Trade Liberalisation's Impact on Edible Oil Sector in India

Paper submitted in the 

Public meeting by KRRS, Chamrajanagar, Karnataka, 6^th July 2011
by 

Afsar Jafri[1]

Focus on the Global South, India

New Delhi

The oil seeds sector in India has seen the most adverse impact of last 20 years of trade liberalization in the country. The oil seeds sector in India has undergone perceptible changes in the new environment of liberalized trade. This period has witnessed the great transformation of the edible oil industry, from self sufficiency to import dependency; from small entrepreneur based economy to a monopolistic control of multinationals; and from ‘loose sold oil’ to ‘branded/packaged oil’. This period also witnessed changing consumption pattern, as consumers began to accept edible oils (like palm oil) other than those consumed traditionally. The edible oil sector today presents a typical example where the multinational monopolies over all types of edible oil are fast going into the control of few big corporations of the west like Cargill, ConAgra and Bunge. This vindicated our apprehensions that the trade liberalization regime as advocated by free trade paradigm under World Trade Organisation (WTO) and Free Trade Agreements (FTAs) generally protects and advances the interests of large multinational corporations.

India is one of the four major players in the edible oil sector in the world next to USA, China and Brazil, as oilseed grower, oil producer, importer and exporter, accounting for about 14.5% of the world’s oilseeds area and 6.65% of the production. Currently, India accounts for 6.8% of the oil meal production, 5.9% of the oil meal export, 6.1% of the vegetable oil export, 9.00% of the edible vegetable oil import and 9.3 per cent of the edible oil consumption of the world.

India is the home of oilseeds diversity, growing different varieties of Castor, Coconut, Groundnut, Linseed, Niger, Rapeseeds and Mustard, Safflower, Sunflower and Sesame. These nine oilseeds are being cultivated mostly under rain fed conditions and support the livelihood earnings of small and marginal farmers of the arid and semi-arid ecosystems of the country. These oilseed crops form the second largest agricultural commodity after cereals occupying 14.87% of the gross cropped area, which is around 27.86 million ha and provides 27.98 million tonnes of production registering productivity level of 1004 kg/ha. It is estimated that 14 million farmers are involved in oilseed cultivation, while one million persons are involved in processing of oilseeds and oils.

The edible oil sector has faced several challenges due to trade liberalization with the formation of WTO in 1995. Now this sector is again at the verge of another onslaught due to proliferation of the free trade agreements (FTAs) which India has signed with economic powerful nations/group of nations like the Association of Southeast Asian Nations (ASEAN), South Korea and Japan. Besides that more than 12 FTAs are under negotiation including with European Union (comprising of 27 European countries), Australia, New Zealand and Israel. The Indian edible oil sector is going to be largely affected by India’s FTA with the ten nations ASEAN bloc, which was signed in August 2009, and came into force on 1st January 2010. Any further liberalisation in trading of cash crops under ASEAN-India FTA will expose small and marginal farmers in the plantation sector mainly in four Southern Indian states to the competition which will lead massive job loss in these states.

Trade Liberalization: A recipe for import dependence

India has a bitter experience of trade liberalization in edible oil which has resulted in an increasing gap between demand and production of edible oil in India. In 1980’s when the demand and production gap widened and in 1988 India faced a shortfall of 2 million tonnes (MT), necessitating an import of 1.9 million tonnes, of worth USD $1billion. Due to the increasing burden on the country’s depleting foreign exchange reserves for edible oil imports, the government of India undertook combination of steps to augment production including setting up of Technology Mission on Oilseeds (TMO) in 1986 to make oilseeds more attractive to growers. This led to an enhanced oilseeds production and thus, self sufficiency in edible oils. The production of oilseeds increased by over 70% in six years and the country became almost self-sufficient in edible oil (up to 98%) and the imports of edible oil was reduced to 0.1 million tonnes (MT) in1992-93 from 1.5 MT in 1986-87. However this self sufficiency in edible oil production was short lived. Under the pressure from the World Bank Structural Adjustment Programme (SAP) India started the process of phased liberalisation of edible oil imports from 1994-95. And this was at a time when edible oil exporting countries like Malaysia, Indonesia, Argentina and Brazil were preparing to flood the Indian market with Palmolein and genetically engineered soybean oil. The series of measures for trade liberalization in edible oil completely reversed the situation within a decade and from self sufficient position, India became a net edible oil importing country. These trade measures were:

• Elimination of state monopoly on edible oil imports in 1994 by placing palmolein oil imports under the Open General License (OGL), subject to 65% of basic customs duty (or import duty). Subsequently, imports of other edible oils were also placed under OGL.

• Rapid lowering of import duties, from 65% in 1994 to 20% in 1996 and 15% in 1998 even though the Bound Duty under WTO for all types of crude and refined edible oil is 300% except soybean oil which is fixed as 45%.

·         Removal of Quantitative Restriction (QR) and replacing them with import duties, purportedly under WTO obligations for market access but actually through un democratic and non-transparent bilateral negotiation between Susan Esserman of the Commerce Department, United States of America and N.N. Khanna of the Ministry of Commerce, Govt. of India where it was agreed to eliminate 1429 items from quantitative restrictions between 1st April 2000 to 1st April 2001.

The negative consequences of liberalising the edible oil policy soon became clearly visible. These measures combined with a sharp fall in international edible oil prices in 1999 led to the dumping of cheap edible oil, mainly soybean and palmolein oil, in India initially in far greater quantity than the requirement and as a result the imports of edible oil rose from 0.1 million tonnes in 1992-93 to 4.3 million tonnes in 2002-03. Thus the self sufficiency level of edible oil also got reduced in ten years, from 98% in 1994-95 to about 53% in 2002-03. On the other hand the share of bills for the import of edible oil in the total agricultural imports has ranged from 6% to 52% during 1991-92 to 2002-03. India has been exporting the oil meals, however, their export also got declined from as high as 4.84 MT in 1993-94 to 1.61 MT in 2002-03. The flood of cheap imported oil had disastrous effect on India's edible oil farmers due to drastic slump in oilseeds prices. In 1999, newspapers reported massive distress sales of oilseeds by farmers at prices much below the Minimum Support Price, with the government refraining from market intervention operations. Not getting a remunerative price, farmers responded in the only way they could - by reducing the acreage under oilseeds. After seeing a continuous increase in acreage up from 18 million hectares in 1986 to 27 million hectares in 1994, the area under oilseeds production has remained around 26-27 million hectares, falling at times of depressed international prices. Moreover, the edible oil policy of the post-WTO period introduced a large element of instability into domestic production by completely exposing it to international price fluctuations.

Impact on the Coconut Economy

With the inclusion of coconut oil in the Open General License (OGL) list and the reduction of import tariffs on edible oil in the 90’s, the prices of coconut had fallen sharply. The average price of coconut oil came down from Rs. 5553 a quintal in 1996-97 to Rs.2500 a quintal in September 2000. Between 2000 and 2005, the prices for coconut oil crossed Rs. 6000 but again it dropped from Rs 6758 per quintal in 2004-05 to Rs 5078 quintal in 2005-06 and by March 2007, it reduced to Rs 4800 a quintal. Even the tender coconut prices crashed from Rs. 10 a  piece to in mid 90’s to Rs 2-3 a piece in the year 2000 which was a big worry for the coconut farmers whose daily income in cash got drastically reduced. The price of the Coconut has been going down year by year, e.g. in 1988-89 the prices were Rs 450 per hundred units (Rs. 4.5 for each coconut piece), in 1997-98 it went up a little but to Rs 650, but in 2007-2008 it came down to Rs 450 and in 2009-2010 it was as low as Rs 275 per hundred units. The coconut prices are diminishing when the inflation is going up. The actual rate for the Coconut should have been at least more than Rs 15/- per unit now.

However one of the main reasons for decline in the coconut prices since 90’s were the constant lowering of import duty (tariff) on crude and refined palmolein oil; from 1994 till 2005 there were eleven changes in the tariff rate for palmolein oil which naturally affected the price stability of the Coconut and its products. And the major jolt came in April 2008 when the import duty on all crude edible oils duty was reduced to zero, and on refined edible oils duty was reduced to 7.5% on the pretext of tackling the rising inflation and to meet growing demand of edible oils. Zero import duty on crude edible oil and very nominal duty on refined Palmolein have favoured the import over domestic oils at the expenses of Indian oilseeds farmers. And the result was a big jump in the imports of edible oil from 5.61 million tonnes in 2007-08 to 8.82 million tonnes in 2009-10.

Another important reason for stagnation in the coconut economy and prices was the negative publicity against coconut oil in the late 90’s by projecting it as a health hazard and creating misconception that it contains unhealthy saturated fats and therefore creates clogged arteries and heart problems which were proved wrong. The truth is saturated fat in coconut is different from those found in animals and contains no cholesterol. But the negative propaganda affected coconut sale to the extent that the government of Kerala had to launch a people's campaign to run down ‘canards'’ spread by vested interests. It is believed that the business lobby for soya and soya oil manufacturers in the US was responsible for creating a health scare over coconut oil consumption. A similar conspiracy was also hatched against mustard-rapeseed oil in north India, by the same vested interest, which led to series of death due to ‘dropsy’ epidemic, caused by adulteration of mustard oil, which broke out in 1999 and claimed more than twenty-three lives in Delhi alone. This created an scare against mustard oil and led to a countrywide ban forcibly shutting down the mustard oil trade. Those who hatched this conspiracy against mustard were successful to some extent in making people change their dietary habit by shifting to soybean oil whose imports increased by almost threefold from 1998 to 2001, from 439,625 to 1,357,920 in just two years. It is believed that the same lobby also influenced the government of India to fix the Bound tariff rate for soybean at 45% while the bound tariff rate for all other edible oil is fixed at 300%.

Coconut Economy and ASEAN India FTA

Though last 20 years of trade liberalization has caused drastic impact on coconut economy but 2011 augurs well with the sharp increase in prices of coconut, each costing between Rs 18 and Rs 30 in the retail market in South India. In early 2011, coconut price even touched Rs 35 in Chamarajnagar in Karnataka due to reduced supply to the local market. On some days against a demand of 1 to 1.5 lakh coconuts, the supply was not even 10,000 pieces in Chamarajnagar. After a long time, almost after two decades, coconut wholesale price was hovering between Rs 8,000 and Rs 12000 per thousand and coconut oil prices have crossed Rs. 10,000 a quintal. The exports of Indian coconut to Middle East have also increased due to ban on exports from Sri Lanka in order to control local prices and fulfill domestic requirement of coconut and coconut oil.

However the increased price level for coconut could prove to be short lived given the drastic tariff reduction commitment under the ASEAN-India FTA (AIFTA) which is currently in its second year of implementation and by December 2013, tariff on 70% of the product will be come down to zero. As tariffs gradually fall in coming years, the FTA is expected to negatively impact crops such as pepper, cardamom, cashew and coconut. Since the southern Indian states and the ASEAN countries produce several similar agricultural products, competition from the latter is a big cause of worry for small and marginal farmers in the south Indian states.

The Free Trade Agreements (FTAs) are generally bilateral agreements signed between two countries or between an individual country and a trading bloc like the ASEAN or European Union (EU). Depending on the bargaining power of the countries involved, FTAs go much further in liberalizing trade, services and investment than multilateral agreements like the WTO. In fact FTAs are another way to ensure that governments implement the liberalisation, privatization and deregulation measures of the corporate globalisation agenda. India has signed full-fledged FTAs (which include investment and services along with goods) with Singapore (June 2005) and South Korea (August 2009) and limited FTAs (limited to goods and which are to be expanded to services and investments) with Sri Lanka (2000), Thailand (2003) and ASEAN (August 2009), Japan (February 2011). Currently, there are several FTAs which are at different stages of negotiations, including with European Free Trade Association (EFTA), the European Union (EU), Australia, New Zealand, Israel, the Gulf Cooperation Council (GCC), Chile, China, Colombia, Egypt, Hong Kong, Russia, Southern African Customs Union (SACU), Uruguay and Venezuela. Moreover, Indian business community is also lobbying for an India-US FTA. All these FTAs are being negotiated undemocratically and in complete secrecy. The public and their parliamentary representatives and even the state governments are denied the right to see any text of these secret trade deals. The FTA agenda does not have a popular democratic mandate and is being pushed by the Prime Ministers Office, a section of the bureaucracy and industry lobbies such the Confederation of Indian Industry (CII) and Federation of Indian Chambers of Commerce and Industry (FICCI). Unfortunately, none of these bilateral trade agreements faced any kind of stiff opposition from any state government, political parties or mass movements except the AIFTA which has come in for both political opposition (from the Left Democratic Front Government of Kerala) and resistance from farmers and fishworkers groups of Southern India states, mainly Kerala. This is not surprising since Kerala found itself at the receiving end of India’s first FTA which was signed with its neighbour Sri Lanka in 2000. The implementation of this trade agreement resulted in an import surge and a resultant sharp drop in domestic prices for pepper and coconut and the initial years of the FTA saw hundreds of farmers in the pepper belt of Wayanad district in Kerala committing suicide.

The AIFTA is going to greatly affect the coconut farmers in India because it will allow the import of coconut oil from the Philippines - a major producer which enjoys significantly lower costs of production. Even though coconut has been put under the Exclusion List, yet it will not be of much help because palm oil from Indonesia and Malaysia will take over the market with the drastic reduction in tariff. However having a product on the Exclusion List does not mean that it will be protected. Local producers could face increased competition from cheaper imports that substitute for locally grown agricultural products and other products included in the Exclusion List. Several agricultural crops could also face increased demand and price uncertainties because many semi-processed or processed versions of these crops are not on the Exclusion List.

The AIFTA will be equally disastrous for the thousands of workers in the coir sector in different coconut producing states. Not only coconut, but this FTA would be a death knell for the plantation sector in India because as per the present pattern of exports, ASEAN accounts for 31.56% of copra, 82.41% of coconut oil, 64% of desiccated coconut and 92% of natural rubber. In 2008, India imported 67% of its total global imports of animal and vegetable oils and fats from Indonesia, followed by about 15% from Malaysia. As for coffee, tea and spices, Indonesia provided nearly 21% and Vietnam 13% of India’s total imports in these two segments in 2008. There is a vast trade deficit between India and ASEAN, while India's exports to the ASEAN countries grew by about 21 per cent, its imports from those countries went up by a whopping 66 per cent between 2005-06 and 2006-07. Thus, under the AIFTA, Indian farmers are likely to encounter significantly increased volumes of imports in the domestic market.

Under the AIFTA, India is committed to reduce or eliminate tariffs on more than 89% of all its agricultural, marine and manufactured goods. Nearly 70% of India’s tariff lines fall under Normal Track-1, for which tariffs decline to zero by 2013. Nearly 9% of India’s tariff lines fall under Normal Track-2, for which tariffs drop to zero by 2016. The 496 products excluded from tariff reduction commitments and included in the Exclusion List constitute 9.8% of India’s total tariff lines, while 11.1% of its total tariff lines come under the Sensitive Track. Special Products constitute just 0.1% of its total tariff lines. Evidently, the vast majority of products come under the lists for tariff rate eliminations by 2013 or 2016.

Conclusion

Given the imminent threat of imports from ASEAN countries under zero duty, the coconut sector need to prepare itself to face the challenge. More so since livelihood of millions of small and marginal farmers in the southern states of India are dependent on the coconut economy. With the increasing requirement for edible oil to the burgeoning population in India, there is also a vast growth opportunity for the coconut sector to take the challenge and fill the gap through enhancing the production, productivity and reducing cost of production.

Coconut oil for edible purposes is now being claimed to be the second best edible oil in the world, after Olive oil. The demand for coconut products will steadily grow at an increasing pace as education, awareness and prosperity reaches more and more people. There is an increasing market for exports of virgin coconut oil in West Asia, Europe and USA as valued health supplement with its medicinal qualities to reduce risk of atherosclerosis and heart disease, reduce risk of cancer and other degenerative conditions, help to heal wounds and reduce acne, aid in the control of diabetes and others, it is time the government must provide proper support for making coconut farming a profitable venture as is being achieved by other coconut growing countries through processing and export of diverse coconut products.

In order to protect the coconut sector, the government of India must adopt a trade policy to curb the import of palm and soya oil and provide necessary support to modernize the production technology to world standards in order help it survive under the onslaught of the FTAs. In view of the increasing inflation and the increasing demand for edible oil for domestic consumption, the government must also provide a remunerative minimum support price for coconut which cover the cost of production and also provide some profit to coconut farmers.

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[1] Afsar Jafri is a Research Associate with Focus on the Global South-India, a policy research organization. He can be reached at a.jafri@focusweb.org or +91-9582070803.