Explained | Why is India losing sleep over record-high vegetable oil prices?

India, the world's top importer of vegetable oil, will have to spend billions of extra dollars this year to buy more costly cooking oil from overseas and is mulling cutting taxes on those imports to soften the blow to the economy, industry officials have said.

The government is considering reducing taxes on vegetable oil imports after cooking oil prices hit record highs last month as it seeks to make food costs more affordable for its population of over 1.3 billion and keep price pressures at bay.

Why have global edible oil prices rallied so much?

Problems in the global production of key oilseeds coupled with rising biodiesel use have fuelled the global vegetable oil rally.

Soyoil futures have jumped more than 70% this year after drought tightened US and Brazilian soybean supplies. The US Department of Agriculture has forecast global soybean stocks will fall to a five-year low of 87.9 million tonnes by September.

Palm oil prices, the most widely consumed edible oil, also rallied 18% in 2020 after Covid-19 lockdowns curbed output from plantations in Southeast Asia.

Benchmark futures in Malaysia touched 4,142 ringgit ($1,007.30) a tonne in mid-March, their highest since 2008.

Poor rapeseed and sunflower seed harvests in Europe and the Black Sea region further tightened edible oil supplies, helping push global food prices to 10-year highs last month.

Mirroring record global prices, domestic palm oil and soy oil rates have more than doubled in the past year.

Why is India concerned?

As the top edible oil importer, India spends an average of $8.5-$10 billion annually on imported vegetable oils and the recent price surge will only inflate its bloated import bill further. Vegetable oil is India's third-biggest import item after crude oil and gold.

India's vegetable oil imports have surged to 15 million tonnes from 4 million only two decades ago, according to industry estimates. It could touch 20 million by 2030, trade and industry experts say, boosted by a growing populace with higher incomes and a taste for calorie-laden curry and fried food.

Domestic oilseed production has failed to keep pace with demand, as farmers prefer to grow grains like rice and wheat, the price of which is guaranteed by the government.

India produced about 10.65 million tonnes of edible oils in 2019-20, less than half of the roughly 24 million tonnes it consumed during that period, according to trade and government estimates.

It imported the rest, buying around 7.2 million tonnes of palm oil from Indonesia and Malaysia, about 3.4 million tonnes of soy oil from Brazil and Argentina, and 2.5 million tonnes of sunflower oil, mainly from Russia and Ukraine.

What has been the government's response?

Soaring vegetable oil prices have further hit people already reeling from record fuel prices and lower incomes due to a devastating second wave of Covid-19 infections.

The government has voiced support for greater domestic production of oil crops in recent years, and had been expected to unveil incentives for farmers willing to expand oilseed output in its latest annual budget plan.

But the government has yet to come up with a viable plan to raise oilseeds production.

India grows several oilseeds - mainly peanuts, soybeans and rapeseed (mustard) - but their prices are not guaranteed by the government like grain prices are. As a result, Indian output of rice and wheat is nearly six times greater than total oilseed output on average.

The local vegetable oil industry has argued that the government, which earns about 350 billion rupees ($4.79 billion) from levies on edible oil imports, should set aside some of that to incentivise farmers to switch to oilseeds.

But the government has not taken any such measure so far in 2021, and is relying on adjusting import tax rates to try to control volumes and prices.