From UPSC perspective, the following things are important :
Prelims level : National Edible Oil Mission-Oil Palm (NEOM-OP)
Mains level : Edible oil scarcity in India
Last week, the government announced the minimum support prices (MSP) of rabi crops for the marketing season 2022-23.
Key Highlight: Hike for Oilseeds MSPs
- The MSP for wheat is up by 2 per cent while that of rapeseed-mustard is up by 8.6 per cent.
- This indicates that the government wants to focus more on edible oils/oilseeds than on wheat.
- It is important to note that PM 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 remains very high (July 2021 was 32.5 per cent).
- Against this backdrop, the move to promote oil palm is a step in the right direction.
Reasons for oil price hikes
- 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.
Why Oil Palm?
- 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 temperatures 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.
- 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).
- A large potential is thus waiting to be tapped.
No reasons for farmers to switch
- The government has a massive procurement programme for wheat, but a very meagre one for rapeseed-mustard even when the prices rule below MSP.
- This 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.
What can be done to make NEOM-OP more effective?
The NEOM-OP intends to focus on productivity and area expansion by supporting the farmers in the following ways:
(A) Financial assistance
- Input assistance for planting material, additional assistance to cover maintenance/opportunity costs of farmers, with no limits on acreage.
- Big-budget assistance to industries that plan to set up a five tonnes/hour processing unit.
- Such a comprehensive assistance package will attract farmers as well as incentivize the industry to work with agriculturists and augment domestic edible oil production.
(B) Pricing mechanism for OP
- There will be no MSP, but the FFB price for farmers would be fixed at 14.3 per cent of average landed crude palm oil 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.
(1) Rationalizing import duties
- The Commission for Agricultural Costs and Prices (CACP, which recommends MSP) recommended that India should keep an import duty trigger at $800/tonne (say).
- 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.
(2) Neutral incentive structure
- 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.
- There is a 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 crops, provide good planting material, better irrigation management, fertilizers and other inputs to raise productivity to four tonnes of oil/hectare.