How much should India worry over Indonesian palm oil export ban?

It is not just a cooking oil confined to kitchens. Its derivatives are almost omnipresent. From cakes, biscuits and chocolates that you relish, to the beauty products. From cleaning agents to laundry detergents to margarine.

No wonder, shares of fast moving consumer goods (FMCG) companies dropped up to 6 per cent on Monday when the news flashed that Indonesia was putting a halt on export of crude and refined palm oil. Higher prices will increase margin pressure for consumer goods companies like Hindustan Unilever and ITC. 

The ban by the world’s biggest palm oil producer and exporter came into effect on Thursday. It could further inflame surging global food inflation. India is the world’s biggest importer of palm oil as well as edible oils in general. 

Palm oil is preferred in India’s foodservice industry as it is relatively cheaper, lasts longer and is more stable at high temperatures than other oils.

 Indonesia has said it will revoke the export ban once the domestic prices of bulk cooking oil come down by around 30%. It consumes less than 40% of its annual palm oil production of 48 million tonnes and the rest is exported. 

Industry officials don’t expect the ban to last long due to limited infrastructure to store the surplus oil and mounting pressure from importers. 

India consumes around 24 million tonnes of edible oil annually. About 10.5 million tonnes of demand is met through domestic production whereas the rest of 13.5 million tonnes is imported. 

More than 60% of this, around 8-8.5 million tonnes, is palm oil and 45% of that comes from Indonesia and the remaining from neighbouring Malaysia

The prices of vegetable oils like mustard oil, soya oil, sunflower and palm oil have gone up by as much as 25% over the past year.

Sudhakar Desai, CEO of Emami Agrotech says, Indonesia has been trying to control edible oil prices. Its total production is 40 lakh tonnes per month, where 12 lakh tonnes is used for local consumption and making biofuel. The present export ban cannot sustain more than 10-12 days, he believes, and indicates that palm oil prices in India can go up another Rs 5 per litre.

The current situation has also highlighted the need for self-sufficiency or at the least to reduce import dependence. The self-sufficiency in oilseeds attained through the “Yellow Revolution” during the early 1990s, could not be sustained beyond a short period.  

Several steps to boost oilseed production have been taken since then. One of them is the recently-launched Oil Palm mission with the objective of producing 2.8 million tonnes of palm oil locally by 2025-2030. However, even if the mission succeeds, it will not significantly lower import dependency. Despite all the measures, India’s reliance on imported edible oils continues to grow.

It is also possible to reduce the consumption of vegetable oils by creating awareness among the consumers about optimum and healthy oil consumption habits. As per nutritional requirements, 12-13 kg per person per annum is sufficient, while an average Indian is consuming more than 18 kg per annum.

Desai says India’s edible oil consumption has been falling marginally over the last two years and is expected to fall 2-3% in the current year. He added that high prices are already encouraging farmers to grow more oilseeds. 

Emami Agrotech's Sudhakar Desai says results from Oil Palm Mission will be seen in medium term. High prices will also give the right opportunity to cultivate oilseeds in India. Soybean and mustard crop has gone up by 25-28% in last two years, he says. 

India’s vegetable oil import bill jumped 63% in the 2020-21 marketing year ended October 31 to a record $15.7 billion. The volume of imports remained roughly the same as the previous year at around 13.5 million tonnes but the value spiked as overseas prices surged. The import bill may go up slightly this year. 

The crude oil import bill doubled last fiscal to $119 billion and oil prices are staying elevated due to the war in Ukraine.

The country is also staring at coal shortage. Several states like Tamil Nadu, Gujarat, Maharashtra, Karnataka and Uttar Pradesh are stepping up coal imports by paying high prices to overcome a domestic shortage.

India's fertiliser subsidy bill is also likely to shoot up by 55% to a record Rs 2.5 trillion this fiscal as the government will provide additional funds to make up for the spike in cost from higher import prices. 

India imports 90% of phosphates, 30% of urea and 100% of its potash requirements. Ukraine war has shot up the price of natural gas, which is used in making urea.  

Against this backdrop, the International Monetary Fund has estimated India’s current account deficit to widen to 3.1% in FY23 from 1.6% in FY22. A host of factors such as rising prices of crude oil, coal, vegetable oils, fertilisers and natural gas will continue to put pressure on India’s external position going forward.