Mint Primer: Rise and fall of edible oil duties: Who benefits?
More than eight months after imposing a 20% basic customs duty on crude soybean, palm and sunflower oil, the government has reduced this duty by 10%. What is the move aimed at and what will be the impact on fast moving consumer goods (FMCG) companies?
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What happened in September last year?
That's when the government increased the basic customs duty on various edible oils (crude and refined) to protect domestic producers from cheap imports and encourage local cultivation of crops. Effective 14 September, the basic customs duty on crude soybean, palm and sunflower oil was raised from 0 to 20%, making the effective duty on crude oils as high as 27.5%. Similarly, the basic custom duty on refined palm, sunflower and soybean oil was raised to 32.5% from 12.5%, with an effective duty rate of 35.75%. This added to the overall household inflation as manufactures passed on higher prices to consumers.
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Why were the duties hiked?
India relies heavily on edible oil imports, which meets 57% of its demand. The Centre attributed its decision to increased global production of oilseeds and resultant falling international prices. This glut resulted in cheap imports flooding India, pushing down prices for domestic farmers. Raising the cost of imported edible oils, the thinking ran, would lead to increased procurement, thus supporting more production and ensuring fair compensation for farmers. Additionally, a National Mission on Edible Oils–Oil Palm was launched in October to further support domestic oilseed production.
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What happened as a result of the government move?
Following the hike, packaged oil firms like Marico and AWL Agri Business Ltd passed on prices to consumers, raising household spending on essentials. Packaged food makers also faced edible oil inflation. For instance, palm oil prices surged 43% in the December quarter, leading biscuit-maker Britannia Industries to implement price hikes totalling ₹100 crore in that quarter.
How did the Centre respond?
Effective 31 May, the basic customs duty on the three crude oils was cut from 20% to 10% in a bid to stabilize edible oil prices and boost demand. The effective import duty on these three products, which includes basic customs duty and additional fees, now stands at 16.5%, down from the previous 27.5%. Meanwhile, the basic customs duty on refined oils remains unchanged at 32.5%, a decision industry bodies such as the Solvent Extractors' Association of India believe will create a level playing field for domestic refiners.
What does the cut mean for FMCG firms?
It is expected to lower edible oil prices for consumers in the next 25-30 days as companies pass on the benefits. It should also ease the pressure of commodity costs for packaged food companies. Key beneficiaries include Bikaji Foods, Britannia Industries, Nestle India and ITC's food business, according to Nuvama Institutional Equities. Analysts also expect improved margins for FMCG firms over the next two quarters. Other companies could also benefit if palm oil derivatives, used in soaps and detergents, become cheaper.
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