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ANALYSIS: India faces uphill battle in battle for self-sufficiency in its third most costly import

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Robbing Peter to pay Paul is one way of assessing India’s latest federal budget, at least as far as import taxes on crude palm oil (CPO) are concerned.

 

India has cut the basic import tax on CPO from 27.5% to 15% but imposed a so-called ’cess’ tax on CPO imports of 17.5% - meaning palm oil importers now face a 35.75% tax against 27.5% previously, following a reduction to that level last November.

 

It simultaneously announced cuts to basic import duties on soybean and soyoil imports to 15% from 35% but slapped a ’cess’ tax of 20% on both, effectively maintaining the import tax at 35%. So the 8.25% import tax advantage previously enjoyed by CPO over competing vegetable oils has been reduced to just 2.75%.

 

India is the world’s biggest importer of vegetable oils.

 

It gets palm oil from Indonesia and Malaysia, while it imports other edible oils from Argentina, Brazil, Russia and Ukraine. Some 70% of edible oil consumed in India is imported, with CPO accounting for some 50% of India’s total consumption of 23m tonnes a year.

 

India’s imports of vegetable oils are the third biggest import item after crude oil and gold and are currently running at around 15m tonnes a year - 11m tonnes higher than at the start of this century. These imports cost around $10bn.

 

Estimates suggest edible oil imports could rise to 20m tonnes by the end of the current decade, as an expanding and richer population consumes greater quantities of fried food.

 

Atmanirbhar Bharat

 

In May this year India’s Prime Minister, Narendra Modi, announced as his government’s policy Atmanirbhar Bharat Abhiyan, Hindi for "self reliant India".

 

India has since independence struggled to maintain self-sufficiency in vegetable oils.

 

In theory, the ’cess’ taxes will be used to give financial incentives to encourage farmers to switch from rice and wheat to planting more crops that yield vegetable oils, such as sunflower and rapeseed. The initial aim is to raise the country’s edible oil production from around 10m tonnes now to 18m tonnes, and simultaneously reduce India’s surplus wheat and rice production.

 

Back in 2014 the central government created a National Mission on Oilseeds and Oil Palm as part of the 2012-17, 12th five-year plan, but that seems to have run into a bureaucratic mire; its website has ’action plans’ but the latest only covers 2018-19.

 

Prime Minister Modi last July appealed to farmers in the north-east states to cultivate CPO, only to arouse anxieties from conservationists who raised alarms about the sustainability of palm oil production.

 

Imports to fall, prices to rise

 

CPO prices dropped almost 2% on the Bursa Malaysia Derivatives exchange today, to Ringgits 3,434 ($849.79) per tonne, partly on anticipated lower demand from India.

 

Vegetable oil traders in India are forecasting that consumers will see an immediate increase in palm oil prices as a result of the rise in import duties.

 

A big question for Prime Minister Modi’s hopes to persuade farmers to switch crops will be if farmers, tens of thousands of whom are camped on the outskirts of New Delhi in protest against farm laws introduced last September, are in the mood to listen. The promise to plough 16.5 trillion rupees ($225.74 billion) into "agricultural infrastructure" has left the protestors cold.

 

The extra tax burden on CPO and consequent higher retail prices will certainly hit India’s demand, but it’s doubtful India will be able to achieve its edible oil self-sufficiency target any time soon.

 

And the easily-imposed extra tax could just as easily be removed if food price inflation looms.

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