Why traders are upset over govt response to rising pulse,edible oil prices

The slash in import duties on crude palm oil has been negated by price rise in global markets, stock holding limits on pulses are self-defeating, say industry players

Edible oil and pulses prices have been on the boil the past few months, both in the retail markets and wholesale markets.

Though prices have softened since June after being considerably higher in the March-May period, the Centre says that rates are still higher than last year. (see chart)

This has prompted it to announce a slew of measures that included a sharp reduction in import duties on crude palm oil, the largest component of India’s annual edible oil imports, lifting all restrictions on import of refined edible oils but most importantly it announced the imposition of strict stock-holding limits on pulses.

The stock-holding limits not only came after allowing free imports of pulses but also months after the Centre had passed three farm reform laws in the Parliament, one of which was meant to end such arbitrary imposition of stock holding limits and bring about a certainty in its actions.

The stock-holding limits on pulses riled traders who alleged that it came at a time when prices had started softening and also when farmers were just preparing to plant their kharif pulses.

“The Central government needs to understand that the price rise in pulses is due to fundamental reasons and not due to hoarding. The rise will continue despite all such steps because supplies are inadequate while big demand due to major Hindu festivals is just ahead of us and above all there is big cloud over the next kharif pulses crop due to uncertain monsoon,” Bimal Kothari, vice chairman of Indian Pulses and Grains Association (IPGA) told Business Standard.

He said the stock limits could not have come at a worse time as they have created a hurdle in the plans of traders to import pulses to bridge the production gap.

“Instead of smoothening up supplies, the Centre has, in fact, choked them because of its sudden and unexpected decision to impose stock limits,” Kothari said.

He said traders are not importing any pulses despite lifting all restrictions as they fear that their stocks will be seized by authorities for violating stock limits.

Trade sources said the production estimate of pulses given for 2020-21 was also wrong as trader sources believe that against the projected pulses production of 25.6 million tonnes, the actual output was much less than 20 million tonnes.

India has 6,000-7,000 pulse millers, most of whom have a milling capacity of 30-40 tonnes a day, while the number of retail traders and wholesalers is much more. Their storing and holding capacity depends on the financial heft and demand.

Earlier this month, the Centre imposed a stock limit of 200 tonnes on wholesalers. On retailers, the limit will be 5 tonnes.

In the case of millers, the stock limit will be the last three months' production or 25 per cent of annual installed capacity, whichever is higher.

Lastly, for importers, the stock limit will be the same as that of wholesalers for stocks held/imported prior to May 15, 2021.

And for pulses imported after May 15, stock limit applicable on wholesalers will apply after 45 days from date of customs clearance, the government order said.

Edible oil traders

If pulse traders and millers are unhappy, edible oil trade feels that the decision to lower import duty came slightly late in the day as international prices were in any case softening. They feel the decision to prune duty would have little impact on retail prices as international traders had already pushed up prices to nullify the effect.

India is heavily dependent on import of edible oils as domestic oilseeds production is barely sufficient to meet 40 per cent of its annual edible oils demand.

Traders also feel that demand to lift all curbs on refined edible oil imports will destroy domestic refining, which in turn will hurt the interest of growers.

“They (Centre) talks about making India Atmanirbhar, but at the same time allow unrestricted entry of cheap refined oils. This will kill domestic refining and in six months, all port-based palm oil refiners will shut shop,” B V Mehta, Director General of Solvent Extractors Association of India (SEAI) had told Business Standard some time back. Click here to read the story. 

Mehta said the decision to lower import duties on crude palm oils by 5.5 per cent and on refined palm oil and palmolein oil by 18.15 per cent and 8.25 per cent respectively announced by the Centre had limited impact on domestic prices as palm oil prices in Malaysia and Indonesia have already jacked up by $40-45 per tonne on the day that India lowered its duty.

The Centre in its order has said that duty reduction is applicable only till September 2021 to protect the interest of farmers, as domestic kharif oilseeds crop will start hitting the market from October onwards.

“The net effect of the duty reduction on crude palm oil (CPO), the edible oil that India imports from Malaysia and Indonesia in larger quantities than any other edible oil, is $50-60 a tonne or Rs 4,600-5,000 in Indian rupees, but this has been nullified as traders in Indonesia and Malaysia jacked up their rates, nullifying the impact of duty cut,” Mehta said.

He said that in the end, neither the consumer nor the government stands to gain as the latter will lose revenue, while for the former prices won’t go down as the international markets have hardened.

Gap between retail and wholesale prices

Though trade and industry sources have claimed that the gap between retail and wholesale prices, particularly in pulses, has widened between last year and this year, data sourced from department of consumer affairs shows that the difference has not been all that large.

Take moong for example. The difference between the retail and wholesale prices was nine per cent on July 12, 2020. This widened to 12.7 per cent on July 12, 2021. Similarly, the difference between retail and wholesale prices or urad daal widened from 9.3 per cent in 2020 to 12 per cent in 2021.

The divergence between retail and wholesale prices in the case of edible oils is much narrower than that of pulses.

For example, it was 6.5 per cent for mustard oil in 2020, and 6.7 per cent in 2021.

In the case of palm oil, the divergence was 5.7 in 2020, widening to 7.5 per cent in 2021 (see chart).

In both commodities, experts feel that unless sustained and concerted attempts are made to boost production and lower import dependency, knee-jerk reactions only fuel speculation and volatility in the markets.