Import tariffs: Changing the price equation

Aarati Krishnan

HIGH soya bean, rapeseed and palm oil output have pushed the global carry-in stocks of oils and fats to a record high of 101 lakh tonnes for the just-begun oil year 2000-01.

And thanks to this global supply overhang, Indian edible oil consumers have been having a ball.

Domestic prices of edible oils have fallen 40-50 per cent from a couple of years ago. The refined sunflower oil in the Mumbai wholesale market now sells at Rs 280 per 10 kg, down 44 per cent from its peak of Rs 500 in October 1998. The price of imported palmolein has crashed from a peak of Rs 410 per 10 kg in June 1998 to the present Rs 217. The prices fell despite the Government's repeated attempts, through changes in the tariff structure, to stem the flood of edible oil imports into the country.

Since December 1999, not only has the Government raised the effective import tariffs sharply, it has also gradually introduced duty differentials between unrefined and refined oils, and the cheap RBD Palmolein and the dearer soft oils (sunflower and soya bean oil). It has also pegged tariffs at different levels for traders and actual users. The bulk of imports into India have traditionally come in the form of RBD Palmolein and refined soft oils, resulting in falling capacity utilisation for domestic oilseed processors, vanaspati manufacturers and refiners. Recent alterations in duty structure have tried to address this problem.

In 2000, there have been three successive hikes in the import duty on edible oils. Prior to December 1999, all edible oils, whether crude or refined were subject to a uniform tariff of 16.5 per cent. With effect from January, the effective import duty on refined oils was hiked to 27.5 per cent. However, the duty of crude oils was left unchanged at 16.5 per cent for actual users. Importer traders had to pay the higher rate of duty. In June, the effective duty on all refined oils was hiked to 44.04 per cent, while that on crude oils was pegged at 27.5 per cent. Vanaspati makers could continue to pay 16.5 per cent on their crude oil imports.

In the latest round of hikes on November 21, the effective import duty on refined oils has been marked up further to 50.8 per cent, while the import duty on crude oils has been pegged at 35 per cent. Both crude palm oil (at 55 per cent) and RBD palmolein (at 71.6 per cent) are now subject to higher rates of duty than other soft oils, such as sunflower oil and soya bean oil.

These changes in the duty structure appear to have a two-fold purpose -- to deter cheap imports of palm oil and its variants by traders and to deter the imports of refined oils, thus encouraging value additions by domestic oilseed processors and refineries.

The above alterations in duty structure have not served their purpose in entirety. Since India is the largest importer of edible oils in the world (it buys 6 per cent of the global output of vegetable oils and one-fourth of the global palm oil output), international prices have fallen sharply following each duty hike, thus absorbing the hike's impact. This is especially true of RBD palmolein and other palm oil variants where the market is largely dependent on India. Second, importers have switched from the dearer refined oils to the cheaper crude oils, managing to work around using domestic refining capacities to convert imported products. Around 50 per cent of the oil imports in 1999-2000 were in crude form against 30 per cent the previous year. Third, despite the duty hikes, the landed cost of the imported palmolein continued to rule far lower than other soft oils, making imports of the former attractive.

But the latest round of tariffs could arrest the free fall in domestic edible oil prices. With limited downside potential left from these levels, the tariffs are certainly likely to discourage imports of RBD Palmolein, hitherto the cheapest competitor to other soft oils. Moreover, a shrinkage in the global sunflower seed output and a downtrend in the palm oil yield cycle are expected to tighten the global supply situation over the oil year 2000-01. Sunflower oil prices globally have begun to firm up on these developments.

However, players in the domestic market for branded oils are still not optimistic about benefitting from the latest round of tariff hikes. They contend that while the duty hikes on crude oils would push up the cost of production, competition from cheaper oils, such as soya oil and palm oil in the vegetable oil complex, would continue to pressure refined oil prices. Passing on higher input costs to consumers may be difficult in a price-sensitive market, where a host of regional players pose stiff price competition.