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‘Indian entrepreneurs in Sri Lanka flouting spirit of FTA’

The Hindu

Business Line

‘Indian entrepreneurs in Sri Lanka flouting spirit of FTA’

By G. Chandrashekhar

1 July 2008

Mumbai. Some of the Free Trade Agreements (FTAs) the country has got into in recent years have resulted in unintended adverse consequences, primarily because of non-application of mind at the time of negotiations and signing of the agreement as also lackadaisical enforcement of rules subsequently.

For instance, agreements with Nepal and Sri Lanka, as everyone knows, opened the floodgates to import of low-priced vanaspati that hurt the domestic vanaspati industry and contributed to closure of scores of units. No amount of representation and persuasion by the industry moved the Government, which perhaps wanted to display a big brother attitude.

With the recent withdrawal of basic customs duty on import of crude vegetable oils of edible grade, vanaspati imports from Sri Lanka under the FTA have all but evaporated.

Ironically, several Indian entrepreneurs had invested in Sri Lanka for production of vanaspati and successfully lobbied to keep the policy unchanged for more than three years. They reaped enormous profits in the process.
Flouting rules

It may also be pertinent to point out that the tiny island country Sri Lanka does not domestically produce enough raw material for production of 3 lakh tonnes of vanaspati. The raw material, palm oil, is imported from either Malaysia or Indonesia, duty-free. In other words, the spirit of the FTA in terms of rules of origin and value addition was flouted brazenly.

Indian businessmen who find themselves jobless in Sri Lanka (after India announced zero-duty crude oil import) have now opened a new gambit. They have begun to lobby that India should allow import of ‘refined palmolein’ from Sri Lanka at zero-duty.

Currently, on import of refined oils, including refined palmolein, there is 7.5 per cent customs duty. Again, ironically, Sri Lanka does not produce any palm oil, much less refined palmolein.
Danger zone

The game-plan is clear. Out-of-work Indian businessmen in Sri Lanka will simply purchase refined palmolein from Malaysia and bring it over to India at zero-duty. It is not impossible to fudge documents to show that the oil comes to India from Sri Lanka.

There is great danger if the government succumbs to pressure from this group of Indian businessmen operating from Sri Lanka. Most unfortunately, some of these are known to have strong political affiliations. There are whispers that this group has the tacit support of a high profile union minister.

If permitted, refined palmolein imports at zero-duty would directly hurt processing units in the southern region.

Refineries operating in Tamil Nadu and Andhra Pradesh are sure to turn sick as large-scale refined oil arrivals from Sri Lanka will have a most immediate impact on units in the south.
Kerala impact

The coconut oil trade in Kerala too will be affected. Palm oil imports into the State’s ports have already been prohibited. But opening the floodgates of zero-duty is sure to depress coconut oil prices.

There is absolutely no warrant to have policies that will distort the market and create arbitrary winners and losers. There has to be a level-playing field for all.

If need be, in order to rein-in high prices and augment supplies, the customs duty on refined oils should be reduced to zero for all categories of importers. But to selectively favour without merit Indian businessmen in Sri Lanka would be suicidal.