Ashok Gulati and Ritika Juneja write: An oil palm plan for home

As far as agriculture, trade and food security are concerned, the challenge is to figure out the most appropriate trading rules in dire situations like pandemics, wars, social/political disruptions or natural disasters. Many countries become inward-looking in such times and impose outright export bans citing domestic food security needs. Recent examples include Russia’s export ban on wheat and sunflower oil, Ukraine’s ban on exports of food staples, Indonesia’s ban on palm oil exports (it was lifted last month), Argentina’s ban on beef exports, Turkey, Kyrgyzstan and Kazakhstan’s ban on a variety of grain products, and India’s wheat export ban. Sudden actions such as these exacerbate the pressure on global trade leading to a spike in the prices of these commodities, threatening the food security of net food-importing countries.

Supply disruptions during the pandemic and the Russia-Ukraine war have led many nations to think about “self-sufficiency” in critical food items or at least reduce their “excessive dependence” on imports of essential food products. India is no exception. India’s edible oil import bill in 2021-22 (FY22) crossed $19 billion (for more than 14 MMT of imports) (see figure). India imports 55 to 60 per cent of its edible oil requirements. This is considered “very excessive” and efforts are on to reduce this dependence.

It would be interesting to keep in mind that “self-sufficiency” and “self-reliance” are two different concepts with very different policy implications. While “self-sufficiency” would imply replacing all imports of a commodity (say edible oils in India’s case) at any cost (thus raising import duties exorbitantly), “self-reliance” would continue to embed the principle of “comparative advantage” in the endeavour to reduce dependence on imports.

Let us take India’s case. The country’s agri-exports in FY22 touched $ 50.3 billion against its agri-imports of $ 32.4 billion. This means that Indian agriculture is largely globally competitive. But its biggest agri-import item, edible oil, accounts for 59 per cent of India’s agri-import basket. This is despite the quite high import duties that have generally been imposed on edible oil imports. Palm oil comprises more than 50 per cent of India’s edible oil imports, followed by soybean and sunflower. Edible oil imports are followed by fresh fruits and vegetables (F&V), pulses, spices and cashew among others (see figure).

The “excessive dependence” on imports has raised the pitch for “atmanirbharta” in edible oil. The Prime Minister launched the National Edible Oil Mission-Oil Palm (NEOM-OP) in 2021. Indian policymakers are aware that achieving atmanirbharta in edible oils through traditional oilseeds such as mustard, groundnuts and soya would require an additional area of about 39 million hectares under oilseeds. Such a large tract of land will not be available without cutting down the area under key staples (cereals) – this could endanger the country’s food security even more. So, a rational policy option to reduce import dependence in edible oils is to develop oil palm at home and ensure that it gives productivity comparable to that in Indonesia and Malaysia — about four tonnes of oil per hectare, which is more than 10 times mustard can give at existing yields.

India has identified 2.8 million hectares of area where oil palm can be grown suitably. So far the objective of NEOM-OP is to bring in at least 1 million hectare under oil palm by 2025-26. Given the way international prices of edible oils have surged in the last year or so (by more than 70 per cent), it may be time for India to ramp up its efforts in developing oil palm. The problem with oil palm is that it is a long gestation period crop. It takes four to six years to come to maturity; during this period, smallholders need to be fully supported. The support (subsidy) could be the opportunity cost of their lands, say profits from paddy cultivation, which is largely the crop oil palm will replace in coastal and upland areas of Andhra, Telangana and Northeast India. Further, the pricing formula of fresh fruit bunches (FFB) for farmers has to be dovetailed with a likely long-run average landed price of crude palm oil with due flexibility in the import duty structure. One needs to identify trigger points when import duties need to be raised as global prices come down, and when to reduce these duties in case of rising global prices. Besides this, the processing industry needs to ensure an oil recovery of at least 18 to 20 per cent – that must be built into the pricing formula.

The other option is to declare oil palm as a plantation crop and allow the corporate players to own/lease land on a long-term basis to develop their own plantations and processing units. This does not seem plausible in the current socio-political context.

Overall, unless India thinks holistically and adopts a long-term vision, the chances of reducing India’s imports of edible oils from 14MMT in FY22 to 7MMT by FY27 look bleak.

This article first appeared in the print edition on June 20, 2022, under the title ‘An oil palm plan for home’.

(Gulati is Infosys Chair professor and Juneja is Consultant at ICRIER)