At the recently concluded Globoil annual conference of the vegetable oil industry here, the recurring theme among domestic refiners was Indonesia's sudden move to slash customs duty on refined palm oils and its adverse effects on the Indian refining industry.

From large refiners to the small ones, every one here is seriously worried about the deluge of imported refined oils that is sure to flow into the country. The floodgates of refined oil exports having been thrown wide open by the Indonesian Government, the target market is India for reasons more than one.

With over 50 lakh tonnes a year, India is the single largest importer of crude palm oil. The geographic proximity makes voyage time as short as 10-12 days. Although large crude oil import has supported capacity utilisation by the domestic refining industry, the challenge from refined oil imports has been very real.

Despite the rate of customs duty at 7.5 per cent on refined palmolein, effectively the duty works out to just about 3 per cent simply because the tariff value on which the rate of duty is applied has been retained at an artificially low level of $ 484 a tonne, whereas the market price is in excess of $ 1,100 a tonne.

Simply put, the Indian Government has willy-nilly provided a fiscal incentive to import refined palmolein rather than encourage import of crude palm oil, with a view to capturing value addition domestically, complain refiners.

Import

Import numbers actually justify their grievance. Indeed, in the last two years, especially after duty on refined oils was reduced to 7.5 per cent, refined palmolein inflows have risen sharply and currently stand at about 12 lakh tonnes a year. In other words, the domestic refining industry has lost the opportunity to refine 12 lakh tonnes of crude oil.

According to Mr Sushil Goenka, President of Solvent Extractors' Association of India, large-scale imports of refined palmolein (consequent to the latest Indonesian duty reduction) will be detrimental to the interest of domestic refiners, resulting in further decline in their capacity utilisation which might threaten closure of refining units.

Worse, if the Indian Government does not appropriately respond to the Indonesian move, a surge in low priced refined palmolein imports can threaten the promotion of indigenous oil palm plantation, Mr Goenka points out. It is not just that oil palm growers may not get a good price, there will be no takers for indigenous domestic crude palm oil if refineries turn sick.

Options available

So, what are the options before the Indian Government? It is necessary to counter the Indonesian move without appearing to be retaliatory and without disturbing the flow of edible oil. While the easiest option would be to straight away raise the duty on refined oils from the current 7.5 per cent, an innocuous but equally impactful move would be to first raise the tariff value to reflect the market price of refined palmolein.

Fixing the tariff value at around $ ,000 a tonne would provide sufficient protection to the domestic refining industry for the time being and neutralise any fiscal advantage that Indonesian oil will have. The Finance Ministry must move in the matter expeditiously. It is necessary to restore the domestic industry's confidence about policies that would advance domestic industry interests without in any way hurting consumers.

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