Oilseeds price control requires more measures

EXIM MATTERS

Last week, the government took three steps to increase supplies and bring down the prices of edible oils "" cut in import duties, cut in tariff values and ban on exports.

Import duty on crude mustard/rapeseed/colza/canola oils are down from 75 per cent to 20 per cent; crude sunflower oil down from 40 per cent to 20 per cent; refined mustard/ rapeseed/ colza/ canola oils down from 75 per cent to 27.5 per cent; refined sunflower oil from 50 per cent to 27.5 per cent etc.

In short, the duties on crude oils are now at 20 per cent whereas the duties on refined oils are at 27.5 per cent. The exception is soyabean oil, which attracts 45 per cent duty. The differential duty rate between crude and refined oils favours few large refiners who control the domestic prices of edible oils.

The international prices of edible oils had been rising since last year. The August 2007 prices of $770/MT for crude palm oil and $947 for sunflower oil shot to $1220/MT and $1695/MT respectively in February 2008.

However, domestic oil prices have shot up by 20-25 per cent only in the last few weeks.

The government had kept the tariff values for the purpose of charging duty steady since July 2006, although their imports increased by 32 per cent during the year. Now, tariff values are reduced to $337/MT for crude palm oil (from $447/MT), and similarly on other oils.

Effectively, the lower tariff values ought to translate into lower duties and result in lower prices.

Edible oils export ban may not mean much as the exports barely add up to about 40,000 tonnes whereas the imports are to the extent of 5.1 million tonnes. At best, the ban can impact sentiments. It follows restrictions (such as minimum export price) and bans on export of rice, pulses etc.

The government has taken these steps at a time when the world prices are easing out eg, crude palm oil and soyabean oil are moving towards $1000/MT.

The relief for consumers, who find most oils sold at Rs. 65-70 per kg, in the retail market may only be temporary. The oilseed production in the country, estimated to increase from 24.3 million tonnes in 2006-07 to 27.2 million tonnes, is unable to cope with increased demand from growing population and rise in incomes.

The international markets for edible oil, like other commodities, are targets for a growing bunch of hedge funds and speculators. Worldwide and especially in the US, large tracts of land are being diverted from vegetable oils to bio-diesel. The supply-demand mismatch is likely to worsen.

So, the government has no options but to look for long term measures to increase oilseeds production. In the meantime, the government may have to bear a long hard summer on the price front. Zero duty for edible oils and distribution through Public Distribution system to help the poorer sections cannot be ruled out. Fiscal measures to curb prices may have to be supplemented by dear money policy, dampening the prospects for demand, growth and employment generation.

tncr@sify.com