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Palm Oil Diplomacy

Palm Oil Diplomacy

Why in news?

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

Palm oil import in India

  • India imported 64.15 lakh metric tonnes (MT) of CPO and 23.9 lakh MT of RBD in 2018-19, the bulk of which was from Indonesia.
  • The official data show India imported $10 billion worth of vegetable oil in 2019-20, making it the country’s fifth most valuable import.

Need Of Palm Oil In India

  • It stays relatively stable at high temperatures, and is therefore suitable for reuse and deep frying.
  • It is the cheapest edible oil available naturally and its inert taste makes it suitable for use in range of foods.
  • It is unlikely that restricting the refined palm oil imports will impact food inflation immediately, as palm oil is not used in Indian homes and also CPO continues to be imported.
  • It is the main ingredient in vanaspati (hydrogenated vegetable oil).

Issues with Malaysia | Palm Oil Diplomacy 

  • According to a report, India is planning to restrict buying of petroleum, aluminium ingots, liquefied natural gas, computer parts and microprocessors from Malaysia.
  • India is the world’s biggest buyer of edible oils and has already effectively stopped importing palm oil from Malaysia by asking importers to look elsewhere.
  • Earlier in September, India had increased customs duty on refined palm oil imports from Malaysia by 5% for six months as a measure to safeguard the domestic industry.
  • India may further enhance its informal Economic sanctions that include import control, Non-tariff Barrier, stronger inspections of Electronics imports from Malaysia.
    • Recent response by Malaysian PM has been much more out of character. Not only has he chosen to speak about the internal matter of India publically, but he has also done it at a higher platform like UNGA.
  • The response has come despite PM Modi’s positive gesture towards Malaysian PM Mahathir that was evident when Modi cut short his visit to Indonesia and flew to Kuala Lumpur to personally greet Mahathir after his election as the Malaysian PM.
  • Malaysia continually made vacuous comments on Kashmir, the citizenship amendment act and has given permanent residency to Zakir Naik and did not take India’s request for his extradition seriously.
  • Malaysia’s Behaviour towards India is also guided by its domestic political compulsions to use “ Islamic card” to woo support from the Islamist parties in its domestic politics.

Impact Of This Decision | Palm Oil Diplomacy 

  • 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 can supply CPO which would allow India to utilise its full refining capacity.
  • The entire refining process increases the price 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.
  • But 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.

Effect Of Restricting Imports Of RBD Palm Oil 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.
  • If prices continue to hold, farmers will get a better realisation for their crop.
  • But the timeframe over which the changes in import policy will have an effect on domestic crop realisation is fairly long, given that palm trees take over 4 years to provide a yield.
  • Also, if the demand is met entirely by importing and refining CPO, farmers will be left out of the picture.

Effect on Malaysia | Palm Oil Diplomacy 

  • Malaysia has said that it cannot retaliate against India because it is too small.
  • With imports to India, its largest market restricted, Malaysian palm oil futures fell.
  • India and Malaysia signed a free trade agreement in 2011, Malaysia-India Comprehensive Economic Cooperation Agreement.
  • Under the agreement, India was required to reduce import duty,
  • On CPO to 37.5% (from 40%) by December 2019, and
  • On RBD to 45% (from 54%) by December, 2018.
  • In 2018, Malaysia exported 25.8% of its palm oil to India.
  • If India does not issue licenses for importing refined oil, Malaysia will have to find new buyers for its product.

Indian Economy

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