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Import duty on palm oil cut

Topics Covered: India and it’s neighbours.

Import duty on palm oil cut

What to study?

For Prelims: What is import duty? India’s palm oil consumption, why refining is necessary?

For Mains: Implications of this move on Malayasia and India.

Context: India has cut import duty on crude palm oil (CPO) and refined, bleached and deodorised (RBD) palm oil, and also moved RBD oil from the “free” to the “restricted” list of imports.

What’s the issue now?

The move has been construed as retaliation against Malaysia’s Prime Minister Mahathir bin Mohamad, who has criticised India’s internal policy decisions such as the revocation of the special status for Jammu and Kashmir and the new citizenship Act.

Malaysia has also been sheltering since 2017 the Islamic preacher Zakir Naik, who is wanted by India on charges of money laundering, hate speech, and links to terror.

Why and How this decision would affect Malaysia?

Indonesia and Malaysia together produce 85% of the world’s palm oil, and India is among the biggest buyers.

Both Indonesia and Malaysia produce refined palm oil; however, Malaysia’s refining capacity equals its production capacity — this is why Malaysia is keen on exporting refined oil.

Indonesia, on the other hand, can supply CPO, which would allow India to utilise its full refining capacity.

How and why crude oil is refined?

Crude oil contains fatty acids, gums and wax-like substances. Refining neutralises 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.

This entire process increases the value of a barrel of crude oil by about 4%.

Additionally, there are costs to transporting the crude, which makes it more cost-effective to import the refined oil.

Why domestic players demand for crude oil imports?

The refining industry has been demanding that the import duty on refined oil be increased, which would make importing crude oil cheaper than importing refined oil. This will mainly benefit domestic refiners, which include big-ticket names like the Adani Wilmar group.

Why does India need so much palm oil?

It is the cheapest edible oil available naturally.

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 the main ingredient in vanaspati (hydrogenated vegetable oil).

 Implications of this move:

On Indian consumers: Palm oil is not used in Indian homes and the fact that CPO continues to be imported, makes it unlikely that the decision to restrict refined palm oil imports will impact food inflation immediately.

On Malayasia: With imports to its largest market restricted (India bought over 23% of all CPO produced by Malaysia in 2019), 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 for its product.

Sources: Indian Express.