Mumbai , June 21 - IT is a strange case of Indian producers of vanaspatilocated in Sri Lanka competing with vanaspati producers in India.

Several Indian companies that have set up vanaspati manufacturingfacilities in Sri Lanka export the product to India to enjoy the doublebenefit of liberalised imports into India and Sri Lanka's licensingcondition that the entire production should be exported to India.

Already reeling under the pressure of excessive level of installedcapacity (48 lakh tonnes versus the current production of 14 lt), idlecapacity of over 70 per cent, sluggish demand growth, competition fromcheaper liquid oils and widespread sickness, the domestic vanaspatiproducers have to contend with the challenge of large imports from thesouthern neighbour.

Strangely, from being a major producer, Sri Lanka is a net importer ofvegetable oil, a key raw material for manufacture of hydrogenated oil(vanaspati). However, the island nation is now in a position to exportabout 2.5 lt of vanaspati to India under the free trade agreement betweenthe two countries signed in March 2000.

According to Indian Vanaspati Producers Association (IVPA), vegetable oilimports into Sri Lanka are duty-free if the finished product (vanaspati)is exported. Value-addition norms do exist but are observed more in thebreach, the association has complained.

A joint team of Government officials and industry representatives thatvisited Sri Lanka found that in addition to six production units alreadyin operation and two units under installation, more licences have beengiven for new plants.

These units enjoy several concessions, including full tax holiday forperiods ranging from 3-12 years; duty-free imports of raw material(usually palm oil from Malaysia/Indonesia) during the lifetime of theproject; duty-free import of capital goods; and 100 per cent ownership ofassets by foreigners.

IVPA asserted that there is absolutely no case for allowing import of evenone tonne of vanaspati given the current dismal status of the Indianindustry and large idle capacity. The industry believes that even thevalue-addition norms (35 per cent) are being flouted, as the actualvalue-addition in Sri Lanka is only about 18 per cent.

It is unclear what the response of the Government is. Without doubt, thefree trade agreement with Sri Lanka is hurting domestic interests. What isclear is that it was entered into in a great hurry, perhaps overlookingseveral aspects, including origin certification, strict compliance withvalue-addition norms and so on.

IVPA said it does not want any protection but can meet the competition ifprovided with a level-playing field. Ironically, crude palm oil whenimported into India as raw material for vanaspati attracts 80 per centduty, while imports of vanaspati (finished goods) attract much lower duty.

A significant part of exports from Sri Lanka land at the southern ports,creating unsettled conditions for vanaspati producers in the region, whileimports from Nepal hurt those in the North, a double-side attack for localproducers.