India’s policy makers seem to have slipped on oil while trying to balance foreign and domestic policy goals.

In January, India put three categories of refined palm oil on the list of restricted import items. This move was meant to squeeze Malaysia for its criticism of India’s policies in Kashmir and enactment of the Citizenship (Amendment) Act (CAA). Reuters reported on Thursday that the government had issued import licenses for importing 1.1 million tons of palmolein, a variety of refined palm oil which was among the three categories put on the restricted list, from Indonesia. Why is this move significant?

Palm oil and its variants have a share of more than 50% in India’s total edible oil, fat and waxes (edible oil) imports. In 2018-19 India’s oil and fat imports were worth almost $10 billion. This is almost a fourth of India’s total agricultural exports ($38 billion) that year. Almost all of India’s palm oil imports are sourced from Indonesia and Malaysia.

See Chart 1: Share of Indonesia, Malaysia in India’s total Edible Oil Imports

Consumer Price Index (CPI) data for January was released earlier this month. It showed that inflation for oils and fats (which include edible oil) more than doubled between December and January. At 6.6%, the inflation rate for oils and fats in January 2020 was the highest since December 2015.

The government decision to put palm oil in the restricted category list was taken at a time when international edible oil inflation was almost at a decade’s high. The Food and Agricultural Organisation’s (FAO) oils price index rose 10.4% and 9.4% in November and December 2019. The November value was the highest since October 2010. Trying to cut off among perhaps the most important sources of edible oil imports when international prices were already rising, clearly came with a risk of triggering domestic inflation. CPI data for January suggests that this risk might already have affected domestic inflation.

See Chart 2: Domestic and FAO edible oil inflation

Experts believe that the government’s decision might have been hasty. “No one took a holistic view of the situation while putting the restrictions in the first place. Food inflation was already mounting when this ban was imposed”, said Biswajit Dhar, professor of economics at Jawaharlal Nehru University. “The latest decision (on imports from Indonesia) might not bring any relief, as most commodity prices are speculators’ markets. India is among the biggest consumers of edible oil and signals that its demand for the commodity is rising will push international prices upwards. What’s even worse is that we have no effective system in place to circumvent import of palm oil from Malaysia via Indonesia,” Dhar added.

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