Addressing the Impact on India of Indonesia's 2022 Export Ban on Palm Oil

Introduction

India is the world's largest importer ofpalm oil, as its derivatives are omnipresent in the Indian consumer sector. Itswide uses as a raw input, which can be seen in the FMCG industry, the cosmeticsindustry among others implies that India’s demand for it will double by 2030(Simlai and Maheshwari, 2021). Therefore, arise in the price of palm oil adversely impacts Indian consumers.

As the COVID-19pandemic spread rapidly across six continents in early 2020, government-imposedlockdowns affected the production and processing facilities of edible oil incountries like Indonesia and Malaysia. Production was adversely affected inIndonesia and Malaysia, which are strategic supply chain points and account forapproximately 40% of the edible oil market. Hence, the price for edible oilsrose to almost 250% of standard market rates (FAO, 2020).

Due to the ongoing Russia-UkraineWar, India has switched to Argentina and Brazil for edible oil imports. But analystsexpect droughts to negatively affect Brazil and Argentina’s harvests soon (Atesand Bukowski, 2022). InIndia, edible oil is the third largest import after petroleum and gold. As amatter of food security, India cannot become heavily dependent on imports tosatisfy its expected increase in demand for the commodity. Hence, it is vitalfor the Indian government to increase its domestic production palm oil in asustainable manner.

Indonesia’sBan of Palm Oil Exports

Indonesia is theworld’s largest supplier of palm oil. Oil palm plantations in Indonesia yieldan average of approximately three tons of oil per hectare each year (Mapa,2022). However, according to the Indonesian Palm Oil Association,local production of crude palm oil fell in 2021 compared to 2020, even as globaldemand surged for the commodity. When demand increases and supply falls, priceswill rise if other determinants remain constant. Hence, in 2022 the price of aton of Indonesian crude palm oil cost $1,700 on the European market, increasingsignificantly from its price of $545 in April 2020 (Ates and Bukowski, 2022).

When the price of edibleoils began to rise, the Indonesian government scrambled to find effectivedomestic measures to protect domestic consumers. To bring the price down, theydecreed a price cap on palm oil and imposed a consumption limit of two litersper consumer. They also increased the levy on palm oil exports and offereddirect cash transfers to low-income citizens to subsidize their purchases ofthe commodity (Murali and Palit, 2022). However, the administration’s inabilityto stabilize prices resulted in protests from citizens. Indonesia therefore announcedthe export ban of crude palm oil in April 2022.

TheImpact of the Palm Oil Export Ban on the Indian Economy

The prices of edibleoils were already high in India following Russia's attack on Ukraine. The two countrieswere responsible for more than half of the global production of sunflower oil(FAO 2022). Additionally, India's imports of palm oil had been hampered by adiplomatic dispute with Malaysia after the Malaysian Prime Minister Mohamad criticizedIndian policies over Kashmir. Therefore, between 2020 and 2021, palm oil pricesincreased in India by more than 50% (Ates and Bukowski, 2022). To controlrising prices, the Indian government reduced import duties. But India'sincreased inflation due to the economic effects of the Covid-19 pandemic addedto rising price levels of essential commodities for domestic consumers.

Following a three-weekban on crude palm oil, the Indonesian government lifted the ban on 23 May 2022.Following lifting of the ban, the government introduced additional requirementsfor exports, including reinstating the Domestic Market Obligation (DMO) and theDomestic Price Obligation (DPO) to stabilize the price of domestic cooking oil.The DMO requires palm oil supplies to be reserved for domestic consumptionversus export at a 1:3 ratio, with an aim to safeguard 10 million tons ofdomestic cooking oil supplies, the reason for the domestic agitation inIndonesia (FAO, 2020).

The price of edibleoil in India would take time to fall because India relies largely on theinternational market for 70% of its use. The demand for fried good is lesserover the summer, hence the demand for edible oil is expected to fall. To reduceIndia's reliance on imported oil, the central government took an important stepby determining the guidelines of the National Mission on Oilseeds and Oil Palm (2014)during the 12th Five Year Plan. The initiative intends to increase edible oilproduction and grow oil palm plantations.

To counter India’sreliance on other palm oil producing countries and to address the issue ofnon-employment among the vast Indian population, the Indian government launchedthe National Mission on Edible Oils – Oil Palm (NMEO-OP Guidelines, 2021). Thisnew palm oil initiative aims to boost India’s self-sufficiency in edible oilsand help increase farm incomes. Under the new scheme, oil palm is offered as analternative to low yield crops such as sugarcane and paddy, with expansionfocused on areas where it can be a rain-fed crop (WWF, 2022).

Meanwhile, theprohibition on oil imports, combined with supply disruptions caused by theongoing conflict in Ukraine has resulted in price increases in the edible oilsector. India’s reliance on imports, particularly palm oil is thereforeexpected to decrease. Indian imports have been gradually decreasing since priceshave become unattractive in the international market, even as Indonesia easesthe ban on crude palm oil exports (Ates and Bukowski, 2022).

PolicyRecommendations

a.     IncreasingDomestic Yield

In India, palm oil ismainly cultivated in the states of Andhra Pradesh, Karnataka, Tamil Nadu,Kerala and the Andaman and Nicobar Islands. India has undertaken significantinitiatives to grow palm oil, including identifying 2 million hectares acrossthe country for cultivating the crop to implementing the National Mission onOilseeds and Oil Palm (NMOOP) under the 12th Five Year Plan. However, thecountry hasn’t yet been able to achieve self-sufficiency in the production of palmoil. One factor for this could be the reluctance of farmers to adopt itscultivation.

While returns to palmoil have remained consistent over the last few decades, the crop requires high degreesof maintenance in the cultivation process which is difficult for small farmers whopossess extremely minuscule financial capacity. Palm trees grow as high as 12meters, posing maintenance difficulties for individual farmers. Moreover, oilpalm bunches are heavy and spiny, requiring the use of sharp sickles. Oil palm cultivationis therefore financially unviable for small landholders and tenant farmers. Itis also extremely susceptible to seasonal fluctuations (Indian Ministry of Agricultureand Farmers Welfare, 2014).

Farmers requireassistance in introducing new techniques and improved land management systemsto gain scale in cultivation capacities of oil palm. These include:

i.                Industry Status

Oil palm has not beendeclared officially by the Indian government as a plantation crop. Hence farmersdo not enjoy the benefits of its cultivation as they can with tea, coffee orrubber industry. It is recommended by the guidelines of the National Mission onEdible Oils (2022) that industry status should be provided to the cultivationof palm oil, which would help farmers cultivate the crop with increasedpersonal financial viability and revenue generation.

ii.               Provisions of the LandCeiling Act

India needs to employapproximately 2 million hectares of agricultural land out of its 160 millionhectares to produce palm oil for its domestic requirements (Murali and Palit,2022). New techniques will need to be developed for effectively utilizingIndia’s land resources. Additionally, modifications should be brought in landclassification to increase the availability of land for palm oil cultivation.

iii.             Cooperation between Industryand Farmers

More than half of thetotal number of Indian farmers are dependent on rain with no access toirrigation. The new scheme rolled out for small farmers to assist in oil palmproduction will not be effective until they are given other resources, likeirrigation facilities, equipment and techniques. Establishing connectionsbetween leading corporate organizations in India (such as Patanjali, Godrej amongothers) and small farmers can pave the way for stability in the production ofpalm oil.

Small holdings likeAsian Agri in Indonesia are also an important innovation that India canconsider adopting. Asian Agri has assisted its smallholder partners in improvingproductivity, supply chain traceability, in obtaining certifications and inminimizing greenhouse gas emissions through energy efficient mills.

b.    Sustainable Cultivation andProduction Practices

Using environmentallysustainable practices, setting realistic goals, and respecting India'sbiodiversity will be critical in expanding the domestic cultivation and productionof palm oil. Expansionary decisions based on short-term economic benefits willlead to biodiversity issues including the loss of indigenous communities'traditional rights to natural resources, illegal clearing of forest lands, occurrenceof forest fires and exploitative fertilizer use. Hence, engaging allstakeholders including the local population, village councils, the Indiangovernment and nonprofit organizations is key for success in the domestic productionof palm oil.

Business models canalso be brought into this industry, to not only increase the production level,but grow the crop sustainably. Increasing awareness on sustainable palm oil productionamong supply chain actors and improving capacity building for multi-stakeholdercollaboration is key.  One suchenterprise is Navabharat Limited (NBL), an edible oil processor based in AndhraPradesh and the first private company to breed oil palm seeds, which iscurrently working with RSPO to get its plantation certified (OPAE, 2011).

In a move towardspromoting sustainable practices, the ‘Sustainable Palm Oil Coalition for India’(I-SPOC) was formed by RSPO, Center for Responsible Business (CRB), RainforestAlliance, and the WWF team in India (2022). In addition to this initiative,training and capacity building work in Andhra Pradesh (the leading producer stateof India’s domestic palm oil market) are supporting Indian farmers in adopting sustainablefarming practices and increasing their yields of palm oil. Since 2020, RSPO andWWF-India have been training 400 Indian farmers and palm oil mills in AndhraPradesh under the RSPO Independent Smallholder Standard.

c.     Spatially Explicit Mapping

NMOOP is on a missionto plant oil palm on an additional 120,000 hectares of land (OPAE, 2011). InGhana, where natural areas are being turned into plantations, similar policiesare already directing the sustainable development of oil palm farms. In India,however, existing agricultural areas and non-arable fallow lands must beutilized to cultivate oil palm. Such trade-offs must be investigated at a moreregional or local level. Oil palm is the most efficient oilseed, producingroughly 5 times more per unit area than any other major oilseed crop (WWF, 2022).Plantations should be expanded on existing agricultural lands by convertingother oil seed crops like rapeseed, peanut, and sunflower seed, as well asstaple food crops like rice, to oil palm plantations.

For this theGovernment implemented the National Mission on Oilseeds and Oil Palm underwhich roughly Rs 11,000 crore will be invested to promote oil palm cultivationin the northeastern states and Andaman and the Nicobar Islands. The area underoilseeds has also increased to 28.8 million hectares (NMOOP, 2014). Over thelast couple of years, the Centre has begun distributing oilseed mini-kits withhigh-yielding seeds of soyabean, groundnut and sesame.

d.     Increasing Irrigation Facilities

Palm trees aretypically found in tropical climates such as Indonesia and Malaysia, which havean average annual precipitation of over 2,500 mm. Due to the size of thesecrops, the water requirement is high which can put a large strain on the watertable. India’s average annual precipitation comes to a little over 1,000 mm. Hence,to fulfill India’s demand for palm oil, improved irrigation systems arerequired for domestic cultivation of the crop (OPAE, 2011).

With adequateirrigation, non-arable fallow lands could likewise be transformed intoplantations. This irrigation can be provided by the businesses or by variousstakeholders. Additionally, intercropping can be done to avoid the wastage ofland and water. With climate models predicting a 0.5C rise in temperature inIndia by 2030, heat waves, drought, severe storms, and flooding are projectedto worsen in the future, posing a threat to health and livelihoods. Oil palm isa water-intensive crop that requires 280 to 350 L of water per plant per day. TheNMOOP (2014) includes incentives for farmers to install drip irrigation andbore wells, as well as build ponds and acquire irrigation pump sets. However, tosustain irrigation, groundwater replenishment must be quickly incentivized andaccomplished. Stakeholders can also invest in irrigation techniques and furtherdecentralize to the local farmers for implementation.

Conclusion

In the aftermath ofthe COVID-19 pandemic, India has understood and acknowledged the urgentrequirement for self-sufficiency to reduce dependency on imports around vitalgoods. To become self-reliant, the Indian government has set a target ofcultivating palms on roughly one million hectares of land by the year 2029-30(Mapa, 2022). Several policy initiatives to boost domestic production like theexpansion of areas under cultivation for palm trees have been set into motion.These have helped India increase the total area under cultivation of oil seedsin India from 9 million tons in 1986 to 32 million tons in 2019. However,analysts argue that much remains to be done for meeting forecasts of increaseddemand for the commodity in the future.

References

·       Nurkhoiry,Ratnawati & Oktarina, Sachnaz Desta. “How does COVID-19 Impact Oil PalmManagement Practices in Indonesia?” International Journal of Oil Palm, Volume3 (2), pg. 56-67, May 2020. DOI: https://doi.org/ 10.35876/ijop.v3i2.49.

·       M.Ates, Aaron & Bukowski, Maria. “Oil Crops Outlook: February 2022”. UnitedStates Department of Agriculture (USDA): Situation and Outlook Report,OCS-22b, 11 February 2022.

·       Foodand Agriculture Organization (FAO). “Oilseeds, Oils & Meals: Monthly Priceand Policy Update”. MPPU: Issue no. 134, September 2020.

·       Mapa,Nicholas. “Indonesia: Palm Oil Export Ban Shrinks Trade Surplus”. ING:Economic and Financial Analysis, 15 June 2022.

·       Simlai,Neha & Maheshwari, Sneha. “Moving Towards Responsible Sourcing: India andPalm Oil”. KPMG: The Sustainable Trade Initiative, November 2021.

·       Guidelinesfor Special Programme on Oil Palm Area Expansion (OPAE).Department of Agriculture and Cooperation, Ministry of Agriculture, Governmentof India: New Delhi, March 2011.

·       Murali,Divya & Palit, Amitendu. “Indonesia’s Palm Oil Export Ban: India mustDiversify Sources to Avoid Future Supply Disruptions”. ISAS (Institute ofSouth Asian Studies) Brief, No. 927 – 27, April 2022.

·       NationalMission on Edible Oils: Operational Guidelines. Departmentof Agriculture & Farmers Welfare, Ministry of Agriculture & FarmersWelfare, Government of India: New Delhi: 2022.

·       NationalMission on Oilseeds and Oil Palm (NMOOP): Operational Guidelines.Department of Agriculture & Farmers Welfare, Ministry of Agriculture &Farmers Welfare, Government of India: New Delhi: 2014.

·       PalmOil in India. WWF (online), 2022.

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