Impact of trade liberalization on India’s oilseed and edible oils sector

Abstract

The edible oil and oilseeds sector in India faces many challenges in the new environment of liberalized trade. Government intervention is faced with the task of balancing the interests of different stakeholders in the oilseed complex. Providing benefits to some may be at the cost of others. This study analyzes the regional impacts on consumers and producers of liberalizing edible oil imports. It uses a multi-market, partial equilibrium computational model that takes into account regional patterns in the demand for edible oils and production of oilseeds. It obtains the impact of protecting oilseed growers, through three different alternative mechanisms, on different stakeholders. It also examines the relative effectiveness of these mechanisms in protecting farmers’ prices under different market situations. The results show that consumers are the main beneficiaries of trade liberalization in the edible oils sector. The gains to consumers are however substantial so that the marginal losses incurred by other agents can be compensated with an overall net gain. Prices of both oils and oilseeds are reduced. Consumption of palm and soy oil is increased but consumption of other oils decreases due to substitution effects. Since the production of soybeans is the most adversely affected, the states producing soybeans suffer most of the loss in producer welfare. Three alternative mechanisms are considered to support prices received by oilseed farmers: import tariff on edible oils, import tariff on oilseeds and government subsidy. Import tariff on oilseeds is found to be an ineffective instrument in supporting farmers’ prices. Between the other two mechanisms government subsidy turns out to be superior.