The Union government is averse to taking a “hasty decision” on cutting import duties on edible oils, whose spiralling prices have hit consumers, after reviewing an internal proposal to cut tariffs. Prices are showing signs of easing and cheaper duties have the potential to do more long-term harm than good, going by past experiences, a senior official with knowledge of the matter said.
India is the largest importer of vegetable oils, a base ingredient for cooking most common dishes, and meets up to two-thirds of its domestic demand through imports, costing it up to $10 billion annually.
Cutting import duties can lower prices instantly. Edible oil is India’s third most high-value import, after crude oil and gold.
On June 10, the UN Food Agency said costs of food imports could surge to record levels in 2021. Lower global output and higher demand from the biofuel industry have stoked international prices of edible oils to multi-year highs since March 2021, according to an analysis of the FAO.
This has naturally caused domestic prices of edible oils, such as soyabean, mustard and palm oil, to nearly double in recent months. The country typically imports from producers such as Malaysia, Indonesia Brazil, Argentina and Russia.
Currently, India’s levies on edible oil imports ranges between 32.5% (for palm oil, the cheapest edible oil) and 35% for soyabean oil.
“Current data show that prices have started to come down from their peak. On average prices have come down by 8% and in some cities, such as Mumbai prices in some categories are down by up to 20%,” a second official from the consumer affairs ministry said.
India produces about 11 million tonne of edible oil but consumption is growing and stands at about 24 million tonne.
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. For instance, most biscuit and snack makers use palm oil for their products.
Cutting duties entails a complex set of downsides, the official cited in the first instance said.
One immediate consequences of lowering duties will be even higher imports. This could crash prices going forward, shifting farmers away from oilseed cultivation and worsening India’s dependence on imports. “Ultimately consumers will be hit if domestic production goes down and imports go up further,” the official said.
Farmers typically grow more cereals, of which there is a glut, than oilseeds, which are scarce, because the government effectively guarantees prices for cereals through large-scale procurement, which refers to the buying of farm produce at federally fixed minimum support prices.
The government finely calibrates duties on imported edible, underlined by the need to maintain a balance between making the commodity affordable to ordinary consumers and encouraging domestic production through better prices.
For instance, in September 2019, the government raised customs duty on imported refined palm oil from Malaysia to 50% from 45% for of six months.