India relies heavily on edible oil imports. More than half of the country’s edible oil consumption is met through imports. The ongoing conflict in the Middle East, along with deficient rainfall, has raised concerns in India’s edible oil market, according to a recent report published in OpenMarkets, a global market insight platform of the CME Group.

According to the Indian Meteorological Department, this year’s monsoon season is expected to witness below-normal seasonal rainfall over most parts of the country. India has seen rising prices of palm, soybean and sunflower seeds needed to make cooking oil. Another fallout of the Middle East conflict has been a sharp rise in crude oil prices, another commodity that India imports in significant quantities. Higher crude prices have prompted economists to trim this year’s GDP growth numbers to 6.6% from 7.7%.

The current economic situation risks derailing plans by the world's most populous nation to double domestic edible oil production to roughly 25.5mn metric tons by 2031, the report said. Under its National Mission on Edible Oils programme, New Delhi is aiming to reduce its dependence on imports from Indonesia, Malaysia, Brazil, Russia and Ukraine and establish self-sufficiency to a large extent.

The plan is to increase acreage under oilseeds to 33mn hectares up from 29mn hectares, and the use of more innovative harvesting methods. India’s heavy reliance on edible imports (56% vs. 15% in 1995) means New Delhi does not have much room to negotiate prices given the supply chain bottlenecks that have emerged due to the Middle East conflict, the OpenMarkets report stated, citing a study by Indian think tank Observer Research Foundation (ORF).

The ORF said that India's edible oil demand has been increasing at an average annual rate of 4.3%, outpacing domestic oilseed production, which has grown by only 2.2% a year. The widening gap between consumption and output has increased the country's dependence on imports. ORF added that recurring rainfall shortfalls have further heightened India's vulnerability to swings in global edible oil prices and supply chain disruptions.

As petroleum prices rise, farmers are suffering from higher raw input costs, such as fertilisers, that may not be entirely compensated by domestic Minimum Support Price (MSP) government subsidies. If this continues, farmers may be discouraged from long-term oilseed cultivation, potentially undermining the national expansion plan, according to the ORF.

Palm, soybean and sunflower oil, meanwhile, have surged 23%, 11% and 8% since the conflict began in late February, hurting importers who were already suffering under India’s weakening rupee, the report added. 

In an effort to stabilise domestic prices, India could roll out so-called price-triggered tariffs that rise when foreign prices drop below a benchmark and decrease when global prices increase, according to the ORF. Currently, import duties stand at a flat rate regardless of market dynamics. 

An industry analyst, quoted in the OpenMarkets report, said Indian oilseed farmers remain exposed to volatile international edible oil prices because imported oils are often cheaper than domestic production. The analyst noted that the small scale of most farmers' operations limits their ability to lower costs and compete effectively with overseas suppliers.

The analyst suggested that the government adopt a flexible import tariff mechanism under which duties would increase when global edible oil prices are low to improve the competitiveness of domestic produce for bulk buyers and reduce when international prices increase.

The analyst further proposed setting up Special Oil Zones (SOZs) as dedicated trade and logistics hubs at India's ports to improve the efficiency of the edible oil supply chain. The analyst also suggested that India strengthen its edible oil security by partnering with other countries to develop offshore oilseed cultivation, creating a more integrated and resilient global supply chain.

The report stated that for now, the situation looks increasingly difficult, especially as Indian farmers are already paying much more for key fertilisers, such as urea and ammonium phosphate, than they did in February.

The Indian government is already working to rescue the sector by pledging to hike the MSP, especially for sunflower seed, where production lags.

Recent developments in major palm oil-producing countries, Indonesia and Malaysia, could also potentially squeeze Indian importers, the report said. The two Southeast Asian countries plan to increase biofuel output to benefit from higher margins.

Indonesia has mandated that 50% of palm-based biodiesel be blended with regular diesel, up from 40%. Malaysia, meanwhile, is also transitioning to B12 (12% palm / 88% petroleum) from B10 and plans to gradually boost it to B15.

The Reserve Bank of India (RBI) has also expressed concerns about the development in Southeast Asia. The RBI in its July Bulletin has attributed the rise in edible oil prices to widespread diversion of edible oil in the biofuels sector. A footnote in the Bulletin cited Indonesia’s increase in its palm oil biodiesel blending mandate from B40 to B50, according to a report by The Deccan Chronicle.

Rising edible oil prices have a significant impact on India's retail inflation, as edible oils carry a 2.18% weight in the country's Consumer Price Index (CPI) basket. Any sustained increase in edible oil prices can therefore contribute to higher overall consumer inflation.