Ashok Gulati, Ritika Juneja write: The incentive structure that favours rice, wheat and sugar cultivation must be ended
Last week, the government announced the minimum support prices (MSP) of rabi crops for the marketing season 2022-23. The MSP for wheat is up by 2 per cent while that of rapeseed-mustard is up by 8.6 per cent, perhaps indicating that the government wants to focus more on edible oils/oilseeds than on wheat. This is the right approach given, on the one hand, the bulging stocks of wheat at home and the massive imports of edible oils on the other. But the profitability of MSP over the projected cost (A2+FL) is 100 per cent both in case of wheat as well as rapeseed-mustard. Given that the government has a massive procurement programme for wheat, but a very meagre one for rapeseed-mustard even when the prices rule below MSP, the relative incentive structure remains in favour of wheat. So, we doubt if farmers will switch from wheat to mustard in any meaningful manner to bridge the edible oil deficit.
In this context, it is important to note that Prime Minister Narendra Modi recently announced a Rs 11,000-crore National Edible Oil Mission-Oil Palm (NEOM-OP), as a part of the Aatmanirbhar Bharat Abhiyan. This is a bold step to augment domestic edible oil supplies, given that 60 per cent of the edible oil consumed in the country is imported — more than half of this is palm oil followed by soybean and sunflower. In FY 2020-21, edible oil imports touched $ 11 billion or about Rs 80,000 crore (for 13.5 million tonnes). Despite these imports, edible oil inflation in July 2021 (on a year-on-year basis) was 32.5 per cent.
In this backdrop, the move to promote oil palm is a step in the right direction. It is the only crop that can give up to four tonnes of oil productivity per hectare under good farm practices. But it is a water-guzzling crop, loves humidity (requires 150 mm rainfall every month) and thrives best in areas with temperature between 20 and 33 degrees Celsius. The National Re-assessment Committee (2020) has identified 28 lakh hectares suitable for oil palm cultivation in the country — the actual area under oil palm cultivation, as of 2020, is only 3.5 lakh hectares. A large potential is thus waiting to be tapped. Much of this (34 per cent) is in the Northeastern states, including Assam, followed by Andhra Pradesh (19 per cent) and Telangana (16 per cent).
NEOM-OP aims to bring an additional 6.5 lakh hectares under oil palm by 2025-26, of which 3.25 lakh hectares will be in the Northeast and the remaining in other parts of the country, most prominently in the irrigated tracts of Telangana. Thus, by 2025-26, the government hopes to cover an area of a million hectares under oil palm. We feel the government could have been bolder and attempted to cover 2 million hectares by 2025-26, given the huge deficit in edible oil production in the country. Achieving self-sufficiency in edible oil production through the other oilseeds complex would require adding about 45 million hectares under oilseed cultivation. This is not possible without drastically cutting down the area under cereal crops. The best alternative is, therefore, to ensure proper care of palm oil crop, provide good planting material, better irrigation management, fertilisers and other inputs to raise productivity to four tonnes of oil/hectare.
The NEOM-OP intends to focus on productivity and area expansion by supporting the farmers in the following ways: An input assistance of Rs 20,000-29000/ha for planting material, additional assistance of Rs 12,500/ha for four years to cover maintenance/opportunity costs of farmers, with no limits on acreage, a Rs 5-crore assistance to industries that plan to set up a five tonnes/hour processing unit, assistance of Rs 100 lakh to seed gardens in the Northeast for 15 hectares (up to Rs 80 lakh in rest of India); and support for vermiculture, irrigation and farm mechanisation. This comprehensive assistance package will, hopefully, attract farmers as well as incentivise the industry to work with agriculturists and augment edible oil production in a globally competitive manner, thereby reducing the import bill.
A critical element of the strategy is the pricing formula for fresh fruit bunches (FFB) of oil palm. There will be no MSP, but the FFB price for farmers would be fixed at 14.3 per cent of average landed CPO price of the past five years, adjusted with the wholesale price index. This is the most critical part of the pricing policy and the formula needs to be carefully calibrated. However, the litmus test of pricing will be dovetailing it with the import tariff policy to protect the farmers in case landed prices fall below the cost of production. Recently, the effective duty on crude palm oil imports has been slashed against high global prices to 30.25 per cent (including agri-cess at 17.5 per cent and social welfare cess at 10 per cent).The effective duty on refined palm has been slashed to 41.25 per cent. Duties on other edible oils, soya and sunflower, are in the same range. However, effective duty for rapeseed and cottonseed oils ranges from 38.5 per cent for crude and 49.5 per cent for refined oils. It’s this high import duty, at a time when global edible oil prices have gone up by almost 70 per cent (y-o-y), that has caused high domestic inflation (32.5 per cent) in edible oils.
In its 2012 report, “Oil Palm: Pricing for Growth, Efficiency & Equity”, the Commission for Agricultural Costs and Prices recommended that India should keep an import duty trigger at $800/tonne — if the import price falls below $800/tonne, the import tariff needs to go up in countercyclical manner. Thus, import duty needs to be in sync with rational domestic price policy. It is a necessary condition to give a fillip to aatmanirbharta in edible oils. But the sufficient condition would be revisiting the existing incentive structure that unduly favours rice, wheat and sugarcane through heavy subsidisation of power, fertilisers and open-ended procurement. The need is to devise a crop-neutral incentive structure where cropping patterns are aligned with demand patterns, and the crops are produced in a globally competitive manner.
This column first appeared in the print edition on September 13, 2021 under the title ‘An aatmanirbharta challenge’. Gulati is Infosys Chair professor and Juneja is Consultant at ICRIER.
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