Will import duty cut on edible oils offer the much-needed relief to consumers?

The government has yet again slashed import duty on edible oils. Earlier this week, a notification from the Central Board of Indirect Taxes and Customs informed that the base import duty on crude palm oil has been reduced to 2.5 percent from 10 percent.

Additionally, import duty on crude soya oil and crude sunflower oil has also been revised to 2.5 percent from 7.5 percent.

This will lead to an effective duty rate of 24.75 percent on crude palm oil, soybean oil and sunflower oil each. Similarly, the effective duty rate for refined oils (RBD Palmolein, sunflower and soybean) has been reduced to 35.75 percent each.

This is the second reduction in a month by the government to cool off edible oil prices, which have been rising globally.

Soaring prices hit consumer basket

Almost all of India’s palm oil requirements are met from Indonesia and Malaysia. As per ICRA, palm oil accounts for about 40 percent of India’s total oil consumption and 60 percent of imports.

Sample this: The global price of palm oil averaged $601 per tonne in 2019 and increased to $752 per tonne in 2020, according to CARE Ratings. It had increased successively in each of the quarters. In the first quarter of 2021, it reached $1,014 per tonne, said the ratings agency.

The World Bank has forecast the price to average $974 per tonne in 2021. In India, the price of the commodity has risen by 30 percent in the last one year.

Palm oil is a key raw material for the FMCG and HoReCa (hotels, restaurants and caterers) industries in the country, which consume more than half of the palm oil imports in the country, according to estimates.

In soaps, for instance, the commodity accounts for 50-60 percent of raw material costs. Hence, to offset the pressure on their margins due to the increasing cost, FMCG companies across the board have hiked prices.

Data from retail tech company Snapbizz shows that the price of Fortune’s 5-litre sunflower oil has risen from Rs 671 in March 2020 to Rs 1,067 in April 2021. A 100-gm pack of Lux soap, which used to cost Rs 22 in April last year, was priced at Rs 28 in May, showed data from Snapbizz.

Relief in sight?

Experts are divided whether the move to slash import duty on edible oils would impact FMCG companies and consumers. According to Natasha Trikha, Analyst, Care Ratings, the reduction in import duty is expected to help reduce input costs for FMCG companies in the medium term.

However, others differ.

“There have been frequent duty reductions in edible oil in calendar year 2021 following a steep price rise. However, prices have been on an uptrend for all edible oils. The reduction in duty generally follows increased prices. Hence, it helps maintain prices to a certain extent and does not result in a significant price reduction,” said Ravish Mehta, Senior Analyst, ICRA Ltd.

Mehta pegs that edible oil prices may decline only marginally by Rs 3-4 per litre, which would not provide significant benefit to the consumers’ pocket.

Similarly, Abneesh Roy, Executive Director, Edelweiss Securities, projects that the government’s move may benefit food companies. However, given that palm oil is an international commodity, its pricing is dependent on several factors. “Soap companies use PFAD, which is a derivative. So they will see relief from this development.”

Companies operating in the edible oil space, such as Marico, Adani Wilmar and Ruchi Soya, would also not benefit much as the profitability of domestic edible oil refining entities are dependent on the effective duty differential between crude palm oil (CPO) and refined palm oil (RPO), which remains around 5-6 percent.

“The government has reduced duty for both CPO and RPO, keeping the duty differential unchanged. Hence, the domestic edible oil refining companies would have limited impact from the duty slash in terms of profitability,” said Mehta of ICRA.