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Interview: Free trade hurting India vanaspati makers

Wednesday July 6, 2005

INTERVIEW: Free Trade Hurting India Vanaspati Makers

By Benjamin Low


KUALA LUMPUR (Dow Jones)—India’s vanaspati industry, already plagued by excess capacity, has been cast into deeper gloom lately by trade agreements that have opened the way for cheaper imports from neighboring Sri Lanka and Nepal, a top industry official said Tuesday.

I.R. Mehra, executive director of the Indian Vanaspati Producers Association, said the industry has had to cope with the entry of vanaspati from Nepal, which under the terms of a bilateral deal has been allowed to export up to 100,000 metric tons of the palm oil-based product duty free each year for some time now.

Vanaspati is a hydrogenated form of palm oil that is a popular cooking fat in the India.

As Nepal doesn’t impose any duties on the imports of palm oil, vanaspati makers in that country have been able to sell their products at a much lower price than their counterparts in India, where palm oil incurs substantial import duties.

Crude palm oil, the main ingredient for vanaspati, carries an import duty of 80% in India while various forms of refined palm oils carry duties of 90%.

The contrasting tax regimes have meant that ultimately, duty-free vanaspati imports from Nepal have been far cheaper than those produced in India, thus hurting domestic players.

"They sell into India at far below our cost price. This has left the industry totally stranded," Mehra said.

"Over and above that, we now have Sri Lanka also being given the same status."

In the wake of a free-trade agreement signed between India and Sri Lanka in 2000, vanaspati plants have surfaced in Sri Lanka lately.

Ten factories have been licensed in Sri Lanka, with six set up so far, Mehra said.

The arrival of cheap vanaspati from Sri Lanka, on top of those from Nepal, has placed a heavy burden on India’s domestic producers.

Officially, about 70,000 to 80,000 tons of vanaspati are imported from Nepal annually. However, it is widely known that huge quantities are also smuggled into India.

The total volume of vanaspati entering India from Nepal, therefore, is estimated around 200,000 tons every year, Mehra said.

There is no quota imposed on duty-free vanaspati imports from Sri Lanka, with some 20,000 tons entering India every month now, Mehra said.

"So, we get a total of about 400,000 tons of imports a year in a market of 1.3 million to 1.4 million tons," he said.

Domestic Industry Operating Far Below Capacity

The deluge of imported oils comes at time when the industry is already operating far below its capacity of about 4.8 million tons.

For an industry where selling margins are low at only around 2% to 3%, price pressures from cheaper imports have driven some players out of business.

Mehra estimated the cost of CPO in India is about INR15,000 a ton higher than in Sri Lanka and Nepal, due to the unfavorable import duty structure.

Lower CPO costs have allowed Sri Lanka and Nepal to sell their vanaspati in the Indian market at a discount of about INR10 a kilogram, he said.

Domestic vanaspati is priced about INR42-INR45/kg.

"When they try to bring down the price so low, it becomes difficult (for the domestic industry)," Mehra said.

Further, as additional plants begin operation in the two competing countries, "the situation become far worse," he said.

Industry Proposes Two Solutions

Mehra said his association is lobbying the government to correct the imbalance and has proposed two potential solutions.

The first is to exclude vanaspati from Nepal and Sri Lanka from the list of items allowed to be imported duty free.

The second, he said, would be to exempt India’s vanaspati industry from paying the 80% import duty on CPO, in effect, allowing domestic players to compete on equal footing.

Mehra said he couldn’t say when the government would make a decision on this issue.

However, indications so far suggest that the government may favor the second option.

According to documents made available to Dow Jones Newswires, an Indian government panel headed by Director General of Foreign Trade K. T. Chacko recently recommended that a certain amount of CPO imports could be taxed at a lower rate. The panel’s recommendations require Cabinet approval.

"A number of units are closing down and smaller units are unable to function at all. The industry is just living on the hope that one fine day this will be resolved," Mehra said.

 source: Dow Jones Newswire