India-Asean FTA slips on edible oil

In a country where oil diplomacy usually relates to petroleum resources, the year 2006 must have come as a lesson for top trade and foreign policymakers.

For, India's efforts in strengthening ties with other Asian countries as part of its 'Look East' policy suffered a setback over serious differences with Asean on another type of oil "" the one used for cooking.

Edible oil, the country's second largest imported commodity after crude petroleum, was the most important reason for the failure to seal the key Free Trade Agreement (FTA) between India and Asean, although there are divergent views on other commodities such as pepper and black tea as well.

The year also saw the government reducing customs duty on edible oils, but contrary to expectations, imports declined, as speculators found themselves on the back foot and domestic output of oilseeds and consequently that of edible oils rose.

Edible oil, specifically vanaspati, also remained in the news for India-Sri Lanka trade relations, with domestic industry divided over imposing a cap on imports under the bilateral FTA with the island nation.

But Indian policymakers faced their toughest test in bilateral trade pacts, as they tried to balance domestic interests and international relations following demands by Malaysia and Indonesia, the world's two largest exporters of palm oil, to include crude and refined palm oil in the list of items for duty cuts under the proposed FTA.

The demand, if accepted, would almost surely destroy the domestic industry in India, a country which imports more than 40 per cent of its edible oil requirement of about 100 lakh tonne.

While the Asean FTA will affect the sector in future, it was the duty cut strategy that worked wonders this year.

In a bid to check the skyrocketing prices of edible oil, the government announced a 10 per cent customs duty cut in August on the palm group of oils. The duty cut was initially for three months, but was later extended till December 31.

The move caught speculators by surprise and forced hoarders to release their stocks in the domestic market, resulting in greater supply of edible oils in the country.

This also led to a 12 per cent dip in imports to 44.17 lakh tonne in oil year 2005-06, which runs from November 1 to October 31, compared with 50.42 lakh tonne a year earlier.

The other major reason for the dip in imports was the rise in domestic oil production due to robust oilseeds output. Production of nine major oilseeds, including groundnut, soybean and mustard, rose to 239 lakh tonne in 2006 against 221 lakh tonne in 2004-05 and 233 lakh tonne in 2003-04, as per the Central Organisation for Oil Industry and Trade.

The industry body, however, said this year's output falls short of the targeted 294 lakh tonne by about 18 per cent.

Area under cultivation of oilseeds has also slipped 8 per cent to 87.60 lakh hectare so far in the rabi season.

The acreage declined due to diversion of sowing area of rapeseed and mustard to chana in Madhya Pradesh and to wheat in Rajasthan and Haryana. Mustard acreage has also declined to 64.67 lakh hectare from 70.41 lakh hectare a year ago.

But though imports fell, prices of most edible oils remained on the steeper side in wholesale and retail markets.

While prices of refined groundnut oil have risen over 22 per cent by December this year to Rs 1,030 a tin of 15 kg, mustard oil prices increased 15 per cent to Rs 740 a tin.

In the imported oil category, prices rose by 18 to 31 per cent. Soybean oil registered the maximum gain with prices shooting up to Rs 479 per 10 kg. Crude palm oil showed a rise of 18 per cent at Rs 3,880 a quintal.

Although crude palm oil import was stagnant at around 23.6 lakh tonne, overall import of palm group of products declined 14 per cent to 25.7 lakh tonne. Soybean oil import was down to 17 lakh tonne from 20 lakh tonne last year.

While import of soybean oil or palm oil is seen as a step to augment supply of edible oil in the country, vanaspati import saw resistance from domestic manufacturers.

Complaints of imported vanaspati from Sri Lanka flooding the Indian market put pressure on the government, which mandated agri-cooperative Nafed as the canalising agency for all such imports. The decision had an immediate effect and imports from the island nation virtually crawled.

However, the two countries later reached an agreement, as per which India withdrew Nafed's status and Sri Lanka agreed to cap vanaspati exports to 2.5 lakh tonne per annum.

The domestic vanaspati industry is now divided into two camps "" one having manufacturing units only in India and the other group led by Adanis having units in both the countries.

But while there may be differences within the sector over vanaspati imports from Sri Lanka, the industry so far seems to be in agreement regarding palm oil imports from Asean.And even the government has agreed that domestic industry needs to be protected.

India's latest offer to Asean envisages duty cuts on crude and refined palm oils to 50-60 per cent by 2022 from 80-90 per cent now.

The government now needs to withstand pressures, as it seeks to finalise the free trade pact with the ten-member bloc next month during the visit of Prime Minister Manmohan Singh at the Asean Summit.