Exclusive | Government may cut effective import duties on crude edible oils further

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Effective import duties on crude edible oil imports may be reduced further with cuts in two cesses that are levied on incoming shipments, people aware of the matter said.

Separately, the government is considering whether the existing duty cuts on edible oil imports need to be extended on a rolling basis beyond September, the people said.

The effective duty on crude edible oil imports stands at 5.5 percent, down from 8.25 percent earlier. The current taxation does not include basic customs duty, which is zero for all crude variants of edible oil. Instead, it is made up of two cesses - the Agricultural Infrastructure Development Cess (AIDC) and social welfare cess.

From February 13 onwards, a reduction in the AIDC to 5 percent from 7.5 percent earlier, had lowered the effective duty on crude edible oil imports to 5.5 percent from 8.25 percent.

Officials at the Central Bureau of Indirect Taxes and Customs said it may be cut further. They added that the global turmoil in edible oil production and supply, and the subsequent price rise have led to the government now preparing to support the duty cuts in place since October 2021 beyond the initial deadline of September 2022.

Moneycontrol had been the first to report in September 2021 that the government was planning a series of further duty cuts on edible oil imports before the festive season, as retail prices continue to remain high.

Edible oil duties had been first cut in June 2021. Subsequently, basic customs duties were cut in August and September in the space of less than a month. Back, then the cut-off date for ending duty cuts had been September 30. However, retail prices remained high so the cuts stayed in place.

In October 2021, all import duties on crude varieties of palm oil, soyabean oil, and sunflower oil were scrapped until March 31, 2022. In a significant move, this had slashed the effective import duty on crude palm oil from 24.75 percent earlier to nil. Up to 80 percent of India's palm oil imports ($9.3 billion in FY22) are in the form of crude.

The government remains worried over consistently cutting duties as that may lead to further imports, ultimately hitting the domestic refining industry and domestic oil producers.

“Reversing an existing policy so drastically is expected to hit the domestic sector to some degree in the mid-and long-term as well. But we don't have a choice right now,” one of the officials cited above said.

Global scenario

Global prices of edible oils have been rising for nearly a year now due to multiple factors. A combination of bad weather, labour shortages and freight logistics issues caused by COVID-19 plagued large exporting nations such as Malaysia and Indonesia (palm oil), Argentina (soyabean oil), and Ukraine and Russia (sunflower oil).

Since late February 2022, the biggest reason for the price increases has been the Russian invasion of Ukraine, which reduced the flow of sunflower oil to a trickle from Ukraine.

Ukraine is the largest source of sunflower oil for India, accounting for 72 percent of total sunflower oil imports by value. Some 20 percent comes from Russia and 10 percent from Argentina.

With few alternative sources and rising demand, domestic consumers are expected to switch to other, cheaper edible oils, the prices of which remain volatile.

"India imports 2-2.25 lakh tonnes of sunflower oil from Ukraine on an annual basis. As the supply decreases, the demand for sunflower oil will shift to other oils, especially soya oil and palm oil," said Atul Chaturvedi, president of the Solvent Extractors’ Association (SEA) of India. The prices of these are expected to increase as a result, he said.

SEA data shows that in March, 539,793 tonnes of palm oil landed in India, up from 454,794 tonnes in February, as the war in Ukraine raged on. India also imported 212,484 tonnes of sunflower oil in March, up from 152,220 tonnes in February, but this was due to the arrival of a few ships that had left Ukraine before the war, according to the SEA.

With no shipments in April, sunflower oil imports are expected to fall sharply, SEA maintains.

Palm oil demand

Meanwhile, India's plans to source more palm oil from Malaysia and Indonesia have been snagged by a jump in global demand in the aftermath of the pandemic, whereby exports from these nations have been put under pressure amid rising prices.

The ensuing shortage of palm oil in their domestic markets also precipitated protests in some cases. The two Southeast Asian nations account for roughly 85 percent of the world's palm oil production.
Indonesia had already been struggling to control the domestic market prices for cooking oil, made mostly from refined crude palm oil, after global prices surged 40 percent at the beginning of 2022 due to the commodity supercycle.

With huge incentives to export, hoarding began. As a result, the country imposed volume-based export restrictions which forced exporters to sell 20 percent of their planned shipments in the domestic market. The country also increased levies on the export of palm oil and curbed surges in domestic prices.

The Indonesian government has since 2020 made 30 percent blending of diesel with palm oil mandatory as part of a plan to slash fossil fuel imports. Meanwhile, news reports from Malaysia warn that many producers and planters recorded a double-digit production decline in the first 10 days of April because of bad weather.

Oil intake rising

India is the world's biggest importer of edible oils. Palm oils make up two-thirds of edible oil imports, followed by soya oil (20 percent) and sunflower oil (16 percent), according to the International Sunflower Oil Association.

Earlier this year, Economic Survey 2021-22 had predicted that India’s cooking oil imports will continue to grow at a rate of 3.4 percent per annum till 2030 due to growing urbanization and changing dietary habits with a shift toward highly processed foods with a high content of vegetable oils.

Overall, the import of various kinds of edible oils, along with by-products, rose from $9.87 billion in FY20 to $11.3 billion in FY21 despite the ongoing pandemic. It has since then shot up to $ 17.83 billion in the first 11-months of FY22, a 58 percent rise. Experts say this was caused by a rise in prices and not a boost in import volumes.

According to the Department for Food and Public Distribution, about 56 percent of domestic demand for edible oils was met through imports, as of 2019-20.

That year, the total production of domestic edible oils was 10.6 million tonnes, while total edible oil imports stood at 13.4 million tonnes. The government estimates that up to 66 percent of India's edible oil needs are currently imported.​