By B V Mehta Let me begin with reviewing some latest development on food inflation. Experience of last one year, should help us to explore what’s in store over the next five years. All of us are well aware of how unabated food inflation is causing turbulence in the global market. From Australia to Zimbabwe, from Argentina to India, from Brazil to China – indeed, across continents and the whole world – inflation is on top of concerns for the market men and the policymakers alike.
Countries that have been traditional exporters of food are clamping down on export business. Food importing countries are pulling out all the stops to encourage inflows. Import-dependent poor countries are the worst hit by the growing crisis on the global food front and heavy drain on their exchange reserve due to crude oil prices hovering at $ 130-135 a barrel with no sign of relief. It is not as if the world has suddenly started to produce less food for all. It is simply that there now are new industrial uses for traditional food crops.
Also, agricultural commodities have now become of an asset class and attract investor interest. Supplies, on the other hand, have not caught up with robust rise in demand. Rising energy prices too have contributed to food inflation by raising production and transportation costs. Concerns over climate change and global warming are aggravating the anxiety over food supplies in future.
Don’t ask whether these developments are desirable. The debate will lead us no where. No single person or corporate or Government has any significant control over any of these developments. We have to be practical and have to respond to the situation. The complexity of the present situation is unprecedented.
You will all agree that extraordinary situations demand extraordinary responses. The Government of India has responded to the extenuating situation. To counter inflation, rising food prices, political pressure and creeping social unrest, it has done what was unthinkable until even a few months ago.
Crude vegetable oil imports have been allowed at zero duty. Tell me, who in this meeting could have imagined that India that used to levy import tariff of as high as 80 percent on crude palm oil a year ago, would allow CPO to come in duty-free? Or refined palmolein at a mere 7.5 percent duty? Yet, India has done it; and for good reasons.
The Government has to protect the interests of millions of poor consumers and to shield them from the harsh realities of the market. Also, in over enthusiasm some irrational decisions like banning future trading and export of edible oils were taken to show that Government is very keen to check the rising prices.
International prices of vegetable oils have gone up by over 100% in last one year; however, in India domestic prices have remained under check and increased only 30-40%, thanks to duty reduction from time to time, freezing of tariff and rupee appreciation.
The Indian government continues to ride on the horns of a dilemma – Growth versus Inflation. For the time being, the Government has voted in favour of inflation control.
My own sense is that inflation control will continue to be the focus of Indian government attention for some more time. Yet, no one need be under the impression that India will continue forever to be such an easily accessible market with low or no duty. There is reason to believe, the edible oil import tariff structure may be reviewed sometime in September-October when the next oilseeds crop is ready for harvest.
Indian Macro-economic Overview: India's macro-economic fundamentals are strong. Currently, India is one of world's fastest growing significant economies. The current value of GDP is US$ One Trillion. In Purchasing Power Parity (PPP) terms, it is over $ 4 Trillion. For the last four years, India's GDP growth registered an annual average of close to 9.0 percent. For fiscal 2007-08 (April- March), the estimated growth rate is 8.8 percent.
Manufacturing sector and Services sector both continue to record nearly double-digit growth. Foreign trade has been expanding at 15 - 20 percent a year in dollar terms. Currently, foreign exchange reserves are over US$ 315 billion and growing rapidly. Indian rupee has become stronger and appreciated by over 15% in last one year. Stock market is booming and Sensex jumped from 9K to 18K in one year.
FDI flows (both inward and outward) have risen remarkably, albeit from a low base. Importantly, India is the world's third largest producer of food. There is optimism that economic growth can be sustained at close to 10 percent a year over next five years.
Indian Agricultural economy accounts for 20% National GDP. Farm growth has witnessed fluctuations depending on monsoon performance. Indian Government has aimed at 4% growth in agriculture sector in order to achieve 9-10% overall GDP growth in next 5 years.
Industry sector has grown over 9.5% per annum in last three years and is expected to grow over 10%.
Average Service sector GDP growth is 10% in last 4 years and is expected to grow at over 10% in next 3 to 5 years, thanks mainly to information technology sector.
Overall, GDP growth is targeted at 9 to 10% a year in next 5 years (2008-2012).
India's population is currently estimated at 1.15 billion; and is growing at 1.8 percent a year. Out of the 192 million families (average family size - 5.7 persons per family), an estimated 55-60 million families belong to the middle class. India’s population is relatively young. 52 percent of the population is less than the age of 25. In other words, in the coming decades, this young population will bring tremendous productive energies into the economy; be major consumers of goods and services; and generally represent forces of economic activity and growth. 4
A third of the country's total work force is employed in the Manufacturing and Services sectors. With robust growth of these two sectors, incomes in the hands of this one third of the population have been rising by 10 to 12% per annum. With higher disposable income, there is tremendous propensity to consume a large variety of goods and services. The existing per capita food consumption is low; and every rise in income, naturally, translates to higher demand for food products first, particularly in the middle income group.
It is necessary to underline the fact that India is no more insulated from global influences. Indian economy is steadily integrating with the global economy. Developments around the world do impact the Indian domestic market and vice a versa. With rising import dependence, India's influence over the world commodity market in general and food products market in particular, is set to become stronger in future.
Indian Vegetable Oil Sector: India's vegetable oil sector is no exception. With imports representing over 40 percent of aggregate vegoil consumption of nearly 13.0 million tons, Indian domestic market is surely subject to global influences. At the same time, the size of India's imports – 5.5-6.0 million tons a year - will have a bearing on the world market dynamics.
Oilseed Sector:
Currently, India accounts for 7.4% of world oilseeds output; 6.1% of world oilmeal production; 3.9% of world oilmeal export; 5.8% of world vegoil production; 11.2% of world vegoil import; and 9.3% of the world edible oil consumption (Source: Oil World 2007).
India’s Growth Prospects:
India’s growth prospects and ravenous appetite for food including edible oil means that the world market cannot afford to ignore India's presence as a producer, consumer, importer or exporter.
Hot Issues for India: With a rather low growth rate, Indian agriculture is slowly facing a distress situation. Migration of people from rural to urban areas in search of livelihood is a reality. Government's efforts to strengthen farm and related activities have not yielded the desired results. Tightening domestic supplies on the one hand and rapidly rising demand on the other, and import dependence have resulted in food related inflation. The rural poor people are the worst affected because of the low income growth and high food prices. Malnutrition and 5 under-nourishment, particularly among the low income groups, are a serious issue for the country.
Reduction of Import duty: The Indian Government is under intense pressure to control food inflation as surged to 7.83% as on 3rd May 2008. No wonder, imports have been liberalized and custom duties on crude vegetable oils have been slashed to zero and on refined oil to 7.5%. The effective duty on RBD Olein is less than 3 per cent due to freezing of RBD olein tariff at US$ 484 against current CIF price US$ 1310.
Round Table Sustainable Palm Oil (RSPO) The World produces about 40 million tonnes of palm oil per annum. Out of which more than 85% is produced by Malaysia and Indonesia combined. Malaysia has taken a lead to produce Sustainable Palm Oil (SPO) to counter NGO propaganda. The momentum for production of SPO is yet to geared up. The producing and exporting countries have to take some measures to encourage the production which is linked with the exports. I would like to make suggestions to Palm Oil Producing countries Indonesia and Malaysia.
Indonesia has imposed the export duty on CPO at 15% and Malaysia has fixed the quota for exports of CPO. These two regulations can be relaxed to promote SPO. Indonesia may allow exports of SPO at lower duty than normal duty of CPO and Malaysia may place SPO out of quota. I am sure if these are done, will encourage the production and exports of SPO and support RSPO movement.
India – a growth Market for Pam Products: The world produces about 40 million tons of Palm Oil per annum. India consumes over 4.5 million tons Palm Oil and other Palm Oil Products per annum, while domestic production of Crude Palm Oil in India is hardly 60,000 tons per annum and rising very slowly. Palm Oil is very well accepted by the Consumers & Bulk users in India, thanks to the efforts made by the Malaysian Palm Oil Council (MPOC) in the last two decades to popularise Palm Oil as good cooking oil in India. CPO mainly imported from Indonesia while RBD Olein from Malaysia.
India will continue to be large importer of palm oil for quite some time - at least for next 10 years - because domestic output growth is unlikely to catch up with demand growth. Strong GDP growth contributed mainly by Manufacturing and Service sectors and also rising population automatically translates to higher demand for a host of food products including edible oils.
How much of this incremental import demand palm oil will be able to garner would of course depend on relative prices of various oils and tariff structure and landed cost. It would be in palm oil producers' interest to look at India as a large market that is going to be available for a very long-term - for long years - and do all that is required to sustain and service it.
As regards price outlook, let me say, India is a price-conscious market. The share of various oils will depend on relative prices and attractiveness of import. There is also the possibility of a reduction in import duty on oilseeds that may change the fundamental picture and projection for the import of vegetable oils by India.
Friends, I have attempted to share my thoughts and views on India as a major market for vegetable oil in general and palm oil in particular. No one has any doubt about India’s growth prospects. The latest mantra of the Indian Government is ‘Inclusive Growth’.
It means that the fruits of economic growth must flow to the entire country – to the One Billion plus population. In the process, the government may face conflict between meeting domestic compulsions and fulfilling international obligations. But such conflicts are bound to be of short duration. What is certain is that over the medium to long-term horizon, India will be a major growth market that our trading partners will continue to enjoy doing business with.
(B V Mehta is Executive Director, Solvent Extractors Association of India, Speech delivered at India Malaysia Palmoil Trade Fair, Mumbai, on May 29)
