No end in sight to increasing prices of edible oil

Palm oil accounts for about 40% of total consumption of edible oils in India followed by soy oil and rape/mustard oil

Indians are not only struggling with soaring prices of petrol and diesel but also that of steeply northward moving edible oil rates. Prices of several edible oil varieties have gone up by up to 70 per cent in the last one year. Such a whopping rise has hit household budgets beyond repair.

But why such a sudden and dramatic rise in prices of late? India heavily depends on edible oil import. In fact, edible oil is the third largest imported commodity in the country after crude oil and gold. In the past one-and-a-half years, to tide over Covid-related economic woes, leading economies of the world have unleashed massive liquidity. This cheap money sloshing around the system has found its way into commodities, fuelling inflationary pressure.

Added to that, labour shortage due to Covid-related restrictions has hit production of palm oil in two major producing countries – Malaysia and Indonesia. Drought has impacted Canada’s canola crop and La Nina has curbed soybean output in South America. India, which consumes about 24 million tonnes of edible oil per year, imports palm oil from Malaysia and Indonesia, soybean from Argentina and Brazil, and canola from Canada. In addition, it also gets sunflower oil from Russia and Ukrain.

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The world’s largest edible oil importer, which spends up to $10 billion annually on its shipment, also grows oilseeds but its production is far less than what it consumes. In 2019-20, edible oils produced in the country were less than 11 mt. Such a huge dependence on imports results into retail prices of vegetable oil being unexpectedly high when the global oil production suffers due to some reason or the other. The other main contributor to high oil prices has been import duty hike on edible oils. India, since the beginning of 2018, has increased duty on palm, soy, sunflower and rapeseed by about 15 percentage points. The duties were, however, cut when the global prices of imported oils climbed in the past one year or so.

Palm oil accounts for about 40 per cent of total consumption of edible oils in India followed by soy oil and rape/mustard oil.

Palm oil is more popular in hospitality, restaurants and catering segments while raw mustard oil is in demand in the northern and the eastern parts. Sunflower oil and coconut oil are used in South India. Ricebran oil and cottonseed are also gaining popularity.

Indonesia, one of the two largest palm oil exporters to India, has imposed export duty plus a biodiesel levy making crude palm oil expensive. This has forced India to pay higher prices. Also, to support their local industry, export duty and levy has been kept low on finished goods like palmolein. “This has made India subsidise their export duty and levy. Malaysia too has followed suit by bringing duty to nil on palmolein. “In view of this one-sided advantage to the exporting country, we have requested the Ministry of Commerce and Industry that a proper proviso be included in ASEAN agreement to restrict/regulate the imposition of export duty/levy by the exporting country,” said Bharat Mehta, the head of Solvent Extractors’ Association, the representative body of Indian oil producers.

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The government had last month announced a Rs 11,000 crore national mission on edible oil - oil palm (NMEO-OP) programme for the development of oil palm plantations and reduce its dependence on edible oil imports. It proposes to increase the area under oil palm cultivation to 10 lakh hectare by 2025-26 and 16.7 lakh hectare by 2029-30 from the current 3.5 lakh hectare.

The plan has the potential to pull crores of Indians out of poverty and save billions of rupees in foreign exchange. India is the world’s largest consumer and importer of palm oil.

About two-thirds of its total consumption is shipped from abroad. Experts, however, have warned that the plan looks too ambitious and emphsises only on oil palm leaving behind other high-oil bearing oilseeds like mustard, soya, groundnut and rice bran. Palm is a long gestation crop. It is also a water guzzler and India’s agriculture is mostly rain-fed. About 60 per cent of agriculture GDP comes from rain-fed farming. The future of water in India is so bleak that farmers are already withdrawing from rice cultivation in certain states. If the policy support is provided for other oilseeds like mustard, coconut, soya etc which consume much less water than palm, the benefits could be tremendous, according to agri specialists.

Beyond control

Also, when palm oil becomes costlier due to global factors beyond our control, the other oils that India produces also start getting costlier. This is because people switch to locally produced oils such as mustard, sunflower and others. In the recent months mustard oil prices have also gone up by Rs 45-50 per litre, though mustard production has increased in the country. Sunflower oil, which is consumed largely by urban population, has become even costlier.

If edible oil exporting countries continue to pursue biofuel policy using their own resources, there are chances that prices would not soften significantly in future. Malaysia and Indonesia are using palm oil for their biofuel policy. The US is diverting soyabean for biofuel production. The government recently claimed that the vegetable oil prices will start softening from December onwards when the new crop arrives, it added the decline will not be dramatic as there was still global pressure.

India, once an exporter of edible oils prior to independence, has now turned a net importer. A short period in between, which has been termed as the golden period of edible oil, was the early 1990s. This came after the then prime minister Rajiv Gandhi set up a technology mission on oilseeds in 1986 to boost domestic production. This helped increase area under oilseeds cultivation from nearly 18 million hectares in 1980s to 25 m ha in the 1990s. By 1991, India again started producing over 90 per cent of its edible oil needs. But that was short-lived.

With the opening of economy and trade and India signing the WTO agreement, edible oil was put under open general license in 1994-95, meaning it could be imported without seeking government approval. That was another death knell on domestic oil production. By the end of 1990s, India returned to importing edible oil and that only increased with time.

A re-start has been made by fresh policy steps (NMEO-OP) last month aiming at attaining self sufficiency in edible oil, but only time will tell how it is going to pan out, given the limitations India has in terms of cultivable land, water and other resources.

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