The domestic edible oils industry has sought the intervention of the Minister of State for Food and Public Distribution on the low rate of import duty for palmolein and its impact on utilisation of capacity. Is their demand for protection justified?

The Solvent Extractors' Association of India (SEA) has observed: “the edible oil refining industry is reeling under the impact of huge over-capacity and therefore, the government should raise the tariff value on imported refined palmolein in line with current market prices, and the public agencies (such as State Trading Corporatin (STC) should source refined palmolein from local refineries rather than import it.”.

Import of refined palmolein at a lower rate of customs duty (though the specified duty is 7.5 per cent ad valorem, in effect it works out to 3 per cent because of lower tariff value) has resulted in gross underutilisation of refining capacity, SEA has said.

Refining Capacity

What is the refining capacity? There are nearly 1,000 edible oil refineries spread across the country. About 250 units are attached to solvent extraction plants, around 125 are part of vanaspati units, and a majority of the rest are stand-alone refineries.

The combined refining capacity of these units is estimated at around 14 million tonnes per annum. Average capacity utilisation is about 35 per cent, according to the Directorate of Vanaspati, Vegoils and Fats.

According to SEA, refining capacity at the ports alone is about 12 million tonnes a year. Without doubt, refined palmolein inflows into the country have spurted after the government substantially reduced the customs duty on it to 7.5 per cent with effect from April 1, 2008.

According to SEA-compiled import data, refined palmolein imports increased from 7.3 lakh tonnes in 2007-08 to 12.4 lakh tonnes in 2008-09 and dipped marginally to 12.1 lakh tonnes in 2009-10, on oil-year basis, that is November to October.

In the first six months of the current oil year (November 2010 to April 2011), such imports aggregated 4.9 lakh tonnes only, down from 6.8 lakh tonnes during the same period previous year.

These data mask more than what they reveal. It is clear that the share of refined palmolein is steady at 14-15 per cent. Actually, the share of crude palm oil has been taken away not by refined palmolein as is sought to be projected, but by other crude oils such as sunflower oil and soyabean oil.

For instance, in 2009-10, the country imported nearly 24 lakh tonnes of non-palm crude oils including mainly soya, sunflower and palm kernel oils. These crude oils too have helped utilisation of refining capacity.

Those who invested in setting up large refining capacities in recent years (in excess of the country's needs) had taken a commercial decision to enter the business fully conscious of competitive market conditions and the fickle nature of government policies.

Tax breaks

Many units came up in regions which enjoyed tax breaks — Kutch region in Gujarat, for example.

Most of these units have already benefited from government largesse in the form of tax breaks; and it is anybody's guess whether even a small part of the tax concessions was passed on consumers.

The unseemly rush for setting up edible oil refineries in the last five years — without regard for economics or policy uncertainties — has resulted in over-capacity in the industry. The current capacity under-utilisation is the result of the industry indiscriminately building excessive capacities, rather than any adverse change in trade and tariff policy.

Consumer benefits

It is also argued that low import duty on refined oils has encouraged private traders (as opposed to refining industries) also to undertake imports and compete with locally produced refined oil.

This argument seems to suggest that traders should not be allowed to import refined oils, but only refineries. This goes totally against the spirit of liberalisation and deserves to be condemned.

If any, import of refined oils by traders is the best thing that has happened to the Indian edible oil market and Indian consumers.

Traders import refined oil that is readily marketable. Their supply chain and marketing timelines are much shorter. They have helped break the stranglehold of a handful of large refiners who at times hold the market to ransom.

Additionally, import of crude palm oil and refining it here results in huge accumulation of palm stearine . Given the poor enforcement of food laws , the unauthorised use of palm stearine generally goes unnoticed and its adverse effects on health seldom recognised.

Indeed, taking the argument further, there is a case for allowing refined edible oils also duty-free as it will encourage healthy competition between refiners and traders, in addition to reducing stearine misuse.

SEA has made an interesting suggestion that instead of encouraging imports, public sector agencies should source refined oils locally on an open tender basis for supply through fair price shops.

This suggestion merits consideration. Our state agencies are not known for their trading acumen. We have seen how the indiscreet operations of the Indian state agencies often distort the world pulses market.

If Indian refiners are in a position to offer refined oils at truly competitive rates, it would make sense for government companies to buy locally. This must, of course, happen in a transparent manner. On its part, the industry association must strive to evolve and enforce certain discipline among its members in supplying to public sector companies.

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