Frying pan to fire: Why did edible oil prices in India go up so quickly?

Edible oil prices in India have seen a significant rise over the past year. While prices have cooled somewhat of late, the issue is hot potato politically given that it impacts each and every Indian.

What happened to oil prices?

Oil prices in India have shot up over the past year. Look at this chart of packed oil retail prices in the city of Delhi, for example. Mustard, vanaspati, soya and palm oil have gone up by around 30% while sunflower has shot up by more than 40%.

Why have the prices gone up?

India imports a large part of its edible oil. Around 70%. This wasn’t always the case.

Till the early 1990s, India was self-sufficient in edible oils, depending on traditional cooking mediums such as mustard oil. However, a series of government decisions post-liberalisation to favour international free trade as well as a significant increase in per capita consumption, engineered a massive shift, with imported palm oil becoming the market leader.

India’s edible oil imports are so large that the country spends more on importing only two other commodities: crude oil and gold.

The impact of this extreme dependence on imports means that retail prices of edible oils in India are highly sensitive to international conditions. In the past year, to India’s poor luck, multiple crops faced problems around the world. Covid-19 lockdowns in Malaysia resulted in a poor palm crop. Dry spells in Ukraine and Russia saw sunflower oil production hit with global production falling by 9% in 2020 year-on-year. And demand for biodiesel saw soya bean oil prices hit a record high.

Given edible oil is a highly substitutable product, this pushed up prices of even locally produced oils such as mustard. Mustard oil faced further pressure given that due to lockdowns, home-cooked food saw increased consumption, which is where mustard oil is mostly used.

Can domestic production help?

India’s total oilseed production has risen marginally in the past few years. In theory, the government has stated that it aims to increase domestic production (even if these aims are often not followed on the ground). Increased local production is, of course, critical for food security and also helps increase agricultural incomes.

However, increasing domestic production by itself might have a limited impact on price. In fact, it might even increase them further.

Bharat Mehta, the head of Solvent Extractors’ Association, which represents Indian oil producers, explains that this is due to inefficient farming practices in India. “Productivity in India is very low,” explained Mehta. “So it’s natural that given this low productivity, the prices will be high.”

Small farm sizes and outdated farming practices mean that Indian farming is one of the most inefficient in the world. For example, the yield of soyabean in Brazil is around than three times that in India.

So while making farming more efficient and reducing edible oil imports would be beneficial targets, the political focus on inflation means that governments inevitably end up ignoring farmer incomes to keep consumers happy.

Can import duties have an impact?

India levies a 32.5% duty on palm oil imports, while crude soya bean and soya oil are taxed at 35%. The Modi government was seriously considering reducing these taxes in order that retails prices can be decreased. However, movements in international markets saw oil prices decline in the previous week.

In a June 16 press release, the government noted that “in some cases, the decline [in prices] is as much as 20%”. As a result, Reuters reported that the Indian government had put on hold its plans to cut duties.

While oil prices are still significantly higher than last year, the precarious fiscal situation of the government itself means it has limited room to maneuver on this front even though inflation in a commodity as critical as edible oils could have significant electoral repercussions for the ruling Bharatiya Janata Party.