Thursday December 11, 2003 (Mumbai) - December India's oilseed sector isbeset by a number of structural and policy-induced problems that havehindered its ability to meet rising demand.

These are the findings of a research project undertaken by the economicresearch services (ERS) wing of the United States Department ofAgriculture (USDA).

India is the world's leading importer of edible oils and is likely toremain an important source of global import demand for the foreseeablefuture.

A large population and steady economic growth are important contributorsto India's increasing consumption and imports, but policy has also playeda key role.

In a report titled `India's edible oil sector: Imports fill risingdemand', authors Erik Dohlman, Suresh Persaud, and Rip Landes have saidthat trade policy reforms in the mid-1990s have increased market accessand domestic price support policies have generally favoured production ofcrops that compete with oilseeds, resulting in waning oil crop productionand stagnant yields.

Efficiency gains in the oilseed processing sector have also been hamperedby poor infrastructure and policies restricting the scale of processingplants.

Despite increased imports, US prospects for market share gains in Indiaare likely to be limited by competition from palm oil producers inMalaysia and Indonesia, and soybean oil exports from Argentina and Brazil.

One factor contributing to insufficient domestic supply of oilseeds isIndia's domestic price support programme which has often favored cropsthat compete for area with oilseeds.

Under the minimum support price (MSP) program, the Indian Governmentannually sets minimum prices, based primarily on estimated productioncosts, for crops such as rice, wheat, coarse grains, pulses, and variousoilseeds, and is supposed to defend these prices by making purchases afterharvest.

The Indian government attempted to boost oilseed production in the late1980s and early 1990s under its Technology Mission on Oilseeds (TMO)programme.

During that time, MSPs for grains were kept in check relative to oilseeds.The government-controlled import monopoly dramatically lowered oilimports.

This contributed to a sharp improvement in oilseed prices relative tocompeting crops and 70 per cent increase in oilseed production, between1987-88 (14 mmt) and 1994-95 (24 mmt).

Beginning in the late 1990s, however, oilseed prices have declinedrelative to other crops, initially in response to the earlier increase indomestic oilseed supplies and subsequently owing to the liberalisation ofedible oil imports initiated in 1994. MSP levels for grains have also beenraised more than for oilseeds since the mid-1990s.

In addition, the government regularly supported wheat and rice MSPs,mainly in several important cereal-producing states. However, pricesupport operations for oilseeds have usually not been funded.

As a result, increasingly favourable returns to wheat and rice have drawnarea away from oilseeds, lowering oilseed production from an average of 26mmt annually between 1994-95 and 1996-97 to 23.3 mmt in years 1999-2000and 2001-02.

In contrast to the significant progress India has made with wheat and riceyields and production, oilseed yields in India are well below the worldaverage, and yield trends have been flat to negative in recent years.

National average soybean yields, for example, peaked in 1990-91 at just 15bushels per acre and averaged only 13 bushels per acre between 1993-94 and2002-03 compared with a 32-bushel per acre world average.

Yields for other oilseeds like peanuts, rapeseed, and sunflowerseed alsorank far below the rest of the world, typically at 50-60 per cent of theworld average.

In addition to the low oilseed yields at the farm level, the ability ofIndia's oilseed sector to compete with vegetable oil imports is furtherhampered by a processing and crushing sector that is fragmented,small-scale, and suffers from low capacity utilisation.