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A perennial deficit: The other oil problem

Unlike petroleum, India’s edible oil imports are showing no signs of cooling.

Written by Harish Damodaran |
Updated: September 24, 2015 4:06:03 am
oil. edible oil, oil stock, oil price, oil price rise, oil price india, business news, latest news Oil consumption itself is growing, having almost doubled to over 200 lt in the last ten years. (Illustration: C R Sasikumar)

Last Friday, the Centre hiked the basic customs duty on all refined edible oils from 15 to 20 per cent, and on crude oils from 7.5 to 12.5 per cent. The increased tariffs come even as the country’s import of edible oils in 2014-15 (November-October) is slated to cross 140 lakh tonnes (lt), worth over Rs 66,000 crore or $10 billion.

Also, what is remarkable is how much imports have risen — from hardly 44 lt in 2003-04 to a projected 140 lt in the current oil year (based on arrivals till August). Until 2007-08, India’s edible oil production exceeded its imports, whereas today the latter is double that of the former.


The 140 lt of imports likely in 2014-15 would include about 75 lt of crude palm oil (CPO), 15 lt of RBD (refined, bleached and de-odourised) palmolein, 30 lt of crude degummed soyabean oil, 16 lt of crude sunflower oil and 4 lt of crude rape (canola) oil. The decision to raise import duties was made keeping in view two factors.

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The first is international prices. The current landed cost of CPO in India, at around $525 per tonne, is 25 per cent lower than last year’s levels at this time. RBD palmolein, crude soyabean and sunflower oil are now trading 30-45 per cent below what they were three years ago. The higher duties are meant to protect domestic producers from cheap imports in a scenario of falling global prices.

The second objective is to reduce dependence on imports, which at present meet more than two-thirds of India’s edible oil consumption. “The government must take a long-term view. While 140 lt imports may cost Rs 66,000 crore today, it would be Rs 1,00,000 crore if global prices were to recover to their earlier levels”, notes BV Mehta, executive director, Solvent Extractors’ Association of India.


Moreover, consumption itself is growing, having almost doubled to over 200 lt in the last ten years. “Ultimately, there is no alternative to boosting domestic production,” adds Mehta. And since farmers will not plant more oilseeds without remunerative prices — which cheaper imports will not allow — higher tariffs are the only way out. They would, in fact, be more effective than any increases in minimum support prices by the government.

Indian households largely use indigenous oils — mustard in eastern and northern states; groundnut, coconut and sesame in southern states; and groundnut and cottonseed in western states — for direct cooking/frying purposes. Many middle-class homes, though, have increasingly shifted to imported oils like soyabean in North India and sunflower in South India. Palm oil is, likewise, consumed by poorer households, especially in states like Odisha, Chhattisgarh, Jharkhand and West Bengal — both as RBD palmolein and vanaspati (hydrogenated oil). The bulk of palm oil, however, is used in restaurants, bakeries, sweet shops and industries from snack-foods and biscuits to noodles. Ashok Gulati, former chairman of the Commission for Agricultural Costs & Prices, believes it is unrealistic for India to be fully self-sufficient in edible oils. Indigenous oilseeds such as rapeseed-mustard and groundnut can, at best, yield 600-800 kg of oil per hectare, while soyabean wouldn’t give even half of that. Simply put, replacing 140 lt imports will require bringing another 28 million hectares under oilseeds, which is impossible.

A more feasible option, according to him, is to promote cultivation of oil palm, which can produce four tonnes or more of oil per hectare. “There is potential to bring up to 20 lakh hectares under it, mainly in the upland paddy-growing areas of coastal Andhra Pradesh where you have adequate rainfall as well as irrigation facility. This can straightaway lead to a doubling of the country’s existing edible oil production of 70-75 lt,” says Gulati.

But that’s easier said than done, when imported CPO is landing at $525 per tonne. “Domestic oil palm cultivation is viable only at around $800, which also conforms to the long-term import parity price. The difference will have to be bridged through an appropriate import tariff. Also, since oil palm is a plantation crop whose seedlings take four years to start yielding fresh fruit bunches, farmers will have to be paid the opportunity cost of not growing anything during that initial period,” he points out.

The government needs to also consider enabling import of seeds like canola having 35 per cent or more oil content, which can be crushed in large coast-based plants in India. The existing refineries — owned by the likes of Ruchi Soya, Adani Wilmar, Liberty Oil Mills, Emami Biotech, JVL Agro, Cargill and Gokul Refoils — are only engaged in processing of imported CPO or soya/sunflower.

The refining process basically involves removal of free fatty acid and sediments in CPO, along with bleaching and de-odourisation. The resulting RBD palm oil undergoes further fractionation, in order to separate the liquid ‘olein’ from the solid ‘stearin’ fraction. The liquid fraction thus obtained is what is called RBD palmolein, while the palm stearin (comprising roughly 19 per cent of the CPO) goes for making vanaspati and bakery shortening. The other byproduct of refining — palm fatty acid distillates (about 5.75 per cent) — is sold to soap manufacturers.

While there is some amount of value-addition in palm oil refining, this is hardly the case with crude soyabean or sunflower oil, where free fatty acid levels, too, are very low. “The government should encourage further value-addition through crushing of imported oilseeds, as the Chinese have done. Canola, for example, would yield oil as well as meal that can be used as a protein source in animal feeds,” suggests a trader from a leading multinational commodity firm.

That, however, is unlikely to take place, because nearly all the soyabean grown outside of India is genetically modified. The same goes for canola from Canada and Australia, though there is no such problem with the crop of Black Sea (Ukraine and Russia) or Eastern Europe (Hungary, Romania, Poland, Bulgaria).

Either way, India’s “other oil” problem defies easy solutions. And unlike petroleum, there isn’t even any immediate scope for relief on the import bill front.

Palming-off credit

In the global marketplace, everything is interconnected. Such linkages might even extend to palm oil imports and credit flows.

If industry sources are to be believed, palm imports have been used by many traders as a conduit to access cheap international credit, exploiting the large interest rate differential between India and overseas markets.

The usual mechanism employed by the traders concerned has been to avail of supplier’s credit made available for imports, without taking forward cover to hedge against exchange rate depreciation. Such credit — extended for anywhere from three months to one year and costing not more than 3 per cent (after adding the benchmark LIBOR rate and the commission/processing fee charged by the overseas bank concerned) — has then been used to import RBD palmolein or crude palm oil into India.

But imports here are a mere vehicle; the underlying purpose really has been to obtain cheap foreign funds that can be deployed in other businesses. “Very often, the RBD palmolein imported at say, $600 per tonne would be sold locally for $595 or less. The loss from such sales would be more than made up through access to global credit at 3 per cent, as opposed to paying 12 per cent-plus on domestic borrowings,” said a source from a leading global commodity trading firm.

But why palm oil? “It is simple: India is perennially deficit in edible oils, which means there is a ready market for this commodity. Palm oil is something you can easily import and sell, and use the proceeds for even paying off high-cost real estate loans,” he pointed out, adding that this strategy to “generate cheaper foreign credit” worked equally well in pulses. But palm oil also offers the advantage of high volumes and high value that few other commodities can match.

The above game has, however, not been without risks.

“There are many who played it without bothering to hedge. These traders lost their shirts when the rupee fell sharply against the dollar,” the source noted. But the greater damage has been from the excess oil that the country may well have imported — on account of “non-serious” players whose intentions behind importing were clearly different.

But the real lesson — relevant, perhaps, even to the Reserve Bank of India — is that maintaining high interest rate differentials isn’t sustainable beyond a point. Money and credit eventually find novel ways to get round these barriers.

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