Rising refined oil imports threaten edible oil industry

In May, the proportion of refined oil to India's vegetable oil imports rose to a staggering 42 per cent, compared with just 16 per cent in March, according to data compiled by the Solvent Extractors' Association (SEA). Experts attribute the change to the narrowing duty differential between crude and refined oil, as well as the inverse tax structure in exporting countries.

The increasing share of refined oil is a threat to domestic crushing and refining units that largely depend on imported crude vegetable oil and operate on wafer-thin margins.

"Till last year, there was a duty differential between CPO (crude palm oil) and RBD (refined, bleached and deodorised oil) of 7.5 per cent. However, on January 23, an import duty of 2.5 per cent was imposed on CPO, reducing the duty differential to five per cent. This fall in the CPO-RBD duty differential led to large-scale imports of refined palmolein, resulting in further underutilisation of capacity of India's refining industry," said Dinesh Shahra, managing director of Ruchi Soya Industries.

Currently, domestic edible oil crushing and refining units are operating at 30-35 per cent capacity, against about 50 per cent a year ago.

Meanwhile, the share of crude oil in the overall imported vegetable oil basket declined from 84 per cent two months ago to 58 per cent.

"Imports of RBD palmolein stood at 3,73,837 tonnes in May, the highest in a single month since edible oil imports were allowed under the open general licence in 1994. In March, RBD palmolein imports stood at 2,53,489 tonnes. The rise was due to a reduction in the duty differential between crude oil and refined palmolein and the inverted duty structure in palm oil-exporting countries. This encouraged higher exports of RBD palmolein to India," said B V Mehta, executive director of SEA.

To restrict imports, the government had imposed a 2.5 per cent import duty on crude edible oil early this year. However, the duty of 7.5 per cent on refined oil (RBD palmolein) was kept unchanged. Consequently, the duty differential between crude oil and refined oil narrowed to five per cent.

To encourage local processing industries, the governments of Malaysia and Indonesia, the world's largest vegetable oil suppliers, have raised the export duty on crude oil to twice that on refined oil. Typically, crude oil attracts lower duty than refined oil, as the former requires further investment to process it into a commodity that can be consumed directly.

To change the inverse duty structure in exporting countries, as well as the domestic industry's sentiment, Indian edible oil manufacturers have urged the government to raise import duty to 20 per cent for crude palm oil and 10 per cent for refined oil.

"The anomaly in the government policy has hit the industry very hard in the past six months. Current fluctuations in the rupee-dollar exchange rate have added to the woes of Indian refiners. We urge the government to restore the duty differential between CPO and RBD immediately. The government should impose an import duty of 10 per cent on CPO and 20 per cent on RBD. This would give sufficient protection to Indian farmers, as well as the desired 10 per cent duty differential for the Indian vegetable oil refining industry," said Shahra.

The industry's demand to restore the duty differential to 7.5 per cent is in line with the recommendations of the Ashok Lahiri committee.

India's vegetable oil refining industry employs about half a million workers.