Correct the anomaly

The vanaspati industry has been passing through a bad patch for a long time. Its troubles are due wholly to the flawed import duty structure for palm oil, the major raw material for vanaspati manufacture.

This puts the domestic product at a disadvantage vis-à-vis imported competition. As a result, nearly 80 of the 200-odd vanaspati units have already shut shop and more are said to be on the verge of doing so. The industry is operating at an average capacity utilisation of barely 26 per cent, eroding the economic viability of most units.

The tariff anomalies are many. The most striking among them""and prima facie also the most absurd""is that the customs duty is far lower on the finished product than on the raw material. While the duty on vanaspati is 30 per cent, it is 65""75 per cent on different types of palm oil, which constitutes the main ingredient.

The consequences of this have started to surface. Hydrogenation plants to convert palm oil into vanaspati have come up in countries like Malaysia and Indonesia""major palm oil producers""for exporting the finished product to India, taking advantage of the huge cost advantage that this skewed duty structure provides them. Imports from these countries have now begun to swell, adversely affecting the local industry.

The domestic industry is also under threat from vanaspati that comes in from neighbouring countries like Sri Lanka and Bangladesh, with which India has bilateral trade agreements. While the import duty on vanaspati coming from Sri Lanka is zero, it is merely 15 per cent for Bangladesh.

Both these countries produce this product from palm oil imported largely duty-free. As a result, the Indian product is denied a level playing field in the most obvious way, and is being priced out of its home market.

This aside, the reduction in this year's Budget of the import duty on non-edible grade vegetable fats, notably stearin, used for soap manufacture, to merely 20 per cent has led to the adulteration of vanaspati with these fats""creating a health hazard.

For good measure, there also exist problems with the import regime, which hurts other local users of palm oil as well. These pertain to setting unrealistic tariff values for crude palm oil and an arbitrarily determined minimum carotene content for it.

The tariff value on which the duty is charged has continued to remain static at $523 a tonne for several months, though import prices have declined to around $430. This forces importers to needlessly pay a higher import duty.

The same is the case with the import duty of 65 per cent, pegged to a minimum carotene content that is impossible to conform to. Here, too, importers end up paying a higher duty than they should. Unless these issues are suitably addressed, the vanaspati industry will continue to head towards extinction.