MARKET DEVELOPMENT
Vegetable Oil Duty Hike: Ill-timed, Unwarranted, Anti-consumer
Vegetable Oil Duty Hike: Ill-timed, Unwarranted, Anti-consumer
31/12/2014 (Hindu Business Line) - The recent hike in customs duty on crude and refined vegetable oils is ill-timed and unwarranted given the emerging market situation; it once again demonstrates the lack of commercial intelligence within the policymaking circles in the ministries of agriculture, food and finance.
The move does not advance growers’ interest, is clearly anti-consumer, and will only help speculators in the market make windfall gains. In anticipation of a duty hike, importers have built huge inventory through excessive imports as recent data show. Current stocks at the ports and in the pipeline are estimated at 20 lakh tons, almost twice the quantity held six months ago.
Trade bodies have been campaigning for an increase in customs duty citing softer oilseeds prices and growers’ interests. The hectic lobbying has paid-off. The Ministry of Agriculture and the Ministry of Food have succumbed to the trade lobby’s pressure and backed the duty hike. The Finance Ministry seems to have been lulled into complacency because of falling food inflation.
Failure of the policy to address structural issues of the oilseeds and oils sector has meant that India’s vegetable oil imports have escalated rapidly in the last four years much to the delight of overseas suppliers. From 83.7 lakh tons in 2010-11, oil inflows have moved sharply up to 116.2 lakh tons in 2013-14. Indeed, India has become a dumping ground for surplus Indonesian and Malaysian palm oil.
Annually, 10-15 percent of imports (roughly 10-15 lakh tons) into India can be reduced without compromising on availability and prices. Such a reduction cannot be achieved by tinkering with customs duty from time to time. A more fundamental issue that encourages excessive import is the long credit period that overseas suppliers offer and Indian importers enjoy. More often than not, payment for import is within a credit period of 90 days to 180 days.
Shipment of palm oil usually arrives in less than two weeks and the import cargo is disposed of and monies realised in the following two weeks. Importers play around with that money until payment time arrives several months later.
Meanwhile, they import more and more whether or not the market needs it. Such import bulges inventory at home and hurts domestic oil producers. This is clearly a self-perpetuating import credit trap and must be broken. This has been going on for too long and New Delhi has either been blissfully ignorant or indifferent.
If the credit period for payment against import is mandatorily reduced to say 30 days maximum, there will be a marked reduction in the volume of speculative imports which in turn will improve the economics of domestic producers including oilseed growers and will not hurt consumers in any way.
From a world market perspective too, the latest hike in duty is inappropriate and ill-timed. World oilseeds production is likely to decline in 2015 in response to softer prices of the last two years.
Palm oil production in expected to move into the biological down-cycle in 2015. In other words, prices of oilseeds and oils in the international market are likely to increase in the coming months, possibly from the second quarter of 2015.
If such a development combines with higher crude oil prices and weakening of the rupee, there could be a spurt in vegoil prices globally and domestically. In the event, the recent hike in duty will defeat the government’s ongoing attempts to contain food inflation.
The move does not advance growers’ interest, is clearly anti-consumer, and will only help speculators in the market make windfall gains. In anticipation of a duty hike, importers have built huge inventory through excessive imports as recent data show. Current stocks at the ports and in the pipeline are estimated at 20 lakh tons, almost twice the quantity held six months ago.
Trade bodies have been campaigning for an increase in customs duty citing softer oilseeds prices and growers’ interests. The hectic lobbying has paid-off. The Ministry of Agriculture and the Ministry of Food have succumbed to the trade lobby’s pressure and backed the duty hike. The Finance Ministry seems to have been lulled into complacency because of falling food inflation.
Failure of the policy to address structural issues of the oilseeds and oils sector has meant that India’s vegetable oil imports have escalated rapidly in the last four years much to the delight of overseas suppliers. From 83.7 lakh tons in 2010-11, oil inflows have moved sharply up to 116.2 lakh tons in 2013-14. Indeed, India has become a dumping ground for surplus Indonesian and Malaysian palm oil.
Annually, 10-15 percent of imports (roughly 10-15 lakh tons) into India can be reduced without compromising on availability and prices. Such a reduction cannot be achieved by tinkering with customs duty from time to time. A more fundamental issue that encourages excessive import is the long credit period that overseas suppliers offer and Indian importers enjoy. More often than not, payment for import is within a credit period of 90 days to 180 days.
Shipment of palm oil usually arrives in less than two weeks and the import cargo is disposed of and monies realised in the following two weeks. Importers play around with that money until payment time arrives several months later.
Meanwhile, they import more and more whether or not the market needs it. Such import bulges inventory at home and hurts domestic oil producers. This is clearly a self-perpetuating import credit trap and must be broken. This has been going on for too long and New Delhi has either been blissfully ignorant or indifferent.
If the credit period for payment against import is mandatorily reduced to say 30 days maximum, there will be a marked reduction in the volume of speculative imports which in turn will improve the economics of domestic producers including oilseed growers and will not hurt consumers in any way.
From a world market perspective too, the latest hike in duty is inappropriate and ill-timed. World oilseeds production is likely to decline in 2015 in response to softer prices of the last two years.
Palm oil production in expected to move into the biological down-cycle in 2015. In other words, prices of oilseeds and oils in the international market are likely to increase in the coming months, possibly from the second quarter of 2015.
If such a development combines with higher crude oil prices and weakening of the rupee, there could be a spurt in vegoil prices globally and domestically. In the event, the recent hike in duty will defeat the government’s ongoing attempts to contain food inflation.