Why Mahathir panning Indian politics may boost domestic edible oil firms

In October 2019, when Malaysian Prime Minister Mahathir Mohamad criticised the Indian government’s moves to change the status of Jammu & Kashmir in his address to the 74th United Nations General Assembly (UNGA), the domestic edible oils industry took note. The Narendra Modi government was not expected to take Mahathir’s criticism lightly, and the industry lobby issued an informal warning to local importers of refined palm oil to exercise “necessary caution” in negotiating new contracts with Malaysia.
 
In doing so, the industry was recognising geo-economic realities. India is Malaysia’s top buyer of palm oil and that country’s efforts to push exports have been the cause of tension for the Indian edible oil refining industry.
 
India imports 9-9.5 million tonnes of palm oil annually, both crude and refined. Of this, 2.5-3.0 million tonnes comes from Malaysia mainly in refined form, and rest comes in crude form, mostly from Indonesia.
 
In January 2019, India had to lower the import duty on refined palm oil from Malaysia to 45 per cent from the earlier 50 per cent under the Comprehensive Economic Cooperation Agreement (CECA) between India-Malaysia), thus reducing the duty differential between refined and crude imports to India from Malaysia to 5 per cent from the earlier 10 per cent.
 
The impact on import was dramatic: Data shows that between January and September 2019, India imported 2.40 million tonnes of refined palm oil compared with 1.74 million tonnes in the same period last year (an increase of 38 per cent) largely from Malaysia.
 
As a result, domestic refiners found themselves almost out of business. “India was forced to lower its import tax on refined palm oil and the industry there went into an overdrive to push refined palm oil into India creating a big problem for the domestic refiners,” says B V Mehta, executive director of Solvent Extractors Association of India (SEA), the main lobby for domestic oilseed extractors and refiners. From a high of almost 60 per cent, refining capacities in January to September of the 2019-20 edible oil year had slumped 30-40 per cent (the edible oil year runs from November to October).
 
The surge in refined palm oil imports prompted the SEA to appeal to the Centre. In September, a 5 per cent safeguard duty was imposed on refined palm oil imports from Malaysia for six months. This restored the import duty differential between refined and crude palm to 10 per cent, on a par with neighbouring Indonesia.

Mahathir’s UNGA statement initially caused refined palm oil importers to cut back but when no retaliatory tariffs followed, importers re-started orders of refined palm oil consignments from Malaysia and supplies started trickling in. Refined palm oil imports in November 2019 jumped to around 122,409 tonnes, up 3.31 per cent from October.
 
Thereafter in January 2020, India under the terms of the Asean free trade agreement signed in 2010, lowered import duty on refined palm oil from 50 to 45 per cent and that on crude palm oil from 40 to 37.5 per cent for the first time, as part of a periodic revision process, which brought back duty differential between refined and crude palm oil to 7.5 per cent. 
 
Simultaneously, Malaysia and Indonesia together announced export protection measures from January 1, 2020. The combined impact of this along with India’s import duty cuts under the Asean agreement meant that the differential between crude and refined was just 2.5 per cent for Indian importers.
 
Just weeks before that, Mahathir decided to criticise the Indian government again, this time over the controversial Citizenship Amendment Act (CAA), questioning the need for it when Hindus and Muslims have been living peacefully in the country for the past 70 years. This time, the Centre responded promptly, placing the import of refined palm oil under the “restricted” category and announcing plans to issue import licences to keep a tab on supplies.
 
This may not have been an example for skilful economic diplomacy but for the domestic edible oil industry the move could not have been more welcome. “For refiners and farmers this is not blessing in disguise, but a pure blessing,” said Mehta of SEA.
 
Domestic farmers gained because domestic oilseed prices jumped after more than three years. Data from agmarket.nic.in shows that in the Indore mandi average price of soya bean between September 16, 2019 and January 16, 2020 stood at Rs 3,900 per quintal, almost 6 per cent more than the Minimum Support Price (MSP) of Rs 3,710 per quintal for the 2019-20 crop year.
 
Rating agency ICRA in a recent note on the subject said that the restriction on refined palm oil imports will not only improve efficiency but will also improve margins of domestic refiners.
 
Though farmers and refiners are reaping the benefits of the government’s retaliatory moves, the uncertainty of this simmering trade war persists. Latest reports say commerce and industry minister Piyush Goyal will not meet his Malaysian counterpart in Davos next week, citing a tight schedule, though a meeting on the sidelines is possible. Mahathir, meanwhile, is attempting some damage control by admitting his country was too small to retaliate against India. Mehta says the industry wants government to ensure that the licence route is not misused so that refined oil imports start flooding in again. For the time being, though, the domestic industry has the opportunity to make the best of a diplomatic skirmish.