Financial Daily from THE HINDU group of publications
Thursday, Aug 12, 2004
Exports & Imports
Agri-Biz & Commodities - Excise and Customs
Industry & Economy - Economy
Tinkering with customs duty will not help curb inflation
Mumbai , Aug. 11
FOLLOWING the high-level meeting in New Delhi to take stock of the price situation and explore ways and means of containing inflationary tendencies, speculation in the marketplace that the Government would seriously consider reduction in customs duties on the import of some essential commodities is rife.
In its anxiety to rein-in prices, the Government may be tempted to reduce customs duties on food products such as edible oil and sugar. Nothing could be more damaging to the domestic oilseeds and sugar economy than a reduction in import duty at this point of time.
Take sugar. No doubt, a sharp decline in domestic production in 2003-04 is keeping the market buoyant and production prospects for next year too are none too bright. While lower production for two years in a row is a matter of concern, large stocks with sugar mills are a source of strength.
The sugar inventory should be effectively deployed to curb any rise in open market prices. This will result in a substantial drawdown of stocks. Indeed, it is an opportunity to ease the much-maligned stock burden faced by mills, helping improve their operational efficiency.
In any case, in addition to domestic stocks, large imports of raw sugar are already taking place. These imports are against export obligation to be fulfilled within 18 months.
A reduction in customs duty is sure to open up floodgates of imports, depress domestic prices and hurt producers here.
It is time to seriously examine total decontrol of the sugar industry. The Government is committed to removal of restrictions by October 2005 (postponed from March 2003); but nothing prevents New Delhi from advancing the date by several months or by even a year.
In case of edible oils, the processing industry has already been lobbying for several concessions including withdrawal of excise duty on refined oil, reduction in customs duty on crude oil, changes in quality specifications and so on. None of these merit any serious consideration and there is no need to tinker with the existing duty regime.
What is necessary to soften edible oil prices is a revision in tariff values imposed on imported oils. The downward revision of tariff values to reflect international prices has been overdue by several weeks. This brooks no delay.
Despite weak sentiment globally, vegetable oil market here has started to harden because of the long dry spell in July that is seen hurting kharif oilseeds crop prospects. Reduction in customs duty will merely bring windfall gains to some importers, even while encouraging Malaysia, the principal supplier of palm oil, to jack up prices. So, tinkering with the present duty structure is inadvisable.
The Government should also quickly revive supply of edible oil through the pubic distribution system, if need be at highly subsidised rates to the really needy sections of the population.
The period between planting (June/July) and harvesting (September/October) of various kharif crops covering the four-month southwest monsoon season is one when traditionally agri-commodity stocks are low and crops are still in the making.
On the other hand, between August and October, demand for essential food products rises manifold because of the series of festivals. Prices tend to rise during the period because of supply tightness, while traders tend to take advantage of the situation.
Onset and progress of the southwest monsoon critically impacts commodity prices. Aberrant weather, especially early-season or mid-season drought, pushes prices of essential commodities higher in the wake of expectation of lower crop.
While consumer interest has to be protected by ensuring adequate supplies and reasonable prices, a knee-jerk reaction to rise in prices of essential commodities like sugar and edible oil is unwarranted.
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