The Hindu Business Line : Higher farm incomes to increase edible oil offtake this year

While supply-driven international market conditions may not bring much cheer to producers, India as a market is likely to spring a surprise, quite contrary to the predictions of many.

MUMBAI, March 23

oilseedsTHANKS to improved performance of monsoon, overall agricultural growth in 2001-02 is projected at a fairly healthy 5.7 per cent, while GDP growth is placed at 5.4 per cent. Coming after two successive years of near-drought conditions in western and central parts of the country that resulted in massive loss of farm output and incomes, an increase in farm production this year has once again brought cheer, and of course money, to the rural economy.

Apart from foodgrains and cotton, output of nine major oilseeds this year has recovered by over 15 per cent or 27.7 lakh tonnes to 211 lt, according to Economic Survey 2001-02. The increase is accounted for mainly by groundnut, rapeseed/mustard and soyabean. Trade estimate for the year broadly tallies with Government estimate of production increase.

Based on oilseeds production numbers, domestic production of vegetable oil from both primary and secondary sources is projected to increase by about 9 lt this year. Prospect of higher domestic production of vegetable oil has led trade associations and analysts to predict that India's import this year would be 10-12 per cent lower than last year.

Consistent reduction in monthly imports since November 2001 has further strengthened the general belief of an imminent decline in imported oil arrivals during the rest of the year. In the first four months (November 2001-February 2002) of the current oil year, inflows were an estimated 10.8 lt, down from 16 lt during same period last year.

During oil year 2000-01, India's imports totalled 48.3 lt, up from 44.9 lt a year earlier. Based on higher domestic production prospects this year, it is widely expected that India's aggregate vegetable oil imports would actually shrink by 5-6 lt to around 42-43 lt.

These views were also heard during the recently held palm oil price outlook conference in Kuala Lumpur where every producer and trader was keen to know how much India's import will be during March-October 2002. Overall, in recent days, the vegetable oil trade has been in a bearish mood following production increases in soyabean oil in the Americas, Indonesia's expanding palm oil output, uncertainties relating to China's purchases, high tariffs in India and absence of growth markets.

While supply-driven international market conditions may not bring much cheer to producers, India as a market is likely to spring a surprise, quite contrary to the predictions of many.

Consider this. India's consumption demand for essential food products including edible oil is largely income driven. Two years of aberrant weather — 1999-2000 and 2000-01 — led to massive decline in rural incomes that forced a compromise on consumption of food products. For the same reason of loss of income, demand for consumer durables was also greatly affected. While western and central parts of country lost incomes following drought conditions, southern India suffered because of low commodity prices, especially of tea, coffee, rubber, tobacco, copra etc. Indeed, rural incomes were more inequitably distributed last two years than they normally are; a majority of rural population faced virtually no growth in income.

Fortunately, there is a welcome reversal of this grim situation. In a country where close to 70 per cent of the population is dependent on agriculture and allied activities for its livelihood, incomes in the hands of close to 700 million people will increase by 5.7 per cent this year.

This is bound to get converted into demand; first, for essential food items, and then for gold and consumer durables. As an essential food product, edible oil will be no exception. It is basic economic principle that at low levels of consumption, every increase in income will go to meet essential food needs. In addition, increase in foodgrains availability and consumption will spur demand for cooking oils.

There is normally a time lag between generation of incomes and their conversion into demand. First, the kharif harvest took place in September/October last year which put money in the hands of people; and now, the rabi crop is ready, from which incomes will flow during March/May.

The expectation that fresh demand for products and services will soon be generated is based on higher rural incomes this year. Under normal conditions of incomes and prices, consumption of edible oils should grow by 5-6 per cent. This year, however, the growth rate could be higher.

According to the Economic Survey, the contribution of agricultural and allied sectors in 2001-02 will be Rs 3,05,643 crore (at 1993-94 prices) which is around Rs 16,500 crore more than in the previous year. At current prices, the value will be much higher.

Behaviour of 2002 south-west monsoon will be critical. A vigorous onset of monsoon and satisfactory initial progress is sure to provide a ``feel good'' factor that will encourage consumers to spend, especially in rural areas, in anticipation of harvesting a good crop. The traditional festival season in the country - August to October - when edible oil consumption rises manifold will of course add to the demand pressure.

On the other hand, if the monsoon is aberrant, it could set-off an upward price spiral. Speculators are sure to take advantage of the situation as there are no restrictions on storage, movement and credit access. In the event, the Government may be forced to cut customs duty on edible oil to encourage imports and maintain domestic prices. Weakening rupee is a bullish factor too.

So, either way, the next south-west monsoon is sure to impact the country's edible oil consumption and in turn, imports. Out of the additional indigenous production of 9 lt edible oil this year, 5-6 lt will go to meet the normal consumption increase occasioned by growth in population and income. The incremental demand this year in the wake of higher farm incomes can easily absorb the balance quantity and possibly leave room for more.

Based on Indian importers' estimated commitments and shipment information, about five lakh tonnes (2.5 lt each) are expected to arrive during March and April. This will take aggregate arrivals in the first six months to 16 lt.

For the next six months (May-October), import of between 32 lt and 34 lt (a little over 5 lt per month) is a distinct possibility, particularly given higher rural incomes this year and propensity to spend on food products. In the event, India's edible oil import during oil year 2001-02 will be in the region of a high 48-50 lt.

The income-driven consumption demand scenario leaves little scope for reduction in imports as is being simplistically made out on the basis of higher domestic production. Far from shrinking in volume, aggregate imports during the year will be, in the least, around the same level as last year i.e. 48 lt.

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