India has restricted palm oil imports after Malaysia commented on its policy towards Kashmir, with thousands of tonnes now stuck at ports

The dynamics between key players in the palm oil industry will fundamentally shift unless a diplomatic spat between India and Malaysia can be resolved amicably, experts warn.

India – the world’s largest importer of palm oil and a major market for Malaysia – has started a trade war after taking strong exception to comments by the Malaysian prime minister, Mahathir Mohamad.

Late last year, the Malaysian leader condemned the Indian federal government’s move to revoke constitutional provisions that conferred special status to Jammu and Kashmir, the country’s only Muslim majority state. He subsequently criticised India’s new citizenship law as discriminatory to Muslims. The Indian government views these as internal matters.

India has tended to import most of its refined palm oil from Malaysia and crude palm oil from Indonesia. On 8 January, India’s director general of foreign trade restricted imports of the refined oil, with the government to issue import licences. Industry insiders say this amounts to a ban.

India hasn’t made any public statements linking the restrictions to Mahathir Mohamad’s comments. But an Indian trade ministry official told China Dialogue that the restrictions will continue unless Malaysia stops commenting on India’s internal affairs. “We might add other items [besides refined palm oil] to the restricted list,” he said, on condition of anonymity.

Even before the trade restrictions, the Indian government had in October last year informally asked edible oil importers not to buy Malaysian palm oil in any form, an industry executive said. “Palm oil imports from Malaysia have been declining drastically since then,” he told China Dialogue. “All importers have been replacing Malaysian palm oil imports by buying more from Indonesia,” he said, declining to be named.

Fall In Imports

Malaysia’s palm oil shipments to India have indeed seen a precipitous fall in the past couple of months, according to data released by the Malaysian Palm Oil Board. This decline could have severe repercussions in the Southeast Asian country, as exports of palm oil to India had surged in recent times.

As the above data from the Malaysian Palm Oil Council shows, the country exported around 4 million tonnes of palm oil to India in 2019. Out of this, as much as 2 million tonnes was palm oil in, a refined palm oil used as a cooking agent. India has been Malaysia’s largest palm oil market for the past five years. 

“India’s trade ban will shake up the entire palm oil sector,” said the industry executive, adding that the immediate fallout of the 8 January restrictions are already visible. “Thousands of tonnes of refined palm oil shipments are stuck at ports,” he said, mostly at Kolkata on India’s east coast.

It is unclear whether shipments ordered before the restrictions came into force will be allowed in, the executive said.

India is yet to issue any licences to import refined palm oil, the trade ministry official said, adding that the process is expected to start soon.

Price War On The Cards?

The trade restrictions on refined palm oil could spark a price war on various levels. Malaysia will now have to compete with Indonesia, the world’s largest palm oil producer, on crude palm oil. Indonesian crude palm oil generally costs less than the Malaysian variety.

Together, the Southeast Asian neighbours produce 85 per cent of the world’s palm oil. It is Malaysia’s largest agricultural export, accounting for 2.8 per cent of gross domestic product and 4.5 per cent of total exports.

Malaysia has said that it will not reciprocate with trade measures of its own against India. “We are too small to take retaliatory action,” Mahathir Mohamad said this week at a media briefing. “We have to find ways and means to overcome that.”

Malaysian officials are in informal talks with their Indian counterparts to resolve the issues, the trade ministry official said, adding that these are unlikely to yield results. The restrictions, however, could hurt Indian consumers as well, because Indonesian suppliers have started to charge a premium, explained the industry executive.

Palm oil prices have been rising steeply in recent months, which has caused Indian purchases to drop to a five-month low. Importers compensated by buying more sunflower oil.

Contradictory Measures

India’s trade restrictions came a week after it reduced import duties on refined palm oil from 50 per cent to 45 per cent, and crude palm oil from 40 per cent to 37.5 per cent.

This duty reduction was expected to significantly impact India’s palm oil refining industry, according to ICRA Ltd, the Indian arm of Moody’s Investor Services, a market information provider. But with the restrictions, the scarcity of refined palm oil could now present an opportunity for domestic refiners, which are currently operating at only 40 per cent of capacity.​

This story originally published by China dialogue under a Creative Commons’ License.

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