A recent study from the Economic Research Service (ERS) of USDA shows how the Indian vegetable oil industry has been shaped by government policy rather than market forces and is ill-suited for more open international markets. The overhang of these policies is similar to situations in many developing countries where food imports are discouraged to protect local producers. Meaningful trade policy reforms must include overhauling decades of policies that have restricted trade and have left inefficient industries in their wake. Achieving these reforms requires overcoming powerful political forces that benefit from the current trade restrictions.
In India food takes 55 percent of the average consumer’s income which makes food buying decisions price sensitive. Lower food prices would increase the standard of living for most of the people. About two-thirds of the Indian population receives at least a portion of its income from agriculture. The Indian government has naturally been concerned about striking a policy balance between the interests of producers and consumers.
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The ERS report “The Role of Policy and Industry Structure in India’s Oilseed Markets” by Suresh Persaud and Maurice R. Landes describes an industry that is not prepared to operate in a more open market. Demand for edible oil is growing at 6 percent per year and per capita consumption is still below the world average. Half of the demand for cooking oil is met by imports. Prior to 1994 a government State Trading Corporation arranged imports based on estimates of domestic supply, demand, and balance-of-payments. In 1994 India began allowing unlimited imports by private traders subject to WTO rules and replaced quantitative trade restrictions with high tariffs. Bound tariffs on vegetable oils range from 45 percent on crude soybean oil to 300 percent on palm and peanut oil, with applied tariffs of 45 percent to 80 percent. Oilseed imports have a 30 percent tariff, but non-tariff barriers prevent imports. Among the major oilseed producers in the world, India provides far more protection to its industry than other countries.
Government policies limit the size of processing plants. Thousands of small processors operate at 30-40 percent of capacity much of the time, compared to 90 percent plus operating capacity for large plants in other countries. These plants are profitable because of restrictions on movement of domestic supplies and the prohibition on oilseed imports.
Protecting the domestic oilseed industry has not led to efficient farm production. India’s average yields for major oilseeds are 40-60 percent below world averages and increasing at a slower rate. Most oilseeds are grown in areas that are dependent on monsoon rainfall with only one quarter of the acreage irrigated. Farmers have not invested in improved seeds, fertilizer, and pesticides. The rapeseed grown is not well suited for livestock feed and peanuts are high in aflatoxin because of poor handling after harvest. Significant amounts of meal from these crops end up in fertilizer rather than used for higher priced livestock feed. Price risks are substantial because minimum government support prices for oilseeds are low.
India’s efforts to conform to some WTO policies since 1994 have had a positive impact on the Indian vegetable oil market. The bound and applied soybean oil tariff of 45 percent has limited the government’s ability to increase applied tariffs on other oilseeds where bound tariffs are much higher because price-conscious consumers can switch to soybean oil as tariffs on other vegetable oils increase.
The huge difference between the bound tariff of 300 percent on crude palm oil and the applied tariff of 80 percent highlights the importance of U.S. efforts to substantially lower bound tariff with the highest bound tariffs receiving the largest percentage reductions. If the bound tariff for palm oil were cut by two-thirds to 100 percent it would still remain 15 percent higher than the current applied tariff and do nothing to increase trade. Even if the soybean oil tariff of 45 percent were reduced by two-thirds, the resulting 15 percent tariff would still be relatively high compared to the rest of the world.
The Indian government’s policies on oilseeds show how market access is about more than just tariffs. The relatively low tariff of 30 percent on oilseeds has been offset by biotechnology regulations that keep U.S. soybeans out of the market. The government’s Genetic Engineering Approvals Committee must approve the importation of all oilseeds, but currently has no policy that would permit such approvals. With production of biotech cotton in India and ongoing government research on over a dozen crops, the Indian government is well aware of the safety of biotech soybeans.
A lower tariff on oilseeds than on vegetable oils also raises the issue of tariff escalation where tariffs are lower on raw products to encourage processing within the country. That issue has been raised in the WTO talks and is generally considered to be a problem only in developed countries.
The trade policy challenges for the Indian vegetable oil industry are common in many industries in India and other developing countries where market trading systems have begun to develop over the past 15 years. These policies could be changed without WTO negotiations. Just as the government of India gave up central buying of vegetable oils in 1994 and has applied tariffs that are substantially below bound rates, it could take unilateral actions on other internal policy issues that affect trade. The continued growth of the middle class and the increasing demand for food in India will force changes in the years ahead. Not making unilateral policy changes that are in the economic best interest of the nation has made the WTO negotiations on agricultural trade policy much more politically complex than they need to be.