Number theory: Why India is worried about Indonesia’s ban on palm oil exports

India is the biggest importer of edible oil in the world. This also means that the Indian economy and budgets of its households, are extremely sensitive to disturbances in the global edible oil market. Indonesia’s decision to ban the exports of palm oil on April 22 has the potential of administering such a shock. Indonesia is the world’s biggest palm oil producer.

What are the various aspects of the edible oil economy in India? Where does palm oil fit in? Why should India be worried about Indonesia’s decision? Here are four charts which explain this in detail.

Edible oil in household budgets

How important are edible oils in the budget of an average household in India? They are not as important as cereals or vegetables, but more important than pulses. And the poor, as is the case with other food items, are more vulnerable to edible oil price shocks than the relatively rich.

The latest consumption expenditure survey (CES) data is available for 2011-12. It allows us to look at the share of individual food items in total consumption spending of households. The share of edible oil in total consumption spending of households comes down as one moves up the monthly per capita consumption expenditure (MPCE) scale. It is as high as 5.8% for the bottom 5% of households but comes down to 1.3% for the top 5%. In all MPCE classes, edible oil has a higher share of consumption spending than pulses. A comparison of the 2011-12 CES numbers with 1993-94 shows that the share of edible oil in the total spending of the poor has actually increased for the bottom 10% of the population. To be sure, the numbers given here only capture the direct consumption spending on edible oil.

Role of edible oil in driving food inflation

How big a factor has edible oil been in driving inflation in the recent past? A simple analysis of various sub-components of the Consumer Price Index (CPI) basket can answer this question. Oils and fats have a share of 3.56% in the CPI basket, or around 9% of the food basket in the CPI. The contribution of oils and fats category to growth in headline CPI as well as its food component has been significantly higher than its weight in these baskets in the recent past. For example, the oils and fats sub-category accounts for more than 10% of CPI growth every quarter since March 2021. This is something which has never happened in the current CPI series.

Can there be a one-nation one-oil formula for edible oils

While edible oil is an important part of household budgets and therefore retail inflation, there is a large diversity in the type of oils Indians consume. Numbers from the 2011-12 CES show this clearly. For example, more than 80% of the spending on edible oil in Kerala goes to coconut oil. Similarly, eastern states such as Bihar, West Bengal see a large spending on mustard oil, which is not the case in any other part of the country. These regional differences need to be kept in mind for any policy which seeks to decrease our dependence on imported edible oil.

How palm oil became ubiquitous?

There is good reason to believe that the numbers given in the CES do not capture the real edible oil economy in India. To be sure, this is not to say that the CES numbers are incorrect. However, what gets captured under the edible oil head in the CES numbers is direct consumption of edible oil. Edible oil also enters household baskets in indirect form when they consume food items and even non-food items which use oil in their manufacturing process. It is through this route that palm oil has become the most important player in India’s edible oil economy.

Numbers given on the website (https://bit.ly/3vgCvZe) of the Oil Division of Ministry of Consumer Affairs, Food and Public Distribution give an idea about this. “The share of raw oil, refined oil and vanaspati in the total edible oil market is estimated roughly at 35%, 60% and 5% respectively. About 56 % of domestic demand of edible oils is met through imports out of which palm oil/palmolein constitutes about 54%. The consumption of refined palmolein (RBD palmolein) as well as its blending with other oils has increased substantially over the years and is used extensively in hotels, restaurants and in preparation of wide varieties of food products”, the website says. This also means that India will continue to remain vulnerable to disruptions to the global palm oil economy, unless it increases domestic production of palm oil or moves away from its use in meeting direct and in direct edible oil requirements. The government policy seems to have chosen the former route. However, many believe that this could have a significant environmental cost.

Abhishek Jha contributed to the data work for this story.