Processed palm and soybean oil have now become Nepal’s largest exports. The two oils, of which Nepal does not produce a single drop, has been imported by traders in its crude state, to be refined and exported—mainly to India. While this is sure to be a profitable venture for the traders involved on both sides of the Nepal-India border, it will not benefit the economy all that much. And while such actions are not illegal, Nepal should be careful that such actions are not promoted before local manufacturing and true value addition.

Palm oil is used in a variety of ways. It is used as an additive in many cosmetic and cleaning products, and also used as a frying oil. Soybean oil is also a major cooking oil. Nepal’s sudden surge in trading of palm oil is particularly worrisome; until the fiscal year 2017-18, Nepal exported no palm oil.

An oil that is a major export commodity for ASEAN nations, especially Indonesia and Malaysia, Nepali traders have found an ingenious way to profit from this product. First, crude oil is imported from originating countries and refined in Nepal. Then, this oil is sent to India, with which Nepal has a free trade agreement. The Nepali traders are saved the burden of local taxes, since the product is shipped abroad. The Indian traders profit as well; with crude imports to India facing a high import duty, the refined oil from Nepal is allowed to enter the market through the free trade agreement.

But there are many problems here. To begin with, the refinement of crude oil does not add much value; nor is it a labour intensive process to boost employment. The economy does not benefit much either—only a handful of traders do. Moreover, the traders are exploiting the South Asian Free Trade Agreement to export the refined oil to India. But this agreement has a clause which allows countries to put barriers to trade easily. Each member country is allowed to keep a sensitive list that allows for the protection of domestic industries.

Many Nepal-made products do not get exported to India, or do so under high tariffs, because India believes those specific products are harmful towards local producers. Currently, even as these refined oils have become Nepal’s major export, it is still a small portion of India’s total palm and soybean oil market. Should these exports rise in the near future, India might catch up and block further trade. Traders then would be stuck with a lot of product. Nepali ginger producers, in recent years, have faced major issues due to Indian suspicions and barriers of entry. Further, India has already shown how heavy-handed it can be, even to its friends—the blockade of 2015 and a recent month-long restriction of Malaysian palm oil (due to Malaysian PM Mahathir’s comments criticising India’s handling of Kashmir) are examples.

Relying on exporting a product to one single market is always a major risk, especially if the product is generic. India has already announced on Wednesday, January 1, that it is slashing the duties on crude and refined palm oil. This may immediately have repercussions on Nepali palm oil trade. But there are also larger lessons in this.

Nepal cannot have, as its largest export product, something that it doesn’t even produce. The country’s foreign reserves will be depleted if it continues to import goods using dollars and other reserve currencies to get paid back in Indian rupees for exports. The current scenario also shows how the manufacturing sector is lagging behind. The government must pay more attention, and provide support to the industry. 

***

What do you think?

Dear reader, we’d like to hear from you. We regularly publish letters to the editor on contemporary issues or direct responses to something the Post has recently published. Please send your letters to [email protected] with "Letter to the Editor" in the subject line. Please include your name, location, and a contact address so one of our editors can reach out to you.