Why Samosa Prices Are Up: Geopolitical Twists to Palm Oil Imports Benefit Adani, Patanjali
On September 30, 2019, Malaysia’s Prime Minister Mahathir Mohamad stood before the United Nations General Assembly (UNGA) and launched an unexpected attack on India, accusing the country of violating the UN’s resolutions by “invading and occupying” Kashmir, referring to India’s decision in early-August to revoke the special Constitutional status granted to Jammu & Kashmir, India’s only Muslim majority state. The subsequent lockdown and human rights abuses had been condemned across the world, but none were perhaps as high-profile as Mahathir’s barbs on the floor of the UNGA.
The Malaysian PM’s remarks were strongly criticised by the Indian government, and supporters of the ruling Bharatiya Janata Party. But few Indians anticipated that the remarks would have an impact on their favourite samosas, biscuits, and savouries.
About 40% of India’s annual demand for edible oils is satisfied by imported palm oil. India is the world’s largest importer of palm oil from its largest producers, Indonesia and Malaysia. Both countries have large palm plantations created out of rainforests and irrigated by year-round tropical rainfall.
SEAI’s ‘Unprecedented’ Advisory
Reacting to Mahathir’s comments, the Solvent Extractors Association of India (SEAI), a Mumbai-headquartered lobby of some of India’s biggest edible oil companies, issued an unprecedented advisory to its members to stop importing oil from Malaysia.
The unprecedented advisory added a geopolitical twist to one of the most fundamental aspects of India’s food security, and also one of its biggest businesses. The SEAI is currently headed by Atul Chaturvedi, former CEO and current board member of Adani Wilmar, which, is a 50:50 venture of the Adani Group led by India’s second-richest man Gautam Adani, and Wilmar International, the world’s biggest palm oil company.
Mahathir’s remarks came at a time when the SEAI was already engaged in a trade dispute with Malaysia. Imports of palm oil from Malaysia increased dramatically in 2019 after a scheduled cut in import duties came into effect on December 31, 2018. SEAI filed for trade protection from the Indian government, claiming that the Malaysia oil imports had put Indian oil companies at the risk of “serious injury.” It won the dispute after the government imposed a “temporary safeguard duty” on Malaysian edible oil in September 2019.
Malaysia had initially retaliated with its own export duty, and Mahathir then commented against the Citizenship Amendment Act (CAA).
Earlier this month (January 2020), the Indian government made a major decision to restrict imports of refined palm oil; the oil can now only be imported with a licence issued by the Union government. This is the first time such a license is being demanded for undertaking refined oil imports after the trade was opened up in 1994 as part of India’s shift towards liberalisation and globalisation.
The new restrictive import policy will benefit all oil refining companies, including major players like Adani Wilmar, Patanjali Ayurved-owned Ruchi Soya, and Emami.
Background to the Dispute
The SEAI’s grouse against Malaysia began several months before the UNGA was convened. On December 31, 2018, the Indian government cut import duties on Malaysian refined palm oil to 45% against 50% for other supplying countries, such as Indonesia. The cut was an obligation under the India-Malaysia Comprehensive Economic Cooperation Agreement (CECA), a treaty signed in 2011 to encourage trade between the two countries. The CECA set out scheduled reductions in import duties on various commodities, including palm oil, that ended in 2018.
But the duty cut came as bad news for the Indian edible oil industry, especially palm oil refining companies that import crude palm oil (or CPO) from Malaysia and Indonesia, and process it into refined oil (also known as Refined, Bleached and Deodorised or RBD palm oil).
The refineries, which include Adani Wilmar, can thrive only if import duties on refined oil are high enough to make it more expensive than domestically refined oil. According to these companies, duty on refined oil needs to be at least 15 percentage points more than that on crude palm oil.
The duty difference used to be 10%. After the duty cut on Malaysian refined oil, the difference shrank to just 5%. (Crude palm oil faced a 40% duty.)
Predictably, there was a surge in imports of refined palm oil from Malaysia soon after the new duty came into effect on January 1, 2019. Imports of the product jumped by 63% in January-March quarter compared with the October-December 2018 quarter. The imports from other countries fell by about 50%. Total imports of refined palm oil into India increased by 26% from one quarter to the next. Some 40% of India’s oil demand was met with just refined palm oil from Malaysia, according to the SEAI.
In August 2019, the SEAI along with seven Indian refineries filed for protection from the import of “cheap” Malaysian refined oil. They submitted a complaint to the Director General of Trade Remedies (DGTR), a trade protection agency in the Ministry of Commerce and Industry that investigates such cases and recommends “safeguard” duties that can be imposed on goods from a particular country.
On August 26, the DGTR concluded that “serious injury was imminent” to domestic refineries if the imports continued unabated. Though the DGTR had sent questionnaires to Malaysian refineries on August 14, to be answered in 30 days, the official said that there was no time to waste, and recommended a temporary 5% safeguard duty on refined palm oil from Malaysia, which would be levied while the case was being investigated.
The Department of Revenue in the Ministry of Finance accepted this recommendation and notified the duty on September 4, 2019 for a period of 180 days (that is, until March 2020). The safeguards duty raised the import duties on Malaysian palm oil to 50%, equivalent to the duty rate on oil imported from Indonesia.
The seven companies that had petitioned the DGTR included Adani Wilmar, considered to be among the largest importers of palm oil into the country. Its “Fortune” brand of edible oils (that includes sunflower, soybean, and mustard oils) has been rated among the top selling cooking oil brands in the country. Established in 1999, Adani Wilmar has oil refineries across the country and nearly bought over its one-time competitor, Ruchi Soya Industries.
The petition had named 12 Malaysian companies from where most of the imports had been made. The DGTR’s order mentions that a questionnaire had been sent via the Malaysian High Commission in India to these companies to respond to the allegations.
Interestingly, one of these companies is Wilmar International, the world’s largest palm oil company and 50% owner of Adani Wilmar. Half of Adani Wilmar’s profits accrue to Wilmar International, and as a parent company, it shells out half the equity for the venture. Wilmar’s co-founder and chairman, Kuok Khoon Hong, is on the Adani Wilmar board.
Two important questions remain unanswered. Did a company file a motion against itself? Will the Wilmar representatives on Adani Wilmar’s board recuse themselves on decisions regarding the safeguard duty?
Neither Adani Wilmar nor Wilmar International have responded to an e-mail questionnaire sent on January 16.
Atul Chaturvedi, president of SEAI and a board member of Adani Wilmar told Newsclick that none of the Malaysian suppliers named in the safeguard duty order, including Wilmar International, were named by the SEAI in its petition. These names were provided either by the Malaysians or the Indian government, he said.
Chaturvedi has headed SEAI since 2016. He was appointed for a second term to head the association in October 2019, weeks after the body won the battle to impose a safeguard duty on imported palm oil.
As its name suggests, SEAI began as a forum for the solvent extraction industry, which uses solvents (organic chemicals) to extract oil from oilseeds like sunflower, soyabean, groundnut, etc., then refines the oil and sells it either in bulk to units manufacturing snacks or places it in smaller packages for consumers.
Since the 2000s, India has dramatically cut import duties on edible oils, bringing them down to zero. As a result, the domestic oil sector has come to be dominated by companies that refine imported crude oils, including palm sunflower and soybean oils. Consequently, domestic oilseeds have not fetched good prices for farmers (including groundnut farmers in Gujarat) who have shifted to other crops.
The SEAI’s advocacy, too, has come to be dominated by issues relating to imports and exports of oil. It had issued a number of strongly-worded statements calling for changes to the duty structure to protect the Indian industry and oilseed farmers.
Chaturvedi told Newsclick that the effect of India’s low duties on edible oils is “for all to see in the fate of the oilseeds sector.” The SEAI has called for a “complete ban” on imported refined palm oil. “It just doesn’t make sense to import finished goods when we have over 60% domestic processing capacity lying idle,” he said.
But the SEAI’s boldest announcement so far came after Mahathir’s statement on the floor of the UNGA. The Malaysian PM had said: “…despite (the) UN resolution on Jammu and Kashmir, the country has been invaded and occupied. There may be reasons for this action but it is still wrong. The problem must be solved by peaceful means. India should work with Pakistan to resolve this problem. Ignoring the UN would lead to other forms of disregard for the UN and the Rule of Law.”
On October 21––almost three weeks later––the SEAI issued an advisory to it members to “avoid” buying palm oil from Malaysia. “Our government has not taken kindly to the unprovoked pronouncements by the Malaysian Prime Minister and is contemplating some retaliatory action,” SEAI President Chaturvedi said in a note to members.
Aftermath of Trade Dispute
Before India could announce any retaliatory measure, on December 13, 2019, Malaysia imposed a 4.5% duty on its exports of crude palm oil. The duty used to be zero since August 2018 and was reintroduced without any explanation. Now it made crude palm oil dearer to Indian refineries, and effectively levelled the 5% safeguard duty imposed by India on refined oils. The effective duty on Malaysian crude palm oil in India rose to 42%, and the duty differential shrunk to 8%.
Then, on December 20, Mahathir criticised India’s CAA, which grants fast-track citizenship to non-Muslim migrants fleeing religious persecution in Bangladesh, Pakistan or Afghanistan.
Then, as the end of the calendar year drew near, the government India had to fulfil its commitments under another international treaty, namely, the ASEAN-India Free Trade Agreement. (ASEAN stands for the Association of South East Asian Nations.)
A subsidiary agreement on Trade in Goods known as AITGiA, which was signed in 2009, prescribed a scheduled reduction in duties on various commodities, including palm oil imported from ASEAN nations. The final duty cut under the schedule was on December 31, 2019, when India had to cut import duties on crude palm oil to 37.5%, and on refined palm oil to 45%.
But Malaysia is also a signatory to the ASEAN treaty and the AITGiA. So, as the duty cut for ASEAN nations came into effect, Malaysian suppliers simply shifted the paperwork for their orders from the CECA to the ASEAN treaty, which attracted a 45% duty. This nullified the effect of the 5% safeguard duty, which was imposed under the India-Malaysia CECA and was supposed to be in force until March 2020.
“Nobody is a fool to export under the CECA when there is a choice under the ASEAN treaty,” B V Mehta, Executive Director of SEAI, told Newsclick.
This raises obvious questions about the DGTR’s logic to impose a 5% safeguard duty up to March 2020 when a 5% duty cut was scheduled to take place on December 31, 2019 under the ASEAN treaty. The DGTR’s 20-page order mentioned the ASEAN treaty and listed the scheduled reductions, but did not mention that the final cut was scheduled for December 31, 2019.
The cut has now brought the duty difference between crude palm oil and refined oils to just 2.5% (against the 15% demanded by the domestic industry). “Our industry can’t operate at such a low differential. It would have closed down within three months,” Mehta said. “Fortunately, the government has understood our view.”
On January 8, the Indian government restricted the imports of refined palm oil in the country. The Director General of Foreign Trade directed that any import of the product would be permitted only with a prior licence, which would be issued on a “case to case basis.” The licence system, as opposed to the “open” system of free trade, gave rise to what has been described as the infamous era of the “licence control raj” era that led to red tape or bureaucratic delays and corruption in India’s pre-globalisation trade policies before the 1990s.
The SEAI has welcomed the license system saying this would be a major boost to India refiners. “They will now open a small gate for imports, and not floodgates,” Mehta said.
The biggest refiners of edible oil in India are going to benefit from this decision, notable among them being Adani Wilmar, Emami and Patanjali Ayurved, which now owns the oil behemoth Ruchi Soya Industries.
In a media briefing held a few days before the trade restrictions were announced, the spokesperson of the Ministry of External Affairs said that the restrictions were not aimed at any particular country. However, significantly, the following sentences were added:
“In the past, there have been statements made by the Malaysian Prime Minister on which we have reacted, sometimes very strongly…We have told them that they should keep in mind the sensitivities that we have on some of these topics.”
The spokesperson added: “We do hope that at some stage they [Malaysia] will realise that this is not the appropriate thing to do.”
Research inputs: Abir Dasgupta
The writer is an independent journalist.
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