Global edible oil producers are outsmarting India’s moves to curb prices

In a key policy move to tame inflation, India on Wednesday virtually abolished basic customs duty on crude imports of three edible oils
The lowering of the cess will bring down the effective customs duty on palm, soyabean and sunflower oils 8.5%, 5.5% and 5.5% respectively. (Bloomberg File)
The lowering of the cess will bring down the effective customs duty on palm, soyabean and sunflower oils 8.5%, 5.5% and 5.5% respectively. (Bloomberg File)
Updated on Oct 14, 2021 10:39 AM IST
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By Zia Haq

International edible oil producers are synchronizing price increases with India’s series of actions to soften their domestic rates by slashing import duties. This has had the effect of making India’s steps to ease the price of cooking oils less effective, market watchers say.

Higher food inflation not only impacts poorer households more, which tend to spend a larger share of their monthly budgets on food, compared to the well-off, but they also throw the Reserve Bank’s inflation targets off gear.

Inflation must stay within a “tolerable” range to enable India to quickly consolidate gains from a nascent economic recovery underway since the pandemic took a heavy toll on Asia’s third-largest economy.

In a key policy move to tame inflation, India on Wednesday virtually abolished basic customs duty on crude imports of three edible oils, a basic ingredient of most Indian cooking. But international markets are coordinating prices to thwart India’s moves to make imports cheaper, market data show.

India has also pared basic customs duty on refined varieties of edible oil to 17.5% from 32.5%. Both these measures should offer at least short-term relief to consumer prices, while the government would lose out on revenue needed to keep borrowing under check.

“Almost instantly, major producer penciled in the duty cuts by India and raised prices to a similar extent so that there is no impact or very less impact on rates by the time it reaches the consumer,” said Atul Chaturvedi of the Indian Solvent Extractors’ Association, the industry body of oilseed processors, after analysing movement in a fresh increase in Malaysia’s prices.

The tariff cuts announced by India on Wednesday will be in force until March 2022. This is the fifth reduction in import tariffs on vegetable oils since February.

Edible oils have inflated household budgets since India imports up to two-thirds of its domestic consumption requirements of edible oils.

Duty cuts should -- other market factors remaining the same -- immediately lower prices and potentially stave off food inflation soaring to multi-year highs. “However, prices are moving sinisterly in the global edible oil markets, almost in response to India’s measures,” said Ashok Agrawal of Comtrade, a commodities trading firm.

Soon after India’s decision to cut duty rates, exportable edible oil rates in Malaysia moved by an extent enough to match India’s cuts. So, what is at play here? Simply, India’s moves to depress the rates of edible oils are being negated by an almost similar increases in the rates such that international prices remain high.

The main advantage of international producer nations is that India has a gluttonous appetite for edible oils. The country imports up to two-third of its domestic demand for edible oil through imports since the domestic output is not sufficient.

Palm is one of the most widely consumed oils, which is found in everything from bread to ice-creams. Edible oil is India’s third most high-value import, after crude oil and gold. India typically imports from producers such as Malaysia, Indonesia, Brazil, Argentina and Russia.

According to a central notification, imported crude palm oil, the most widely consumed of edible oils in the Indian market, will now be charged an agri infrastructure cess of 7.5%, while unrefined soyabean and sunflower oils will attract a cess of 5 %, down from 20%.

The lowering of the cess will bring down the effective customs duty on palm, soyabean and sunflower oils 8.5%, 5.5% and 5.5% respectively, according to the government’s notification.

The reductions will cut prices by up to 20,000 a tonne, which is expected to have a pass-through effect on final consumer prices. However, a fresh increase in Malaysian prices has made market watchers unsure to what extent Indian consumers will benefit from duty cuts.

According to official data, the share of rural and urban consumption in total is 3.8% and 2.7%. Much of the demand comes from commercial users, like biscuit and snack makers.

“If international prices increase further, the duty cuts may not be effective because they will necessitate further reductions,” said Agrawal. “We are getting into this trap.”

In June, the government cut duties on palm oil by 5% and lifted restrictions on the import of refined palm oil, as food inflation worries mounted.

Edible oil prices have risen by up to 60%, according to data from the consumer affairs ministry from a year ago. Average costs of a litre of mustard oil rose to 170 in August compared to 120 a year ago.

India’s usual levies on edible oil imports ranges between 32.5% (for palm oil, the cheapest edible oil) and 35% for soyabean oil. The country produces about 11 million tonnes of edible oil but consumption hovers around 24 million tonnes.

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Friday, October 22, 2021