Edible Oil Self-Sufficiency in India: A PCA-VECM Approach

Dhriti Pipil

MPRA Paper from University Library of Munich, Germany

Abstract: Between 2019 and 2022, India’s edible oil import value surged from USD 9.68 billion to USD 21.18 billion before declining to USD 16.41 billion in 2023. Rising domestic demand prompted the government to reduce import duties in 2021 to curb inflation caused by factors such as the COVID-19 pandemic, the Russia-Ukraine conflict, labour shortages, and supply-chain disruptions. Although this policy primarily affected import value, it did not reduce import volumes, which rose from 156 lakh tonnes in 2019 to 162 lakh tonnes in 2023. This highlights India’s dependence on major suppliers like Indonesia, Malaysia, Argentina, and Brazil, driven by growing domestic demand to meet the nutritional needs of its vast population. Despite initiatives such as the National Food Security Act, the Public Distribution System, and the Minimum Support Price (MSP) scheme, which aim to reduce import dependence, India’s domestic production meets only 40% of its consumption needs. Rising population, urbanisation, income growth, and changing dietary habits have perpetuated the demand-supply imbalance. The reliance on imports exposes India to global price shocks and supply disruptions, disproportionately impacting low-income households and raising food security concerns. Additionally, the shift toward biofuel production in exporting nations diverts resources away from food markets, exacerbating supply constraints. Using a two-step analytical approach, this study examines India’s edible oil market dynamics from 1981 to 2021. Principal Component Analysis (PCA) constructs demand and supply indices by capturing underlying dynamics and reducing dimensionality. A Vector Error Correction Model (VECM) further explores short-term interactions and long-term equilibrium among cointegrated variables. Results reveal that imports drive surplus ending stocks, suppressing local production incentives despite the availability of MSPs. Approximately 57% of demand disequilibrium and 68% of supply disequilibrium are corrected per period, stabilising the market within three to five years of a shock. Policy interventions are essential to reduce import dependency and address supply chain inefficiencies.

Keywords: Edible oil; import liberalisation; PCA; VECM; India (search for similar items in EconPapers)
JEL-codes: F13 F14 F44 L5 Q17 Q18 (search for similar items in EconPapers)
Date: 2024-09-15, Revised 2024-12-28
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Published in Journal of Indian Economic Association A.1(2024): pp. 226-237

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