible oil prices, so thatconsumers benefited.

However, many small producers of edible oil are lobbying with thegovernment to increase tariff rate (import duty) differential betweencrude and refined palm oil. According to the Solvent Extract Associationof India, the 27 per cent duty differential before the 2003-04 Budget hadresulted in investment in several new and small projects, generatingsubstantial local employment.

Amid such lobbying, in early 2004, the Revenue Department commissioned anindependent study. It recommended a hike in import duty on refined palmoil by 5 per cent from the present rate, which would result in a 10 percent duty differential between crude and refined palm oil (at present, itis 65 per cent and 70 per cent, respectively).

It appears that the 10 per cent duty differential is the best optionbefore the Government and it should be continued. The long-term objectiveshould be to strive for more efficiency in domestic production.

But the efficiency argument should also be balanced with public interest,which involves different actors, with divergent interests, such as smallproducers and poor consumers.

Along with this, the Government may consider adopting the middle ground asfar as excise duty is concerned. It can be reduced from the present rateof Rs 1 per kg on edible oil (Rs 1.25 on vanaspati) to Rs 0.50 per kg onboth. This will ensure the reduction of excise burden on the domesticindustry, and also help maintain some level of incentive for severalprojects which are underway in Kutch (Gujarat) due to the excise dutyincentive.

According to many experts, there is an emerging consensus for prioritisingefficiency over protection. It is argued that even if there is no importduty differential between crude and refined edible oil, the latter willalways be expensive in the Indian market. This is because there is a $30per tonne in-built price differential in the world market of crude andrefined edible oil. Now, if we add import duty to this, there willapproximately $50 per tonne price differential in the domestic market.

If foreign players (dealing in refined edible oil business) can makeprofits with $30 per tonne differential, there is no reason why Indianproducers cannot be more competitive with a $50 per tonne differential.

Finally, the impact of free trade agreements is yet to unfold. It ispremature to say that because of duty-free imports of refined edible oilsas per the FTAs, the domestic industry is suffering. There is noconclusive proof and in-depth studies are required to establish suchlinkages.

Such studies will be of immense value for policy-making, as India ispoised to sign several FTAs in the near future. It will help in developinga model to analyse the implications of the FTAs on specific sectors asalso the consumers, and that will help policy-makers take decisions on thebasis of hard facts. Thus, it will also substantially reduce the intensityof lobbying by the so-called interest groups.