Palm oil tariffs hikes: Consumers bearing brunt of self-reliance push

The Centre's decision to sharply increase import tariffs on palm oil has reignited the debate over the delicate balance between self-reliance and affordability.

While the move aims to boost domestic production and reduce dependence on imports, its timing and impact have raised serious questions about whether economic and social costs outweigh the benefits.

Duty hike adds to inflation

For millions of Indian households already grappling with inflation, the hike in basic customs duty on crude palm oil from 5.5 per cent to 27.5 per cent and on refined palm oil from 13.75 per cent to 35.75 per cent has meant paying more for essentials like cooking oil, soap and processed foods.

The ripple effects are particularly visible in the fast-moving consumer goods (FMCG) sector, where companies struggle to absorb skyrocketing input costs. This has led to price increases for daily necessities, disproportionately impacting low- and middle-income families.

Soap, a basic hygiene product, has seen prices climb by as much as 20 per cent. Cooking oil prices remain high, tightening household budgets.

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Is domestic production the answer?

At its heart, this policy presents a fundamental conundrum: should the government prioritise the long-term goal of reducing import dependence at the expense of short-term economic stability? The immediate fallout suggests that the burden has fallen squarely on consumers.

In a report titled Pathways and Strategy for Accelerating Growth in Edible Oil Towards Goal of Atmanirbharta, NITI Aayog stated: "India’s heavy reliance on edible oil imports, currently accounting for 55-60 per cent of its needs, presents a substantial challenge to its food security and economic stability."

It advocated for a "flexible tariff structure, responsive to global market prices," suggesting that "implementing a higher import duty regime can safeguard domestic production”.

A complex reality

The government’s rationale for the tariff hike lies in its ambition to promote domestic palm oil cultivation under the National Mission on Edible Oils – Oil Palm (NMEO-OP).

This initiative aims to expand palm oil plantations in northeastern states and the Andaman and Nicobar Islands, reducing India’s import dependence and securing self-sufficiency in edible oil production.

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While the vision is commendable, the reality is far more complex. Palm oil cultivation requires significant time and investment, with plantations taking years to yield fruit. Farmers face high initial costs, and many hesitate to shift to a crop vulnerable to climate risks.

Moreover, the northeastern regions targeted for expansion have fragile ecosystems, raising environmental concerns.

India’s move hurts consumers

"There is good and steady demand for our palm oil... Any cancellation of orders is just temporary because I believe that with 1.3 billion population, India will need a lot of edible oil," Malaysian plantation minister Johari Abdul Ghani said at a press conference recently.

He further noted that "increasing the import duty is the right of any government" and offered Malaysia's support for India's palm oil cultivation efforts.

Domestic production may eventually reduce import dependence, but this is a long-term solution. In the interim, the tariff hike has created a supply-demand imbalance, leading to higher prices that disproportionately hurt consumers and small businesses.

Criticism of government

"The Indian edible oil Industry, with a size of Rs 3 lakh-crore, holds significant importance. Over the last 12 years, Indonesia and Malaysia have imposed higher export taxes on crude palm oil (CPO) than refined oil to protect their refining industry. This has made refined oil cheaper, rendering Indian capacity redundant and unutilised,” said Ajay Jhunjhunwala, president of the Solvent Extractors Association (SEA).

Jhunjhunwala emphasised the negative impact of the current duty differential: "The low duty differential is negatively impacting the domestic vegetable oil refining industry... SEA has again appealed to the government to raise the duty difference from 7.5 per cent to 15 per cent between crude and refined palm oil.”

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Palm oil and deforestation

Beyond economics, palm oil’s global reputation is tarnished by its association with deforestation, biodiversity loss and human rights violations. While India imports most of its palm oil, it is not immune to these ethical concerns. The government has supported initiatives like the Roundtable on Sustainable Palm Oil (RSPO) to encourage ethical sourcing but adoption remains patchy.

Analysts say that if India is serious about promoting sustainable palm oil production, it must address the barriers preventing the widespread adoption of ethical standards. Sustainable sourcing often comes with higher costs, further complicating the affordability challenge. Striking a balance between environmental responsibility and economic practicality will be crucial.

Gradual increase in tariffs

India needs a pragmatic approach that balances long-term goals with immediate realities. Policies encouraging domestic production are essential but must be phased in with measures ensuring market stability. A gradual increase in tariffs and more significant financial and technical support for farmers could provide a smoother transition.

Additionally, the government must address supply-side constraints to prevent price shocks. Flexible import policies allowing tariff adjustments based on global market conditions help stabilise prices. At the same time, investments in alternative oils -- such as soybean, sunflower and mustard -- can diversify India’s edible oil base and reduce over-reliance on palm oil.

The bigger picture

India’s push for self-reliance is undoubtedly a step in the right direction. The pandemic exposed the vulnerabilities of overdependence on global supply chains, and initiatives like NMEO-OP signal a commitment to building domestic capacity.

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However, self-reliance cannot come at the cost of economic distress, especially for those least equipped to bear it. For the average Indian, the ability to afford basic essentials matters far more than the nuances of tariff policy.

While the government’s efforts to boost domestic production are necessary, they must be accompanied by measures that cushion the impact on consumers and industries.

The decision to raise palm oil import tariffs has exposed the trade-offs inherent in policymaking. While the government’s intentions to protect domestic farmers and promote self-sufficiency are laudable, the policy’s immediate impact has been inflationary and disruptive.