Managing Price Volatility In An Open Economy Environment: The Case Of Edible Oils And Oilseeds In India

This study examines the impact of alternative price stabilization policies for edible oils and oilseeds in India on the farmers growing oilseeds, the consumers of edible oils and the processing sector with the help of a multi market equilibrium dynamic simulation model. Price stability in the edible oil sector is important at least for two reasons. It can help realize the growth potential in the production of edible oils and improve the nutritional security of Indian households. While efficiency considerations suggest the linking of domestic to world prices, extreme fluctuations in price have to be avoided, for they can lead to undesirable consequences both at the macro and micro levels. The questions addressed in this study include the following. What is the effectiveness of alternative price stabilization mechanisms in stabilizing oilseed/ edible oil prices? Can variable levies that vary within the bound tariff level provide adequate protection against world price fluctuations? What are the costs to the government, benefits to producers and consumers? What is the impact on prices of oilseeds due to the operation of variable levies edible oil imports and vice versa? The following are some of the results obtained from the model. Higher import tariffs on edible oils lead to more variable domestic prices. This indicates that a fixed level of tariff even at a higher level is not useful in stabilizing oil prices. A system of variable levies which adjust to international price and domestic supply situation is what would be required. Tariff protection on oils mainly benefits the processing sector and the benefits to oilseed growers are relatively smaller. Tariff protection to growers by iii increasing tariffs on oilseed imports helps the producers of oilseeds, but at the cost of consumers and the processing sector. The distribution of benefits to different agents varies with the different alternative mechanisms used for price stabilization. As the bound rates of tariffs under WTO are fixed quite high for all edible oils with the exception of soy oil, there is enough room to adjust import duties for price stabilization purposes. The maximum import tariff rate required to stabilize prices within a reasonable price band is as low as 25%.