SCENARIOS-Developing monsoon key to India's vegoil tax regime

Tue Jun 30, 2009 2:05pm IST

NEW DELHI/KUALA LUMPUR, June 30 (Reuters) - With soaring stocks of imported edible oils at Indian ports, the government is under pressure to slap duties on new cargoes, although this hinges on whether the unfolding monsoon lifts domestic oilseed output.

India's first window of opportunity for imposing taxes is during its federal budget in July, but many traders and analysts say it is hard to predict the government's likely moves.

Oilseed crushers have lobbied for levies of 20 percent on crude palm oil and sunoil as well as a 25 percent duty on crude soyoil. Refined edible oils should keep a 7.5 percent duty except for palm olein, which must increase to 30 percent, they say.

For a factbox on India's edible oilseed sector, click [ID:nDEL436409]

Here are two options for the newly-elected Congress-led government and the possible outcomes:

SLAP ON IMPORT TAXES

Finance Minister Pranab Mukherjee could announce import duty hikes if close-to-normal monsoon showers in the next 2 months over India's central and western regions bring higher soybean and groundnut plantings and harvests.

The monsoon acts as an economic stimulus, raising incomes for most of India's 1.1 billion people who depend on farming for a living, and reducing government expenditure in a sector that accounts for a sixth of India's gross domestic product

Oilseed farmers' incomes get an added boost from duty hikes as the prices of soybean, rapeseed and groundnut stocks they sell often rise in tandem with the increases to imported vegetable oils' landed cost.

Also, potential revenues from the hike are attractive, adding up to least $1 billion, or 1 percent of tax revenue receipts projected in the interim 2009/10 budget, analysts and Reuters calculations showed.

Palm oil refiners in Indonesia and Malaysia, the largest suppliers of the vegetable oil, will feel much of the heat and may offer discounts to hold on to at least 80 percent of India's imported edible oil market share, traders say.

HOLD OFF AND MAINTAIN THE STATUS QUO

A weaker-than-expected June-September monsoon may force the government to hold back on hiking import taxes in a bid to douse an inflation flare up as consumers would look to overseas shipments to make up for the shortfall in domestic oilseed supplies.

Food inflation is up 8.65 percent in 12 months to June 13, outstripping India's closely watched wholesale price index INWPI=ECI, which fell to an annual 1.14 percent in the same period, Reuters data showed.

"But demand for imported vegetable oil stocks may rise only marginally because a weaker monsoon would curb farming incomes and we already have record levels of stocks at warehouses," said a Mumbai trader.

And farmers incomes will also be hit by the influx of cheaper imported vegetable oil, and spur more government spending to revive the sector, already dented by the weakening monsoons.

"Given (Congress) UPA's pro-rural policies, the budget may give impetus to rural spending programmes especially given late monsoons," said UBS economist Suresh Mahadevan in a note to clients, adding that it could widen the fiscal deficit.