India-Malaysia Relations: Why New Delhi Banned Malaysia Palm Oil – Analysis

India had achieved a unique position in the world by adopting the democratic form of the government when its middle class was minuscule and never has been civilian government dislodged by the army. Democracy and secularism have served towards the lofty goal of sustaining unity in diversity. But political culture changes and so changes the working of the government. The right-centrist Hindu nationalist Bharatiya Janata Party (BJP) has been alleged for shifting India’s domestic politics towards ethnoreligious lines. The BJP government-led Narendra Modi has been condemned for taking ideological lines while giving meaning to the vague terms in the Indian Constitution. In particular, the Jammu and Kashmir Re-organization Amendment Act 2019 and Citizenship Amendment Act 2019 received global attention.

Malaysia’s Position

Then Malaysia was ruled by a coalition of parties, under the leadership of former autocrat, turned democrat, Mahathir Mohamad. The coalition bloc, Pakatan Harapan, stood against the long-serving government of Najib’s kleptocracy and won the election in 2018. Malaysia under PM Mahathir adopted an assertive foreign policy. He was a vocal supporter of the Palestinian cause. He condemned the US killing of Iranian top military officer Qassem Soleimani and compared it with the murder of the Saudi journalist Jamal Khashoggi. Similarly, Mahathir’s response to India’s change in policy towards Jammu and Kashmir was closer to Pakistan’s position. In his speech at the United Nations General Assembly, Mahathir claimed that India “invaded and occupied” Kashmir despite several United Nations resolutions calling it a disputed territory. “Ignoring the UN would lead to other forms of disregard for the United Nations and the rule of law.” The Malaysian Consultative Council of Islamic Organizations called India to be held responsible for its “crimes against humanity” in the region. Later in a tweet, former PM Mahathir wrote, “I offer no apology for what I had said though I am sorry that it had affected our palm oil export to India. I don’t know if that is a high price to pay for speaking out against such injustices.”

At the sidelines of the Kuala Lumpur Summit 2019, Mahathir questioned the CAA. He said, “people are dying because of this law. Why is there a necessity to do this when all the while, for 70 years, they have lived together as citizens without any problem?” He said that he was “sorry to see that India, which claims to be a secular state, is now taking action to deprive some Muslims of their citizenship.” “If we do that here, I do not know what will happen. There will be chaos and instability, and everybody will suffer.”

India’s Response

The External Affairs Ministry responded to Malaysia’s comments. Its Spokesperson Raveesh Kumar said that the Government of Malaysia should bear in mind the friendly relations between the two countries and desist from making such remarks. The External Affairs Ministry termed remarks made by Malaysian PM Mahathir Mohamad “factually incorrect.” The ministry also said Malaysia should refrain from commenting on the internal developments of India.

Furthermore, the Indian government imposed a de facto ban on importing Malaysian palm oil in December 2019. The commerce ministry held a detailed meeting with edible oil industry stakeholders and asked them informally to avoid purchasing Malaysian palm oil. Instead, they were suggested increasing imports from Indonesia. On January 8, 2020, the Director-General of Foreign Trade (DGFT), Government of India, imposed restrictions on imports of refined palm oil (RPO) through amending the import policy wherein imports of RPO has been moved to the “restricted” category from “free.” As such, the Indian companies were free to import crude palm oil (CPO); prior government permission was needed to source palm oil from Malaysia.

Malaysia did not retaliate against India. It preferred to resolve differences through diplomacy and protect its 23 percent market of palm oil. Malaysian PM Mahathir expressed concerns about the purported Indian restrictions on imports of palm oil but added that he would continue to speak out about “wrong things.” In January 2020, Mahathir said, “we are too small to take retaliatory action.” “We have to find ways and means to overcome that.”

India’s Vegetable Oil Import

India is a billion-plus strong consumer market. Its purchasing power attracts the international market. It imports about 65 percent of vegetable oil, which was worth $10 billion, and made the fifth largest import item after oil, gold, coal, and telecom instruments in 2019-20. India’s cooking oil imports come from Soybean, sunflower, and palm oil. These three items come from three different regions. About 85 percent of soybean oil in India is imported from Argentina and Brazil, 90 percent of sunflower oil is imported from Ukraine and Russia, and all of India’s palm oil requirement is met from Indonesia and Malaysia.

Among these vegetable oil products, palm oil is about 40 percent of total consumption in India and 60 percent of imports. India’s domestic production of palm oil was about 10.65 million tonnes in 2019-20, which was less than half of the roughly 24 million tonnes consumed during the same period. Bhavna Prasad, Director, Sustainable Business, WWF India, said, “if we look at the fast-moving consumer goods market, almost 50 percent of the products in our supermarket currently have palm oil in some form or another whether it is biscuits, chips, soaps, shampoos, toothpaste or even bakery items.” B.V. Mehta, executive director of Solvent Extractors Association of India, said that “Palm oil is everywhere today in the Indian market because it is comparatively cheaper and its imports are quicker.”

Palm oil is the cheapest vegetable oil. Indonesia and Malaysia are the world’s first and second palm oil producers, accounting for a combined 90 percent of global supply. Accordingly, India’s first and second-largest palm oil suppliers are Indonesia and Malaysia. Malaysia has a well-developed oil processing industry and exports more refined palm oil of (RPO) than crude palm oil (CPO). Vegetable oil constitutes a significant part, but the Indo-Malaysia trade relationship is multifaceted. Malaysia is India’s third-largest trade partner in the ASEAN bloc. The two sides signed a free trade agreement in February 2011. India’s export to Malaysia in 2018-19 was US $6,436.30 (1.9499% of total export), and in the same period, the import was $10,818.60 million (2.1045% of total import). In January 2019, India slashed import duty on RPO by 5 percent from 50 to 45 percent, while that on CPO remained at 40 percent.

Subsequently, Malaysian RPO import to India progress from $19 million in 2018 to $190.04 million in 2019, while in the same period, India’s RPO imports from Indonesia declined from US $133.71 to $23.32 million.

India’s Restrictions on Refined Palm Oil

After the Indian commerce ministry changed the status of RPO in January 2020, Indian palm oil importers effectively stopped all purchases from Malaysia. The Finance Minister Nirmala Sitharaman, in the national budget, imposed a 17.5 percent “cess,” a separate tax on palm oil imports. It was anticipated that the tax would narrow the duty gap between palm oil and other edible oils prices, which could reduce India’s palm oil imports and potentially put pressure on Malaysian palm oil prices. Palm oil was earlier attracting 8.25 percent less import duty than sunflower and soya oil; subsequently, India’s total palm oil imports from Malaysia declined to $7.49 million. Indian refiners and traders shifted to Indonesia, despite having to pay a $10 per tonne palm oil premium over Malaysian prices. Malaysian CPO for February shipment was available at US $800 a tonne on a free-on-board (FOB) basis, compared to US $810 from Indonesia.

Restoring Malaysian Supplies

The new government in Kuala Lumpur came to power in March 2020, and by May, two sides agreed to restore the palm oil trade. In July, Malaysia signed a deal to buy a record 100,000 tonnes of Indian rice, and Indian buyers resumed purchases of Malaysian palm oil. New Delhi moved back the RPO from restricted list to freely importable item till December 2020 and cut the basic import duty on crude palm oil to 10 percent from 15 percent effective from June 30 for a period of three months to boost imports.

These moves came in the context of the rise in domestic prices of edible oils in 2020. According to Food Secretary Sudhanshu Pandey, the domestic prices of vegetable oil price increased by 62 percent. From May 2020, the domestic market price of a kg of various cooking oil in 2021, like mustard oil raised from ₹115 to 170, palm oil from ₹85 to 138, sunflower from ₹110 to 175, Vanaspati from ₹90 to 140, and soya from ₹100 to 155. This directly affected the pockets of Indian citizens, who were already facing a corona virus-caused economic slowdown.

Conclusion

India, along with China and the EU, is the largest consumer and importer of palm oil. It has been the market for about 23 percent Malaysian palm market. India’s decision to move RPO from free to restricted item was its response to Malaysia’s political position on the Kashmir Issue and alleged marginalization of the Indian Muslim status. New Delhi, through this decision, attempted to make the Malaysian establishment conscious of India’s leverage as home to a billion-plus consumer market. India chose a particular item and did not boycott trade relations. But India’s domestic market had sent a different signal to the international market. Its domestic vegetable prices jumped by 62 percent. A slight increase in vegetable oil prices affects the budget of millions of households, which live below the poverty line. While Malaysia offered palm oil relatively cheaper than Indonesia, soon after New Delhi lifted the restriction on Malaysian palm oil, Indian companies’ resumed import in a large scale. Therefore, hyper-nationalism does not push market demand into diplomatic leverage. The leverage between consumer and supplier state in the international market is subjected to the degree of dependency, domestic capacity, alternative suppliers, the opportunity cost of shifting alternate products, etc.

 *Mumtaz Ahmad holds Ph.D. in International Relations. He can be reached at [email protected]