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

Wake up last year. While prices have dropped slightly, the problem is politically hot potatoes that affect individual Indians.

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 the increase?

India imports most of its edible oil. About 70%. This was not always the case.

Until the early 1990s, India was independent of edible oils, based on traditional recipes such as mustard oil. However, a series of post-liberal government decisions to favor free international trade and a dramatic increase in individual consumption, have made a big difference, with imported palm oil becoming a market leader.

The importation of edible oil in India is so great that the country uses it to import only two other things: crude oil and gold.

The impact of this excessive dependence on imports means that the price of edible oil in India is less critical to global conditions. Last year, in the Indian subcontinent, many plants faced problems around the world. The closure of Covid-19 in Malaysia has resulted in poor palm yields. Dry spells in Ukraine and Russia have seen petroleum production fall by global production by 9% in 2020. And the demand for biodiesel saw the price of bean wool reach a very high level.

Given that edible oil is a highly volatile product, this increases the prices of locally produced oil, such as mustard powder. Mustard oil was subjected to additional pressures because of the closure, home-cooked meals saw increased consumption, at which point more mustard oil was consumed.

Can home production help?

India's total oil production has risen slightly over the past few years. In theory, the government states that it intends to increase domestic production (although these goals are often not pursued). Increased productivity is very important for food security and also helps to increase agricultural income.

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However, increasing domestic productivity alone may have a limited impact on prices. In fact, it can make them even bigger.

Bharat Mehta, head of the Solvent Extractors ’Association, which represents Indian oil producers, explains that this is due to poor farming practices in India. “Production in India is very low,” explains Mehta. "So it is natural that if you are given this low product, the prices will be higher."

The small size of the farms and the 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 almost three times that of India.

So while making agriculture more efficient and reducing consumption of fossil fuels can be good intentions, the political focus on inflation means that governments are ultimately ignoring farmers' money to keep consumers happy.

Can import activities have an impact?

India imports 32.5% of tariffs on palm oil imports, while crude soybeans and soybean oil are taxed at 35%. The Modi government has been seriously considering reducing these taxes so that retail prices can be reduced. However, global market movements saw a drop in oil prices over the past week.

Released to the media on June 16, the government noted that "in some cases, the decline in [prices] reaches 20%". As a result, Reuters reported that the Indian government has withheld its plans to reduce jobs.

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Although oil prices are still much higher than last year, the government's fiscal position means we have limited space to do so in the past even though inflation in a crisis such as crude oil could have significant election consequences for the ruling Bharatiya Janata Party.

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