India Threatening the Malaysian Palm Oil Industry

Published Jan 10, 2020

India's import policy for Malaysian palm oil has changed rapidly over the last 6 months. Whilst in October import duties were increased, they were lowered again in December. In January, however, a ban was placed on the import of Malaysian palm oil.

India is ruling on its import regulations on palm oil. India imports most of its palm oil from Malaysia. After raising import duties on Malaysian palm oil in October, it lowered duties again in December. Recently, it has outright banned the import of palm oil from Malaysia, the first time ever India uses trade retaliation against a partner country. Commentators mention different underlying reasons: political tensions, price stabilization, and domestic industry protection.

India is the largest buyer in the world of edible oils and palm oil accounts for almost two-thirds of India's total edible oil imports. The country imports about 15 million tons of vegetable oil every year to meet domestic consumption and imported 10 million tons of palm oil in 2019. Malaysia and Indonesia are the first and the second largest exporting countries for crude palm oil and Malaysia is the only dominant exporter of refined palm oil.

India’s Palm Oil Import Policy Flips Again and Again

Back In September 2019, Malaysia and India had a dispute over the Kashmir region, a contested territory in India, after the Malaysian Prime Minister Mahathir Mohamad stated that “India had invaded and occupied the Himalayan territory”. Expanding to a trade war, all the vegetable refineries in India switched from Malaysian to Indonesian crude palm oil. In October, the Indian government also raised the import taxes on refined palm oil from 45% to 50% to protect its local refinery industry. The average capacity utilization of Indian refineries has declined to 46% in 2019 from 65% about five years ago due to an increase in imports.

This policy was overturned after just 3 months when the import duties were lowered in December. In December 2019, India lowered the import duty on crude palm oil to 37.5% from 40%, while a tax on refined palm oil was cut to 45%. However, in another policy overturn, the Indian Ministry of Commerce declared that the import of refined palm oil is amended from ‘Free’ to ‘Restricted’ on January 8, 2020.

Palm Oil as a Diplomatic Weapon and Economic Stabilizer

At the end of 2019, India announced that it wants to renew its focus on its relationship with ASEAN countries, both for its economic relationship and defense partnership. The notice for cutting import tax of palm oil followed right after the announcement.

Many people interpreted that this move was made not only to relieve the tension with Malaysia but also to stabilize the domestic consumer prices. India is suffering from a high inflation rate, with the Consumer Price Index in December having risen to 6.9%, which is the highest since August 2014. Rising food prices, led by high prices for fresh vegetables, remain the key driver of food inflation. Since the price for fresh produce cannot be controlled easily, lowering the consumer prices for edible oil could serve as a stabilizer.

On the other hand, The recent import ban in January is related to a diplomatic dispute with Malaysia about the Kashmir region and New Delhi’s new citizenship law. India warned Malaysia already in September after a first political dispute on the Kashmir region by raising import duties. Recently, Malaysia’s Prime Minister Mahathir expressed strong criticism on India’s recently passed Citizenship Amendment Act – which fast-tracks citizenship for nationals of certain neighboring countries, excluding Muslims. This statement aroused the tension between the two countries again.

The decisions by the Indian government on the palm oil import policy is working as a carrot and stick for the two largest ASEAN countries, Indonesia and Malaysia. The restrictions will hit Malaysia, the main supplier to India of refined palm oil and crude palm oil, but is likely to help Indonesia, the second biggest exporter of crude palm oil. Malaysian refineries will have to rush to find new buyers for their product. Since India’s import volume accounts for 30% of the palm oil production in Malaysia, it would be almost impossible to find a comparable market. With Indonesia as an alternative source, India is in a dominant position to decide on the policy while Malaysia is in a lose-lose situation.

Will India Resume Buying Malaysian Oil?

India is in a relaxed position. It is likely that the Malaysian government may either soften their criticism or propose a favorable trade policy to India in order to resume their palm oil exports. Back in October, after the increase in palm oil import tax, a Malaysian minister even proposed the idea of increasing imports of raw sugar and buffalo meat from India in 2020. Benchmark Malaysian palm futures fell nearly by 10% in the 2nd week of January, after Prime Minister of Malaysia Mahathir Mohamad mentioned that Malaysia is too small to take retaliatory action and that the country will have to find alternative markets to overcome the situation.

Whilst the ties between India and Malaysia are strained, Indian imports of soybean oil and sunflower oil from other sources are expected to increase to compensate for the lower imports of palm oil.