DILEMMA OF DUTIES ON EDIBLE OIL, SUGAR AND WHEAT
(WHY NOT APPLY “ALGO” APPLICATION)
Three agro-commodities namely— edible oils, sugar and wheat-- are engaging immediate attention of the government with respect to custom/import duties. Reasons-- their prices abroad are much lower than in India. Domestic production of edible oil by oilseed crushing / refining units and sugar by sugar mills will stand to lose if duty free import is permitted or insufficient duty is applied while farmers will suffer if duty free import of wheat is authorized. (Why prices abroad are lower and higher in India, is not the narrative of this article)
Thus government provides stakeholders (including farmers) protection by making imports expensive. Current duty on crude/refined oil varies 7.5% to 20%; sugar is 50%; wheat import at 10%. “Import demand” for edible oil varies between 65%-70% (see chart) of annual consumption, imported sugar requirement is about 2% of local production this year and wheat import is about 4-6% of domestic output.
At the same time, government is obliged to shield consumers by discouraging inefficient production and processing.
Edible oil industry has represented that import duty may be increased to 20% on crude oil- specially crude palm oil(CPO)-(from current 7.5%) and 35% on refined oil ( from current max 20%) to support crush parity so that local prices of oils may rise while oil meal exports become viable. Prices of palm and soy oil are interlinked or to say the spread between the two has a relationship –that is if CPO values go up domestically or abroad, a definitive upswing takes place in soy oil and others soft oils as well.
A chart of declining trend in the local crude palm oil prices in rupees/10kg is show cased, which implies that realization of oil seed farmers could drift down. Currently oilseeds prices fetch 10-15% below MSP for soybean, rapeseed and ground nut while last year market prices were higher by 20-25% than MSP.
Industry also espouses case of farmers for future growth of oilseed production. However when there is 65%-70% “import dependency” on edible oil, then a very large section of consumers, including farmers, are exposed to oil inflation with elevated duty. Authorities will have to rationalize whether hike in duty will be justified so far as consumers are concerned.
About 2 million tons of oil is transiting either at ports/custom bonding or in the pipeline. It will be bonanza for those who are positioned for these stocks. But that is how market operates.
Government raised duty on sugar from 40 to 50% on 9th July 2017 to isolate local prices from possibility of cheaper imports. Domestic prices naturally soared. But around third week of July Government has written to industry as to why prices of sugar have flared up!! When the raison d'etre of hiking duty was to keep local prices firmer, then officialdom needs introspection of their own actions. Moreover August/September period is tail end of sugar season and prices shall spike anyway.
Range of the duty varies from 0% to 50% as pictured below. In last 6 years, duty is modified 6 times!! Incorrigibility/ sensitivity of sugar market is such that, in April 2017 “duty free” import of 0.5 mts of sugar was authorized, but in July2017 duty was enhanced from “40% to 50% to curb imports”.
Accompanying graphic displays flip-flop on wheat duty. In a span of less than three years, duty is notified seven times. It demonstrates predicament of policymakers in deciding quantum of duty and applicability of its duration. Importers of wheat remain nervous of any abrupt change in duty structure. With rising demand wheat import is likely to be a long term proposition.
“ALGO” IS THE REMEDY
Above illustrations indicate that duty determination is a very challenging exercise. Market volatility and pressure groups can create arbitrariness in fixing the percentage of import duty and the duration of applicability.
At a time when PSD(production supply and demand) data, duties/tariffs and price movements are known internationally and nationally, Government may create an algorithmic application (ALGO) that can give transparent guidance-- to Government and the industry-- to trigger duty changes, up or down,—so that objectivity is maintained.
ALGO programming is wide spread in commodity and other stock exchanges. ALGO can perform calculations, data processing and automated reasoning tasks including decidability through computers at electronic speed based on input and output requirements. Why not apply ALGO for import/export duties also? Any well-known IT company can come up with computational process—if authorities take a call.
International and domestic prices can be tracked through commodity exchanges while each price tick signifies mutations in supply/demand including weather related issues. Government can predefine its target of high and low prices in domestic market or align them with MSP to regulate imports by duty or prohibition of imports by analyzing overseas prices through speed of ALGO. Each commodity will have well configured ALGO and that will remain in public domain. Inputs and outputs of such an ALGO would be available on real time basis to all and sundry on the website.
Lobbying by association or groups will then be minimal. Even farmers will have satisfaction of rational decision making process. Though no system may be perfect but algorithmic guidance will have less imperfections. Of course government may have final word on percentage of duty to be levied but then basis of duty determination/ any deviations thereof or discretions applied to the guidance of ALGO, will be known to one and all.