Edible oil traders are sourcing exports of palm oil and other cooking oils to India from neighbouring countries, designating the supplies as duty-free under a regional free-trade pact and circumventing India's import tax hike on the oils.

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India, Bangladesh and Sri Lanka are among the signatories of the South Asian Free Trade Agreement (SAFTA) that created a free-trade zone in the South Asian region. The rising flow of duty-free edible oils is disrupting trade in India, the world's biggest importer of the oils, and is undermining efforts to raise local oilseed prices, the reason for imposing the taxes.

Two palm oil traders confirmed that they have sold palm olein from Bangladesh to India as a duty-free product under the SAFTA. Another Malaysia-based palm trader said shipments of palm-based speciality products like cocoa butter substitute and palm-based ghee from Bangladesh and Sri Lanka to India have increased.

"Earlier volumes were less but after the recent duty increase, volumes too have increased," the trader said. "It’s surprising to see now that bulk volumes are coming in," he said, referring to Indian imports from Sri Lanka and Bangladesh.

All three traders declined to be identified as they were not authorized to speak to the media.

India raised its import tax on refined palm oil in March to 54 percent to support local farmers. In June, taxes on crude and refined soyoil, sunflower oil and canola oil were raised to 45 percent.

Exports of palm oil to Bangladesh from Malaysia, the world's second-largest producer after Indonesia, climbed from 3,500 tonnes in May to 36,995 tonnes during July 1 to 25, according to data from surveyor Societe Generale de Surveillance.

The Malaysian-based trader also estimated that Indonesia’s palm oil exports to Bangladesh in July increased by one-third.

Traders had been bringing in edible oils from Bangladesh into neighbouring northeastern India, but now vessels have been booked for western ports, where large refineries are located, said Sandeep Bajoria, chief executive of the Sunvin Group, a Mumbai-based vegetable oil importer.

Bangladesh is forecast to fulfil 91 percent of its edible oil consumption, including soybean oil and palm oil, during the 2018/19 crop year through imports, Reuters calculated using data from a U.S. Department of Agriculture report, which notes "there is no domestic palm oil production industry in the country."

India's Solvent Extractors' Association (SEA), an edible oil trade group, and the Soybean Processors Association of India (SOPA) have requested the federal government halt the duty-free imports.

The gap between the local soyoil price and duty-free soyoil price is as high as 11,000 rupees ($160.80) per tonne, said Davish Jain, the SOPA chairman.

"Imports of large quantities of edible oil at zero duty will totally negate the advantage to the farmers and also affect the industry adversely," Jain said.

The Executive Director of the SEA, B.V. Mehta, noted that a trader imported 10,000 tonnes of refined soybean oil from Bangladesh on the tanker Bertina.

There have been at least four ships that potentially carried palm oil from ports in Indonesia and Malaysia to Bangladesh in the past 14 days, according to shipping data on Thomson Reuters Eikon. (See interactive map in Related Content Section)