India’s imports of palm oil — dynamics of the trade with Malaysia

India-Malaysia Relations Worsens

Approx Read Time: 5 minutes

In News:

  • India has cut import duty on crude and refined palm oil, while moving refined palm oil from the “free” to the “restricted” list of imports.

News Summary: (India-Malaysia Relations Worsens)

  • Palm oil is Malaysia’s biggest agricultural export, while India is its top buyer.
  • However, after Malaysian PM Mahatir’s comments, India has been looking to take direct and indirect measures to curb imports from Malaysia.
  • Now, the import duty on crude oil has been cut while refined palm oil has been moved from the “free” to the “restricted” list of imports.
  • This may be seen in light of the fact that Malaysia prefers refined, bleached, deodorized (RBD) palm oil exports.
  • A special license is required to import a “restricted” good.
  • It has also been reported that vessels carrying RBD palm oil are stuck at several ports because buyers have been asked to shun the product.

Impact of the decision: (India-Malaysia Relations Worsens)

  • The decision to restrict imports of refined oil will benefit refiners.
  • However, the decision to restrict refined palm oil imports is not expected to impact food inflation immediately.

Impact on farmers:

  • Restricting refined oil imports will not help farmers directly, as they are not involved in the process of refining.
  • However, the restrictions have caused refined palm oil prices to increase and if prices continue to hold, farmers will get a better realization for their crop.
  • But the timeframe over which the changes in import policy will have an effect on domestic crop realization is fairly long, given that palm trees take over four years to provide a yield.
  • Also, if the demand is met entirely by importing and refining CPO(Crude Palm Oil), farmers will be left out of the picture.

Impact on Malaysia:

  • With exports to its largest market restricted, Malaysian palm oil futures fell by almost 10% between January 10 and January 17, although it has recovered since then.
  • If India does not issue licenses for importing refined oil, Malaysia will have to find new buyers but replacing a massive buyer like India won’t be easy.

Background:

  • While curbing oil imports has been under discussion since the Budget presented in July 2019, the move has been construed as retaliation against Malaysia’s Prime Minister Mahathir bin Mohamad, who has been proactive in his criticism of India’s internal policy decisions in the recent times.
  • He criticized the recent Citizenship (Amendment) Act enacted in India as well as the abrogation of Art 370 vis-a-vis Kashmir.
  • Malaysia has also been sheltering since 2017 the radical Islamic preacher Zakir Naik, who is wanted by India on charges of money laundering, hate speech, and links to terror.

Basics about Indian palm oil imports:

  • India imports both crude palm oil (CPO) and refined palm oil referred to as refined, bleached and deodorized (RBD) palm oil.
  • The CPO that India imports contains fatty acids, gums and wax-like substances.
  • Refining neutralizes the acids and filters out the other substances. The filtrate is bleached so that the oil does not change colour after repeated use.
  • Substances that may cause the oil to smell are removed physically or chemically.
  • India has good refining capacity to refine the crude palm oil imports.
  • Indonesia and Malaysia together produce 85% of the world’s palm oil.
  • India is the world’s leading vegetable oil buyer. India buys palm oil mostly from Malaysia and Indonesia.
  • Malaysia prefers to export refined oil RBD while Indonesia can supply CPO.

India’s imports:

  • Commerce Ministry data shows that India imported $10 billion worth of vegetable oil in 2019-20, making it the country’s fifth most valuable import after mineral oil ($141 bn), gold ($32 bn), coal ($26 bn), and telecom instruments such as cell phones ($17 bn).
  • The share of palm oil is more than 60% of the country’s total vegetable oil imports.

Reason for high imports of palm oil:

  • It is the cheapest edible oil available naturally and its inert taste makes it suitable for use in foods ranging from baked goods to fried snacks.
  • It stays relatively stable at high temperatures, and is therefore suitable for reuse and deep frying.
  • It is also the main ingredient in vanaspati– hydrogenated vegetable oil.
India-Malaysia Relations Worsens
India-Malaysia Relations Worsens

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