24/03/2008 (The Hindu Business Line), Mumbai - In order to control edible oil prices, the Centre recently announced two decisions — one related to foreign trade and the other to customs tariff. From March 17, export of edible oil stands banned for a period of one year.

On March 20, customs duty on specified vegetable oils (mainly palm oil, sunflower oil and rapeseed oil) was slashed to 20 per cent ad valorem for crude and 27.5 per cent for refined.

For reasons difficult to fathom, the Finance Ministry decided not to reduce the duty on soyabean oil which stands at 40 per cent.

Considering that soyabean oil constitutes the second largest item after palm oil in our import basket, the decision to maintain soyabean oil duty at the same level is not only strange, but also raises suspicion.

In effect, the latest duty cut favours the palm group of oils. In the international market, palm oil is currently available at least $200 a tonne cheaper than soyabean oil; and yet palm oil has been shown undue favour.

The Government is duty bound to come clean on this anomalous decision.

Because international prices are rather high, the duty cut is most unlikely to encourage import of sunflower oil and rapeseed oil. Palm group of oils will be the sole beneficiary. Surely, there is something more than meets the eye in this round of duty cut. Investigations reveal that a few large importers perhaps in the know of an imminent duty cut bought large parcels of palm oil in advance. It is pertinent to note that the voyage time for palm oil to India is less than 10 days. These importers are likely to reap windfall gains.

Creating uncertainty
Indeed, many in the trade expected the Finance Minister to announce the duty reduction in the Budget itself; but he disappointed them. After the Budget, there was continuous speculation whether or not duty would be reduced. This created unsettled conditions and lent uncertainty to the market.

What changed in the domestic and international market between end-February and mid-March to prompt a duty cut on March 20 is something the Government will have to explain. Reports from New Delhi suggest that there was pressure on the Government both from within and from outside not to extend the duty cut to soyabean oil for the ostensible reason that such a cut would hurt soyabean growers in Madhya Pradesh.

The plea was specious, to say the least. The fact of the matter is that despite a bumper crop of soyabean (over 90 lakh tonnes) this season, prices have reached unprecedented levels (Rs 20,000 a tonne). By now, growers have already marketed a substantial part of the crop that was harvested as far back as October/November 2007.

On the other hand, large players in the industry are holding very high levels of stocks and are benefiting from the current strength in prices.

A duty reduction in soya bean oil could have potentially resulted in reduction of profit for these speculators.

Curbing speculators
If the Government is really serious about controlling edible oil prices, the role of speculators will have to be curbed. Quantitative ceiling on oilseeds and oils, at least for a short period, to check hoarding tendencies among those with financial muscle should be imposed; and it should be done at the risk of criticism that it is a regressive step.

Come to think of it, the Government has taken several ‘regressive’ steps in the last one year or so to control prices. The revenue loss following duty reduction is around Rs 4,500 a tonne on crude palm oil and Rs 5,000 a tonne on refined palm oil/palmolein.

Considering current market prices, tariff values (which stand frozen for the last two years at considerably low levels) and exchange rate, lower duty should translate to a reduction of between Rs 4 and Rs 5 a kg on these oils in the open market.

Will consumers benefit?
The critical question is whether importers/refiners will pass on the benefit of lower duty to consumers.

If experience is any guide, consumers are unlikely to enjoy any significant price benefit. The handful of large players will walk away with the cream of profits.

International price of sunflower oil is around $1,600-1,700 a tonne. There has been no import of sunoil of late because of price disparity.

Despite duty reduction, imports are unlikely to materialise. However, as there is no tariff value specified for sunoil, the potential for invoice manipulation remains for this oil.

As for the ban on export of edible oil, it is one more instance of too little too late. Even transitional arrangements have been barred. The unfortunate part of the ban is that exporters of premium oils in consumer packs are also going to be shut out of the market. There is demand for indigenous sesame oil, coconut oil and mustard oil in the overseas markets, especially from persons of Indian origin. There is a case of review of branded edible oil export in consumer packs.