Finding a pan-India substitute for palm oil isn’t easy

Prof Sthanu R Nair, IIM Kozikhode, feels that to curb the popularity of palm oil/palmolein (major contributor to India’s imports), popularity of other edible oils can be enhanced. But this is possible only if they are made price competitive through productivity improvement either by adopting indigenous or foreign (genetically modified) technology.

IBT: What are the major reasons why India’s oilseeds/edible oils imports have increased over the years, despite being a major producer?

Prof Sthanu R Nair: After independence, domestic edible oil availability was sufficient in India to meet domestic demand until the mid-1960s. However, a shortage emerged during the 1970s due to stagnation in the production and yield of oilseeds, and high growth in the demand for edible oils. Consequently, edible oil imports increased in the 1970s and 1980s. To attain self-sufficiency in edible oil production and reduce import dependency, various policy initiatives were launched by the government. As a result, for almost a decade from the mid-1980s, the domestic availability of edible oils improved, and imports decreased thanks to higher oilseeds production.

However, after this, the positive trend could not be sustained due to rapid growth in domestic demand for edible oils as a consequence of the growth in population and rising per capita income; declining growth in the area, production and yield of oilseeds; liberalisation of edible oil imports; low minimum support prices (MSP) for oilseeds; and insufficient government procurement of oilseeds. The shortfall in the domestic supply of edible oils is now around 60%, which is met through imports.

Currently, India spends over ₹ 60,000 crores per year to foot edible oil import bill. Though imports have helped consumers by way of reduced edible oil prices, the farmers suffered as they were unable to compete with the costs of imported oils, resulting in slow growth in the area allocated to oilseeds cultivation.

IBT: What steps can be taken to boost the country’s oilseed and edible oil production to meet growing demand?

Prof Sthanu R Nair: There are several ways to boost the oilseeds production and domestic availability of edible oils.

First, the huge import of edible oil needs to be restricted either by increasing the import tariffs or through a system of fixing an annual import ceiling limit and strict monitoring of imports. Such a strategy might increase the domestic production of oilseeds.

Second, under the Technology Mission on Oilseeds launched in 1986, the strategy of fixing a price band and allowing the domestic prices of oilseeds and edible oils to fluctuate freely within the band has worked successfully to incentivise oilseeds production. Prices were regulated by the government, including through changes in import duty only when market prices breached the limits to the benefit of either the oilseed growers or consumers. A similar strategy can be adopted for improving oilseeds production. At present, despite the domestic shortage of edible oil production, farmers are unable to reap higher prices due to cheap imports. A delicate balancing act is needed for meeting local demand, achieving price stability through imports and ensuring a favourable price for oilseed farmers.

Third, appropriate policy support should be provided to increase oilseed productivity and area under oilseeds cultivation. The yield performance of oilseeds in India is 66% of the global average. It is estimated that there is a vast scope to fill the yield gap ranging from 22-160% for various oilseeds. Indian scientists and farmers have developed technologies or experimented with new methods that have the potential to improve the yield of oilseed crops. Efforts must be made to boost oilseeds production by effective use of such indigenous technologies.

With political consensus and appropriate checks and balances, the adoption of genetically modified oilseed crops can be considered. Extending oilseed cultivation to new geographical areas and crop seasons might also help. In this regard, the Committee on Doubling Farmers’ Income (CDFI) identified the strategy of making use of an estimated 12 million hectares of post-kharif fallows for cultivating non-cereal crops such as oilseeds pulses.

Fourth, edible oils obtained through secondary sources such as coconut, cottonseed, palm, rice bran have to be augmented. For instance, sixty percent of the imported edible oils consist of palm oil (crude and refined). Therefore, there is tremendous scope for expanding the area under oil palm cultivation by addressing the constraints facing the oil palm sector.

Another good example is rice bran. Being the world’s second-largest producer of rice, India has vast potential to produce Rice Bran Oil (RBO). RBO has been scientifically proved to be a healthy oil. It contains components that could control blood cholesterol, glucose, and pressure levels; reduce the possibilities of ailments such as gastrointestinal disorders, cancer, and nerve imbalance; and alleviate the menopausal symptoms like hot flashes. RBO absorbs less oil while preparing the snacks and is the best cooking oil for deep and quick frying. However, due to a lack of awareness about the health benefits of RBO among Indian households, the usage of the oil for cooking purposes has been limited. Therefore, the government and the edible oil industry need to work together to promote the production and usage of RBO.

IBT: What are the constraints that oilseed farmers face across the value chain? How are efforts to provide them sufficient remuneration progressing?

Prof Sthanu R Nair: The oilseed growers in India face numerous constraints. They mainly include inadequate access to quality inputs and organised markets; technological (read low yield) constraints, high input costs; labour shortage; inadequate storage infrastructure, irrigation, and processing facilities; price inadequacy and uncertainty; high transportation costs; exploitation by intermediaries; inadequate training of farmers and poor extension services. For improving the productivity and production of oilseeds, these problems need to be addressed.

Traditionally, compared to rice and wheat, the government price support (i.e., MSP) offered for oilseeds has been inadequate in relation to their cost of production. Also, the procurement of oilseeds by government agencies has become negligible due to the scattered distribution of oilseed producing areas and the public food management system’s relative bias towards the procurement of rice and wheat. The growth of MSP for almost all the oilseeds has decelerated in recent years. Such a scenario has resulted in insufficient returns from oilseeds cultivation in India.

Therefore higher MSP and assured procurement might facilitate more oilseeds production. On the procurement front, things are changing of late. In 2015 the central government decided to allow for the first time the Food Corporation of India to procure oilseeds from farmers at MSP on the pattern of National Agricultural Cooperative Marketing Federation of India Ltd. (NAFED), which is an existing agency involved in the procurement of oilseeds. This policy move was firmed up with the launch of a new umbrella scheme called Pradhan Mantri Annadata Aay Sanrakshan Abhiyan (PM-AASHA) in September 2018. This scheme is aimed towards ensuring remunerative prices to farmers for their produce.

Three schemes announced under PM-AASHA for the oilseeds sector are noteworthy. First is the Price Support Scheme (PSS) under which FCI and NAFED will strengthen the procurement of oilseeds in partnership with the state governments. Second is Price Deficiency & Payment Scheme (PDPS) in which the difference between the MSP and the selling/modal price will be paid to the farmers who sell their oilseeds in the notified markets through an auction process.

The third is the Private Procurement & Stockist Scheme (PPPS), which aims to promote private sector participation in the procurement of oilseeds. If implemented well, these policy moves are expected to bring transformational changes in the oilseeds sector, thereby ensuring remunerative prices for farmers.

IBT: How do you view the entry of Amul in the oilseeds space and how it can help the sector?

Prof Sthanu R Nair: Recently, the dairy major Gujarat Cooperative Milk Marketing Federation (GCMMF), which owns the famous Amul brand, announced its decision to enter the branded edible oil business under the brand name ‘Janmay’ (means “newborn” or “fresh”).  Five edible oils, namely mustard, soybean, sunflower, cottonseed, and groundnut oils, will be made available in the market under the new brand.

The oilseeds required for crushing will be procured from farmers in Gujarat, including from member-farmers of GCMMF, who are involved in the cultivation of oilseeds. Though the operation of the new venture of GCMMF is restricted mainly to Gujarat, it is a welcome development. It will help in providing remunerative prices and stable income for oilseed growers, encouraging farmers to take up oilseeds cultivation in more areas and achieving self-sufficiency in edible oils production, thereby reducing the outflow of foreign exchange on account of edible oils imports.

In my view such ventures need to be promoted also using PPPS and the provisions contained in the recently promulgated central ordinances [Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020 and Farming Produce Trade and Commerce (Promotion and Facilitation) Ordinance, 2020] aimed at facilitating contract farming and direct selling by farmers to buyers without depending on intermediaries. We need more private players in the oilseeds sector to procure the produce from farmers directly by paying remunerative prices.

IBT: How has the National Mission on Oilseeds and Oil Palm (NMOOP) progressed, and what are the challenges it faces? How can these be addressed?

Prof Sthanu R Nair: The NMOOP is one of the major policy initiatives launched by the government to achieve self-sufficiency in edible oils production and reduce import dependence. The mission was launched on 1^st April 2014 to promote the production of oilseeds and oil palm in the country by way of restructuring three existing scheme namely Integrated Scheme of Oilseeds, Oil Palm and Maize (ISOPOM), Tree Borne Oilseeds (TBOs) programme and Oil Palm Area Expansion (OPAE) programme. NMOOP comprises of three Mini Missions: Mini Mission-I focussing on oilseeds, Mini Mission-II focusing on oil palm and Mini Mission-III focussing Tree Borne Oilseeds.

Under the Mini Mission-II (oil palm), farmers are provided financial assistance to cover 85% of the cost of the planting material and 50% of the cost of the other components such as setting up of irrigation systems, cost of maintaining the oil palm plantation, and purchase of machinery and inputs for inter-cropping in oil palm until the fruit-bearing stage. The other major components of the Mini-Mission-II are supporting road construction from farmer’s field to processing centers in hilly regions, capacity building for all stakeholders involved in the oil palm sector, and ensuring an adequate supply of planting materials. Currently, Mini Mission-II is being implemented in 13 states.

Despite the good intentions, the performance of Mini Mission-II has been weak. During the first four years after the rollout of Mini Mission-II, the compound annual growth rate (CAGR) of production of oil palm fresh fruit bunches declined to 11.61% compared to 29.91% witnessed during the previous four years. Only 56% of the targeted area expansion under oil palm was achieved in the first four years after the launch of NMOOP.

It seems that the usual constraints in oil palm cultivation in India are at play here. They include a long gestation period (it takes 4-5 years from planting to the fruit-bearing stage) involved in oil palm cultivation, fluctuations in international prices of crude palm oil, high water intensity of the crop, and availability of imported palm oil at lower prices.

To expand the area under oil palm cultivation, the CDFI recommended addressing the issue of long gestation of oil palm cultivation by way of promoting inter-cropping to ensure additional income for farmers and creating an Edible Oil Development Fund (through a cess at 0.5 percent levied on palm oil imports) for compensating the oil palm farmers against fluctuations in international crude palm oil prices. Acting on CDFI recommendations, the government has set a target of bringing an additional 1.25 lakh hectares under oil palm cultivation.

Another step taken by the government recently was the relaxation of the land ceiling limit for oil palm cultivation under Mini Mission-II aimed at attracting corporates and foreign direct investment towards the oil palm sector. Some states have involved the private corporate sector for developing planting materials and processing mills and providing extension services to the farmers engaged in oil palm cultivation. However, these additional measures will not bear fruit unless the liberal import of palm oil at competitive prices is checked.

IBT: What are the reasons for the success of palmolein/palm oil in the Indian market, and what can be suitable substitutes? How can their production and market outreach be expanded?

Prof Sthanu R Nair: Sixty percent of the edible oils imported by India consist of palm oil (crude and refined), and Malaysia and Indonesia are the primary source countries. Palm oil is the largest edible oil consumed in India, followed by soybean and rapeseed-mustard oil. The success of palm oil in the Indian market is attributed to its price advantage compared to other edible oils, reduction in import duties on palm oil imports over the years, and the suitability of palm oil for blending with other edible oils (for profiteering and meeting domestic shortages) due to its colourless and odourless characteristics. Palm oil is price competitive because oil palm has the highest yielding capability (its yield is five times higher than traditional oilseeds), and palm fruit has high oil content (between 45-55 percent).

Finding a pan-Indian substitute for palm oil is not easy. This is because there has been a regional preference for certain edible oils in India. For instance, rapeseed-mustard oil is consumed mostly in the northern, central, and eastern parts of the country. Similarly, coconut oil is used mainly in some parts of Southern India. Importantly, locally-preferred oils differ in terms of flavour and odour whereas palm oil is odourless.

Also, the price competitiveness of other competing edible oils vis-à-vis palm oil has been poor. In a price-sensitive edible oil market such as India, this is an important differentiating factor. Hence, the popularity of other edible oils can be enhanced only if they are made price competitive through productivity improvement either by adopting indigenous or foreign (read genetically modified) technology. Also, as I said earlier, if adequate efforts are put in to augment the supply of edible oils obtained from alternative sources (e.g., rice bran), the popularity of palm oil can be contained to some extent.

---

Sthanu R Nair teaches Economics and Public Policy at the Indian Institute of Management Kozhikode. He obtained a Ph.D. in Economics from Madras School of Economics, Chennai. His areas of research specialisation are Agricultural Policy, Public Finance, and Energy Economics. He has published widely in the form of books, research papers in national and international academic journals and the popular press. His academic research findings are cited in various news features and articles appearing in The Hindu, The Hindu Business Line, The Economic Times, Live Mint, Business Standard, and BBC.com.