Rising Prices and Its Impact in India

In the Indian food sector, vegetable oils play an important role, both in nutrition and household budgets. This is signified by India’s need to import around 60-65% of vegetable oils requirement. After a rally in the prices of oilseeds and edible oils during the first wave of COVID pandemic amid lockdowns and supply fears and unusually high demand, the second wave of infections has added to the rise in prices and sent the prices of the essential commodities soaring.  Data provided by the State Civil Supplies Departments and Union Ministry of Consumer Affairs, Food and Public Distribution, show that in May 2021, monthly average retail prices of six edible oils, Palm, Soya bean, Sunflower, Mustard, Groundnut and Vanaspati, have reached their highest levels since January 2010.

Changes in international prices have a direct impact on domestic prices of vegetable oils as 60-65% of India’s requirement is met by imports. Global supply of vegetable oils had initially decreased due to supply chain issues in view of COVID 19 restrictions worldwide. Palm oil supply has fallen because of weather and the labor shortage in Malaysia. Biofuel mandates have increased local consumption especially in Indonesia, leaving a lower exportable surplus. Soya bean oil prices are rising because of dry weather in Argentina and increase in bio-diesel production, followed by high demand from China. Sunflower oils prices are high due to lower crop in Ukraine and Russia. A global shortfall in production, weather conditions and high duty in India as well as in exporting countries, have contributed to a rise in prices. According to the Food and Agricultural Organisation of United Nations, global vegetable oil prices Index for April 2020 was 81.2 whereas it has doubled to 162 in April 2021.

This rise in prices has been favorable to domestic farmers as agricultural mandis (wholesale farm produce markets) and private players are offering and buying produce at higher prices than Government’s minimum support prices (MSP). Some farmers are also holding back their produce in hopes of higher prices. Agriculture costs have also been going up resulting from   the rise in their input and labor costs, coupled with acute shortage of labor, reverse migration, transportation and logistics issues due to COVID 19 pandemic. Soybean seed cost has increased over 80% compared to last season. In April 2021, the cost of fertilizers has also increased by around 45-58%. Except urea, the price of all other fertilizers has increased. Some farmers are already resorting to buying less fertilizer, which may have an impact on overall productivity. A spurt in the cost of cultivation might shift the interest of farmers from lower income crops to higher income commercial crops, whereas some might shift to growing vegetables. However, the last one-year has been good for the agriculture sector. With increased production in India, crops and prices have also been higher than the last year.

It is to be noted that the farmers are also consumers at the end of the cycle in an agrarian-based economy like India, where around 70% of the population is based on Agriculture. High inflation amidst the pandemic hit lockdowns and economic woes has placed consumers under reeling pressure. The pandemic has increased the level of unemployment and decreased income leading to financial instability which is pushing consumers to cut on their food expenditure, threatening spell of nutritional poverty and malnutrition amongst children.

While healthcare costs rose moderately during the first wave of the pandemic, it has skyrocketed during the second wave. Consumer sentiment is weak as the second Covid-19 wave has not only claimed thousands of lives but has also led to massive loss of livelihood among the informal working class, evident by the rising unemployment rate. One of the main causes in the fall of consumer sentiment is because of the drop in household income and savings, stimulated by higher unemployment rates and rising prices. According to the Centre for Monitoring Indian Economy (CMIE), at least 97% of Indian households have suffered a loss in real income. This has already led to around 2% demand destruction. 

The consumption of palm oil, mustard oil, is high in rural areas, and refined oils like sunflower oil and soya bean oil is higher in urban areas. According to Government data, retail prices of edible oils have shot up by 55.55% over the last year. The retail price of mustard oil (packed) has increased by 44%. The prices of soya bean oil and sunflower oil have also increased more than 50% since last year. Vegetable oil consumption has witnessed a fall of around 20%.

Table 1: Retail prices of packed edible oil

Edible Oil Average Price in May 2021
(Rs./per Kg)
Average Price in May 2020
(Rs./per Kg)
Palm Oil 133.99 86.98 54.5
Soya bean oil 100.78 153.85 52.66
Sunflower Oil 110.54 172.79 56.31
Mustard Oil 118.79 171.45 44.33
Groundnut Oil 147.87 177.59 20.1
Vanaspati 90.37 131.21 45.19

Source: Department of Consumer Affairs

India’s wholesale price-based inflation surged to an 11-year high of 10.49% in April 2021, mainly due to a sustained rise in fuel and commodity prices, signaling a build-up of inflationary pressures. India’s retail inflation based on the Consumer Price Index (CPI) has consistently registered above 6% during the second half of 2020, hitting a nearly six-and-a-half-year high of 7.6% in October 2020. India’s food inflation zoomed to over 11.07% in October 2020. Though, in April 2021 CPI inflation was seen at 4.29% and food inflation at 2.02%. The food inflation could have a damaging effect on India’s poor who are already dealing with very low or no income. There has been a significant increase in poverty and hunger.

Adding to the plight of consumers, many FMCG companies have raised prices in categories like soaps and toiletries. Given the subdued sentiment due to the pandemic, most companies have been cautious about passing on the price rise to consumers; but, witnessing the rise in prices of edible oils they might hike prices further to offset inflationary pressures. Consumers may have to shell out more money for their daily-use products such as detergents, soaps, creams and tea.

The hike in prices has crushed the already battered HoReCa sector as well. The world’s most consumed edible oil has surged greater than 120%. It is mainly consumed by HoReCa sector, which accounts for nearly 40%. While the state lockdowns this year have allowed the HoReCa sector to open at partial capacity, Indian palm oil refiners and bulk buyers are being extra cautious due to the high prices of crude palm oil. Quick Service Restaurants and social gatherings have trimmed down Indian edible oil consumption by around 400,000 MT in 2021 from 600,000 MT in 2020 levels on a monthly basis. The demand from Allied industries like bakery industry, sweet and namkeen industry, chocolates, biscuits, cosmetic manufactures, which mainly use palm oil has also decreased by 40-50% due to COVID induced lockdown and is further affected by the rise in prices of edible oil.

Companies aspiring to shift from palm to different oils might discover alternatives restricted as a consequence of increased prices in whichever alternative they select. Soya bean oil, the second-most consumed oil, is up by 150%, and sunflower oil prices from Ukraine have surged more than double. International inflation is on a seven-year high. The rise in prices to all-time highs is bound to affect consumer habits. Consumption is slowly on the downward trend and if this rally of prices continues, there can be a long-lasting shift in food habits and preferences of consumers.

Poultry demand is also affected by doubled edible oil prices and high production costs of critical inputs such as soya. The production costs have increased by over 40% since last year. The raw materials like soya, oil cakes, and maize have seen a quantum jump in the price by around 25-30%. Though the prices of soya and maize have decreased slightly from their earlier high levels, they are still high for the poultry farmers. The high prices of soya bean and maize have led to change in poultry feed mix and some sections of the producers are substituting them with mustard seeds/meal, bajra and broken wheat among others, mainly in the broiler segment. Poor demand from bulk users like HoReCa industry, which accounts for one-third of total consumption, has also affected the animal feed industry. The demand for animal feed categories such as milk, eggs and broiler meat will only increase when the HoReCa segment revives.

The price rise has affected both the consumers and edible oil refiners in different ways. Refiners are witnessing lower capacity utilization at their factories. Until 2019, the capacity utilization levels were around 75%, which have dropped to 65% annually. This price rally increases volatility and uncertainty. Many perceive this hike is because of the Commodity Derivatives market rampant speculation. Given the recent price volatility, the China Banking and Insurance Regulatory Commissions (CBIRC) has ordered lenders to stop trading investment products linked to commodities as ordinary investor may suffer huge losses. Government levies and duties, as well as the prevalence of speculative actors in the market, increases the volatility and uncertainty.

Government of India has also sought views to curb the high inflation in edible oil prices. There is a need for immediate short-term measures to keep prices in check and also keeping the focus on long-term plan for making India self-sufficient in edible oil production. SEA of India suggested freezing of tariff values at a lower level. Indian Vegetable Oil Producers Association (IVPA) suggested implementing a slab system for import duty. For short term, they also suggested routing edible oil through PDS for vulnerable sections of society. The reduction in import duties helps only partially to control the prices. It has been observed that whenever India reduces import duty, international prices are partially increased, though eventually prices are global supply and demand driven. There is a need for standard policy and duties for everyone without any biases.

The demand destruction due to high prices and lockdown like situation has decreased the prices slightly. China wants to ramp up its domestic edible oil production and might reduce its imports which might give some relief in prices. Also, the prices are expected to cool down with expected good domestic production and good monsoon (as per IMD reports, normal monsoon is expected this year), lockdown restrictions easing and vaccination picking up pace in the country. But there are concerns regarding the festival season, which will increase the demand and prices too. There is a need for the government to take proactive steps to control the prices and the need of the hour is the smooth and undeterred supply chain to the retail shelves. Already, the spectra of high inflation combined with high unemployment and decreasing low demand is looming large.

Prepared by: Bhavna Shah 

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