Little likelihood of oil prices dropping before Diwali unless Government eases import duty

Edible oil prices, which were at a 11 year high last month, softened in June, claimed the Government this week. The prices at the ports in the last fortnight, it claimed, had registered a decline of 16 to 20%. But there is no explanation why.

Retail price of mustard oil (packed) had increased by 44% to Rs 171 per kg on May 28 from Rs 118 per kg on the same date last year. Prices of soya oil and sunflower oil, too, increased more than 50% since last year.

There is very little chance of the prices easing significantly before Diwali this year. It can marginally go down if the Government reduces duty on imports but the oil traders want to government to subsidise the consumer for edible oil sold through select outlets. Reducing import duty, they have argued, would lead to a rise in international prices and neither the Indian consumer nor the Indian Government would gain.

Hoarding by China and rise in the use of biofuel—oilseeds shifting from the food basket to the energy basket—have also contributed to the shortfall. Anticipating a slump in oilseed production, China is said to have bought up large stocks by way of hoarding, thus pushing up prices and of course reducing supply, which has already been hit by fall in production. Soyabean crops failed in Brazil and the United States due to dry weather conditions while Palm oil production in Malaysia and Indonesia fell because plantation labour, a large number of them migrants from Bangladesh, left for home due to the pandemic. Similarly, sunflower and rapeseed oil production too have suffered because of the pandemic and also due to the changing weather.

These conditions are unlikely to improve overnight, making chances of a fall in prices unlikely.

In 2019-20, domestic availability of edible oils from both primary sources (oilseeds like mustard, groundnut etc.) and secondary sources (such as coconut, oil palm, rice bran oil, cotton seed) was only 10.65 million tonnes against the total domestic demand of 24 million tonnes — a gap of over 13 million tonnes. Thus, India depends on imports to meet its demand.

As demand and consumption of edible oil has grown (the per capita consumption of edible oil in India is said to be around 19 Kg), oilseed production too has grown in India but has failed to keep pace with the demand. Domestic production fulfils less than half of the demand with the rest imported.

Farmers have been urging the Government to offer incentives by way of assured prices to make them shift to growing oil seeds. But the Government so far has neither incentivized the farmers nor rationalized the import duties.

The effective rate of import duties, including agriculture infrastructure and development cess and social welfare cess, has been 35.75% with effect from February 2, 2021. The effective import duties on ‘refined, bleached and deodorised (RBD) palm oil’ is also steep at 59.40%. Similarly, the rate of effective import duties on crude and refined soyabean oil and sunflower oil is in the range of 38.50% to 49.50%.

Unless import duties are rationalized, consumers will not benefit in the shot run. And unless domestic production goes up substantially, it will be a long winter of discontent.