Palm Oil Trade and India Malaysia Relations

Published: January 16, 2020

Tensions between India and Malaysia have risen after the Indian government revealed its plan to restrict palm oil imports from the country. A diplomatic row with relations to the Indian territory of Kashmir is being speculated as to the reason behind such a decision.

What is the diplomatic row affecting the India-Malaysia relation?

The tiff began when Malaysia gave shelter to the radical Islamic preacher Zakir Naik in 2016. More recently, on 4th September 2019, India increased tariffs on refined palm oil being imported from Malaysia from 45% to 50% for a period of six months. This worsened when the Malaysian Prime Minister spoke out in the United Nations on 27th September, suggesting India had “invaded and occupied” Jammu and Kashmir. Both the countries were on the path of resolving the issues amicably, however, the Malaysian Prime Minister refused to retract his comment. On 20th December, the Malaysian Prime Minister further commented on the new Indian Citizenship Act being anti-Muslim. Things gradually worsened thereafter.

How has India reacted?

In October 2019, the top vegetable oil trade body, Solvent Extractors’ Association of India, has directed its traders not to buy oil from Malaysia as per government instructions. After a month’s ban, the traders resumed business as they were offered a $5/tonne discount over Indonesia. On 8th January 2020, India put palm oil on the restricted list, giving out a clear message to Malasia. Now the Indian government has better control over where palm oil is imported from and state-owned oil refineries will have to get a license for imports. There have also been reports that this ban could be extended to the import of electronic items from Malaysia.

How does this affect Malaysia?

Malaysia is the second-largest producer of palm oil after Indonesia. It accounts for 2.8% of Malaysia’s total GDP and 4.5% of its total export. With India making its stand clear, Malaysia will have to find new buyers for their product.

India-Malaysia bilateral trade relations

India and Malaysia are both signatories to the Comprehensive Economic Cooperation Agreement (CECA), 2011, which was built on the India-ASEAN free trade pact of 2009. Malaysia also happens to be India’s 3rd largest trade partner. It overtook Indonesia as India’s biggest palm oil supplier in 2019. India’s exports with Malaysia stood at $6.4 million and imports at $10.8 billion in the fiscal year 2018-19. With a duty advantage over Indonesia under CECA, Malaysia’s Palm oil imports have sprung in recent months.

How has Malaysia reacted to the restrictions?

The Malaysian Prime Minister has insisted that although Malaysia depends on India as its largest palm oil export market, it will continue to speak up when things are wrong. The Malaysian body, Malaysian Trades Union Congress, whose members are general workers, has urged both countries to resolve their differences as soon as possible.

Way Forward

India’s relation with India goes further back than its Look-East Policy. On the other hand, the Malaysian Prime Minister’s comments on what is essential internal matters of a sovereign nation cannot be ignored. Malaysia now stands to lose the largest market for its palm oil industry and while India may look at Indonesia to fulfill its palm-oil needs, it comes at a price. It is in the best interest of both nations to resolve the matter and work together towards a better bilateral tie.

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