Indonesian crisis could spur focus on boosting local edible oil production

However, achieving self-sufficiency in edible oil will remain a distant dream unless drastic policy measures are taken

A few days back, Indonesia, the world’s largest producer of palm oil, decided to suddenly ban exports of the commodity to check spiraling domestic prices. But it clarified the very next day that the ban would embrace only select high-value products and exclude mass-consumed crude palm oil.

However, just a few days later, the country once again went back on its decision and upheld the original decision to ban all varieties of palm oil regardless of their quality.

Global and domestoc edible oil prices swung wildly after this policy flip-flop.

The volatile market movements once again exposed India’s much talked about vulnerability to international conditions on edible oil consumption, something which it will have to live with for years to come, being one the world’s largest consumers of cooking oil.

Following the Indonesia crisis, many experts once again reinforced the need to improve domestic oilseed production, particularly of mustard and soybean and also palm oil to some extent, so that India is sufficiently hedged against global price spikes.

These spikes could get more acute going ahead, as more and more oil meant for cooking is diverted to make biofuels.

Future scenario

At present, India imports 13-13.5 million tonnes of edible oil a year on average, of which 8-8.5 million tonnes (around 63 per cent) is palm oil.

Of this 8-8.5 million tonnes of palm oil, almost 45 per cent comes from Indonesia, the rest from neighbouring Malaysia.

The remaining is imported soyoil and sunflower oil.

Going forward, according to an assessment by the Solvent Extractors’ Association (SEA), the premier body of oilseed extractors and processors, by 2025-26, India’s domestic edible oil demand will be about 26 million tonnes, of which just 13 million tonnes will be met through domestic production of oilseeds.

Therefore, imports will continue to meet at least 50 per cent of domestic demand, which estimated to be 12-13 million tonnes even in 2025-26, the SEA had said.

This scenario can change if and only if there is a surge in domestic oilseed production in India, for which both the Centre and state governments have to make more concerted efforts, because present measures might not be enough.

Strategies to boost domestic oilseed production

To lower India’s rising dependency on imported edible oil, the government has for quite some time been working on a multi-pronged strategy, the cornerstone of which is announcing a higher Minimum Support Price (MSP) than cereals and improving the procurement of oilseeds when prices crash.

In this, there has been renewed focus on expanding the area under oil palm and boosting rice bran oil output of late.

However, despite all the measures, India’s import dependency on edible oil has continued to grow and raises a big question on the existing and past initiatives to boost domestic production.

Experiene shows that a major drawback of most schemes and programmes to boost oilseed production is that unless they are backed by a strong procurement system that offers some guarantee on the return on investments made by farmers, a big switch does not usually happen.

MSP and oilseed production

Data shows that though both the acreage and production of oilseeds have risen significantly the past few years due to higher MSP, they have not impacted rice and wheat production.

Between 2014-15 and 2020-21 (July to June), when the MSP of paddy (common) was hiked by almost 37 per cent, the acreage under the crop dipped only marginally, by about 2.5 per cent.

And while the MSP of wheat was up 36.2 per cent during the same period, there was a 10 per cent rise in its area under cultivation.

In contrast, between 2014-15 and 2020-21, the area under soya bean cultivation was up by nearly 10 per cent as its MSP had risen by almost 51.5 per cent.

In other words, though higher MSPs may have encouraged farmers to grow more oilseeds along with pulses, there has been no simultaneous shift away from wheat and paddy.

Experts say that unless backed by strong procurement mechanisms or ready markets, MSPs alone aren't enough to encourage farmers to leave cereal cultivation and opt for oilseeds or pulses.

During the past few years, India’s pulses production has risen from a mere 14-15 million tonnes to almost 22-23 million tonnes not just due to higher MSPs, but also because of an assured procurement system by state agencies.

This year (2022-23) too, India’s mustard seed production has jumped by almost 30 per cent over last year, as prices in the open market for oilseeds have been remunerative for farmers. That's another example of the role prices play in luring farmers towards a crop.

In this, the performance of the much touted Pradhan Mantri Annadata Aay SanraksHan Abhiyan (PM-AASHA), which lays down a framework of Central intervention in case oilseeds, pulses and coarse cereal pulses fall below MSP, has been below par.

In some of its recent price reports, the Commission for Agriculture Costs and Prices (CACP) said that the allocation for PM-AASHA has significantly declined from Rs 1,500 crore in 2019-20 to Rs 400 crore in 2021-22, while expenditure under the Scheme has been extremely low.

“The scheme has great potential of benefiting the farmers, but there is an urgent need to review PM-AASHA and address implementation issues,” the report had said, urging the government to form a Committee comprised of representatives from Central and state governments and the private sector to review the Scheme and recommend changes to make it effective. 

CACP also found that despite a significant increase in the procurement of pulses and oilseeds during the past few years, market prices have remained subdued.

It also called upon state governments to be more proactive, as it is often seen that the sanctioned quantity is lower than the procurement limit of 25 per cent production in oilseeds and pulses, while actual procurement is much lower than the sanctioned quantity.

Palm Oil Mission

A major initiative announced recently to boost domestic edible oil production is the revamping of the Palm Oil Mission with the objective of producing 2.8 million tonnes of palm oil locally by 2025-30.

However, even if the mission succeeds, it will not be enough to significantly lower the import dependency.

At 2.8 million tonnes by 2025-30, domestic palm oil production will still be less than 35 per cent of the total imports at the current pace. However, if the target is achieved, it will still make a significant contribution.

At present, 90 per cent of the domestic production of palm oil is in Andhra Pradesh, the rest is in other parts of the country.

“Oil palm production did not pick so far in the country despite being in place for the past several years, as price volatility wasn’t hedged for farmers. Secondly, incentives for the crop in terms of subsidy on seeds, fertilisers etc weren’t passed on by the states and finally, the sites chosen for oil palm cultivation wasn’t suitable at all for the same,” Sougata Niyogi, CEO–Oil Palm, Godrej Agrovet Limited had told Business Standard some time back.

Godrej Agrovet is one of the biggest players in the domestic oil palm production market.

Niyogi said that Indian oil palm cultivation shouldn't be equated with Indonesia and Malaysia because in those countries the plantations are mostly rainfed while in Andhra Pradesh, which has maximum number of palm oil plantations, it is largely irrigated.

“Also, if the maximum temperature crosses 38 degree Celsius, it will impact oil palm bunches and their oil extraction rate would drop, which is why not all parts of the country are suitable for oil palm cultivation,” Niyogi said.

But he hoped that the current Indonesia crisis and the fact that India’s will continue to rely on imported edible oil would spur more interest in domestic oil palm cultivation, ably supported by the newly announced Mission.

Rice bran oil

The third major way in which policy makers are looking to boost domestic edible oil availability is by raising rice bran oil production from the current 1.0-1.1 million tonnes per annum to 1.8 million tonnes.

However, taking production beyond the targeted 1.8 million tonnes so that it makes some tangible impact on domestic edible oil availability is a challenge. Trade sources said for that to happen, domestic rice output must grow manifold.

India produces about 120 million tonnes of rice a year at present, and taking the output beyond that looks challenging.

Estimates show that from one metric tonne of paddy, just about 1.6 per cent is crude rice bran oil is extracted and when refined, this further goes down to 1.4 per cent.

Therefore, for rice bran oil production to grow beyond 1.8 million tonnes per year is a big challenge.

Thus in short, overall India’s big import dependency on edible oils will continue for some time to come, unless, of course, there is a big revolution in domestic oilseed cultivation.