Three agro-commodities namely—edible oils, sugar and wheat—are engaging immediate attention of the government with respect to custom/import duties. Reasons—their prices abroad are much lower than in India. Domestic production of edible oil by oilseed crushing/refining units and sugar by sugar mills will stand to lose if duty free import is permitted or insufficient duty is applied, while farmers will suffer if duty free import of wheat is authorised. Thus, the government provides stakeholders (including farmers) protection by making imports expensive. Current duty on crude/refined oil varies 7.5% to 20%; sugar is 50%; wheat import at 10%. “Import demand” for edible oil varies between 65%-70% (see accompanying graph) of annual consumption, imported sugar requirement is about 2% of local production this year and wheat import is about 4-6% of domestic output. At the same time, the government is obliged to shield consumers by discouraging inefficient production and processing.
Edible oil industry has represented that import duty may be increased to 20% on crude oil- specially crude palm oil (CPO) from the current 7.5%, and 35% on refined oil from current max 20% to support crush parity so that local prices of oils may rise while oil meal exports become viable. Prices of palm and soy oil are interlinked or to say the spread between the two has a relationship—that is if the CPO values go up domestically or abroad, a definitive upswing takes place in soy oil and others soft oils as well.
Data of the declining trend in the local crude palm oil prices in rupees/10 kg implies that realisation of oil seed farmers could drift down. At present, oilseeds prices fetch 10-15% below Minimum Support Price (MSP) for soybean, rapeseed and ground nut. Last year, market prices were higher by 20-25% than MSP.
Industry also espouses the case of farmers for future growth of oilseed production. However, when there is 65%-70% “import dependency” on edible oil, then a very large section of consumers, including farmers, are exposed to oil inflation with elevated duty. Authorities will have to rationalise whether hike in duty will be justified so far as consumers are concerned. About 2 million tonnes of oil is transiting either at ports/custom bonding or in the pipeline. It will be a bonanza for those who are positioned for these stocks. But that is how the market operates.
Government raised duty on sugar from 40 to 50% on July 9, 2017, to isolate local prices from possibility of cheaper imports. Domestic prices naturally soared. But around the third week of July the government explained to the industry as to why prices of sugar flared up! When the raison d’etre of hiking duty was to keep local prices firmer, then officialdom needs introspection of their own actions. Moreover, August/September period is the tail-end of sugar season and prices shall spike anyway. Data indicates that range of the duty varies from 0% to 50%. In the last six years, duty is modified six times. Incorrigibility/sensitivity of sugar market is such that, in April 2017 “duty free” import of 0.5 mts of sugar was authorised, but in July 2017 duty was enhanced from “40% to 50% to curb imports”.
The accompanying graphic displays flip-flop on wheat duty as well. In a span of less than three years, the duty has been notified seven times. It demonstrates predicament of policymakers in deciding quantum of duty and applicability of its duration. Importers of wheat remain nervous of any abrupt change in duty structure. With rising demand wheat imports are likely to be a long term proposition.
Algo is the remedy
This indicates that duty determination is a very challenging exercise. Market volatility and pressure groups can create arbitrariness in fixing the percentage of import duty and the duration of applicability. At a time when PSD (production, supply and demand) data, duties/tariffs and price movements are known internationally and nationally, the government may create an algorithmic application (algo) that can give transparent guidance—to the government and the industry—to trigger duty changes, up or down—so that objectivity is maintained.
Algo programming is widespread in commodity and other stock exchanges. Algo can perform calculations, data processing and automated reasoning tasks including decidability through computers at electronic speed based on input and output requirements. Why not apply algo for import/export duties also? Any well-known IT company can come up with computational process—if authorities take a call.
International and domestic prices can be tracked through commodity exchanges while each price tick signifies mutations in supply/demand including weather related issues. The government can predefine its target of high and low prices in domestic market or align them with MSP to regulate imports by duty or prohibition of imports by analysing overseas prices with algo. Each commodity will have well-configured algo and that will remain in public domain. Inputs and outputs of such an algo would be available on real time basis to all.
Lobbying by association or groups will then be minimal. Even farmers will have satisfaction of rational decision making process. Though no system may be perfect, algorithmic guidance will have less imperfections. Of course, the government may have the final word on percentage of duty to be levied, the basis of duty determination/ any deviations thereof or discretions applied to the guidance of algo, will be known to one and all.