Hike in import duties may help Indian farmers, but no alternative to turning globally competitive

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Published: November 22, 2017 4:47:33 AM

Indian authorities have reacted prudently to this situation, in a bid to outsmart the international sellers pushing their value-added refined oil in India while depriving the Indian oil-seed industry of its due share in the market.

The government also applied quantitative restrictions on imports of some pulses—capping it at 2 lakh tonnes—in order to push up local prices and liquidate about 1.8 mt of pulses held by official agencies. (Reuters)

On November 18, 2017, the Centre notified higher import duties on the entire range of edible and non-edible oils. That increase varies from 50-100% while some items have got duty hike of 75%. Such oils are imported from Indonesia, Malaysia, Argentina, Brazil and Ukraine. No doubt, the intent behind the higher levies is to provide protection to the domestic producers/ farmers and processors. Between the crude and refined categories, a difference/spread of 15% in duties is now assured. That will mean more import of crude oils that will be processed locally. Higher duties will lead to higher local prices, whose burden will be borne by consumers as the government will not subsidise users—a well-thought move. But, importers/traders having about 2 million tons of duty-paid edible oil in the pipeline/stocks will get a one-time benefit. There has been a consistent demand from the seed crushing units and oil-meal exporters, raised through their respective associations, for policy support to make their units viable with respect to imported oils whose demand has surged from 10 million tonnes (mt) in 2012 to 15.5 mt last year. At the same time, Indian farmers are selling their oilseeds 15-20% below the MSP. There is hardly any differential in October 2017 CIF prices of crude ($715/tonne) and refined palm oil($717), predominantly sourced from Indonesia. This is prompting greater import of refined oil, adversely affecting capacity utilisation of the Indian processing units.

Indian authorities have reacted prudently to this situation, in a bid to outsmart the international sellers pushing their value-added refined oil in India while depriving the Indian oil-seed industry of its due share in the market. Logically, this should also bring export parity with oil meal items from Argentina and Brazil. The full extent of demand compression in import of oils by India will be known only by October 2018. But this is expected to be marginal due to the rising consumption of oil in the country. On November 10, 2017, import tariff of 50% was imposed on yellow peas while they didn’t attract any such levy before. Their CIF values recently have been $270-$300/tonne. Yellow peas account for 40-50% of total import requirement of pulses. Yellow pea is largely sourced from Canada, the US, Russia, Ukraine, and France, and has seen substantial substitution of consumer preference over expensive chana (Australia chana is at $750cif/ton). With 50% duty, higher yellow pea rates will also increase prices of Indian chana, currently below MSP, and thus farmers will be induced to sow more chana. Yellow pea and chana prices went up by Rs 5,000/tonne the day the 50% duty on peas was announced.

Higher chana prices will also have similar effect on other pulses. The government also applied quantitative restrictions on imports of some pulses—capping it at 2 lakh tonnes—in order to push up local prices and liquidate about 1.8 mt of pulses held by official agencies. Hope the lesson that procurement of pulses by public sector agencies is no solution to resolving the issue of excess supplies is learnt well. Losses for this disposal, as usual, will have to be borne by the government. Opening up export of pulses under OGL will not mitigate the problem due to the quality of stored pulses having gone bad given their shorter shelf life.

On November 8, 2017, the import duty on wheat was doubled, from 10% to 20%, to restrict cheaper imports from Russia and Ukraine. The MSP of wheat has also been raised by 7%. Thus, the duty effect will be largely offset by higher MSP and, to some extent, the stronger rupee. Should there be weaker crop of wheat next year or abnormal price increases of wheat in the southern part of the country, the duty can always be rolled back—while MSP isn’t altered. Thus, such an emergent eventuality can be corrected. All price hikes are to the account of consumer. In July 2017, the import duty on sugar was hiked to 50% from 40%—from a previous level of 25%. At the same time, the import of 0.5 mt had been authorised under TRQ, duty-free. A consistent pattern emerges from such actions of the government—it signals an immediate review of the import duty policy applied to manage local prices by shifting the onus of the price-rise to the consumers. At the same time, if consumers suffer a disproportionate load of such duty impositions, then policymakers can quickly roll-back or reduce the tariff, as in the case of wheat in the last two years in which the duty levied was corrected eight times. This portends well for short-term aberrations. But in agro-items, where weather is the dominant factor—these anomalies occur with higher frequency. Annual wholesale price inflation for food is 4.8% while it is negative in case of oil-seeds (-2.5%), wheat (-2%), pulses (-31%) and just slightly positive (0.65%) for vegetable oils. There seems hardly any risk of inflationary pressure from these items.

The demerits are that India seems like an inefficient producer of agro-items. Unless significant duty protection is conferred on Indian farmers, they will not be competitive with the rest of the world. There are the usual prescriptions, relating to using high-technology seeds, better farming practices, good storage facilities and practices, incentivising farmers, etc. But no tangible results are forthcoming, except in the case of Basmati rice, cotton and sugarcane. Since we have ignored WTO so far, and are also a large importer, we may muscle through with such exorbitant duties—but in the long run, there is no escape from focussing on developing competitiveness. Apparently, food ministry is doing day-to-day management while agriculture ministry also needs to be proactive.

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