POLICY ENVIRONMENT FOR DEVELOPMENT OF DAIRY IN INDIA Harsh Vivek

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1 POLICY ENVIRONMENT FOR DEVELOPMENT OF DAIRY IN INDIA Harsh Vivek Introduction In spite of the unprecedented rise in milk production in the last two decades in India, the modern dairy industry has not really taken-off the way it was thought it would. Despite successes like the Operation Flood and the Cooperatives Movement and establishment of institutions like the National Dairy Development Board (NDDB), much of the dairy sector still remains in the hands of small, informal, unorganized players. This puts considerable constraints on promotion of high-value added dairy products, technological innovation and upgradation, and most importantly quality management. This paper is an attempt to take a look at some of the government policies over the last few decades, and assess the impacts of such policies on the growth and development of the dairy sector in the country. Starting from the Operation Flood in the 1970s, to the delicensing of the dairy sector in 1991, an effort has been made to map the major changes in the dairy sector to the policy changes that either fuelled or hindered such a change. It emerges from the study that the government had a bias in favour of small and cottage scale units in dairy processing due to the presumed contributions of such units in providing livelihoods to small and marginal farmers in the rural country-side. However, what has been the experience in the West and other developed dairy nations of the world is that scale is important in the development of the modern dairy industry. Only by operating at a large scale can a firm generate surpluses to invest in building a sustainable procurement base for procurement and processing of milk. In the absence of any concerted effort on part of the government to promote the development of large-scale dairy plants in India, the Indian dairy industry became cluttered with numerous sub-optimal plants, and a large informal sector. Faced with competition from the low-cost (and mostly untaxed) unorganized sector, and the inability to derive consumer premium in the price-sensitive consumer market, most organised dairy firms in India struggled with low-margins. While some large cooperatives have been able to ensure significant product diversification and market penetration, the overall scenario still remains considerably below the potential and expected performance. 1

2 Milk Production Over the last few years, India has emerged as one of the largest producer of milk in the world. The other major milk producing countries are the United States, the European Union, Australia and New Zealand. The total milk production in the world was 593 million tonnes in the year As shown in figure 1, India, United States and the European Union are the major players contributing to total global milk production. The growth rate of milk production in these nations has been fluctuating widely in the last few years. However, the global average growth rate for milk has hovered close to unity. The rise in milk production in India comes coupled with two important facts. First, India has the world s largest concentration of bovine population in the world. It has more than 40% of world s total buffaloes, and more than one sixth of world s total cows 1. This implies that though our aggregate milk production may be high, the productivity of milch cattle in the country remains abysmally low. Second, despite being the largest producer of milk in the world, India is also the largest consumer of milk. The per capita availability of milk in India, though increasing over the last 30 years, still falls below the world s average of 485 grams of milk per person per day. Figure 4 shows the trends of per capita milk availability in India for the last two decades. Per capita milk availability for the year was 232 grams of milk per person per day. Policy Support for Development of Dairy Industry in India Operation Flood and the National Dairy Development Board (NDDB), 1970 to 1996 Post independence, India was a milk-stressed country with domestic demand far outstripping the domestic production of milk. Given the nutrition and hunger problems in the country, the government took upon itself the task of development of the domestic dairy industry. The two-pronged objectives for the government were first to augment the supply of milk for domestic consumption and second to increase the returns to dairy farmers by providing the infrastructure for producing value-added dairy products. As one of the biggest programmes for development of dairy came the Operation Flood in the year This was a rural development programme, which received liberal grants from the Government of India (NDDB), the World Bank and the European Economic Commission (EEC). 1 Source: National Dairy Development Board, India 2

3 Operation Flood worked to create an integrated national milk-market, and established institutions to cost-effectively procure, process and market the milk and milk products. It worked through setting-up of small milk producers cooperatives, which procured milk from farmers in the village, and provided them with inputs and services. Thus, there was a forward movement of milk from the village cooperative societies to the processing and pasteurizing plants (dairy unions), and a backward movement of inputs, technology and modern dairying practices from the unions to the local village cooperatives. The above has come to be recognized globally as the celebrated Anand pattern of dairy development as depicted in figure 5. A National Milk Grid was established linking more than 700 towns and cities. This helped to connect the producers and consumers of milk, and created an integrated milk market in the country. Operation Flood was implemented in three phases. Phase One ( ) linked the four metropolitan cities in India Delhi, Mumbai, Kolkata and Chennai with 18 major milk sheds in the country. National Dairy Development Board negotiated the details of the programme, and financed the operation through the sale of skimmed milk powder and butter oil gifted under the World Food Programme by the European Economic Commission. Phase Two ( ) expanded the outlets for sale of pasteurized milk in major cities of the country. Capacity for production of milk powder increased from 22,000 tonnes to 140,000 tonnes. Processing units were established for production of butter, ghee, whole milk powder, skimmed milk powder and baby foods. By the end of 1985, village cooperatives were established having more than 4.25 million dairy farmer members 2. Phase Three ( ) consolidated the cooperative movement in the country. It emphasized use of modern technology, better breed of cattle, hygienic and sanitary methods of production and HACCP and other certifications. It also enabled the cooperatives to be market-driven having sophisticated processing capacities for products like UHT milk, yogurt, processed cheese and ice creams. Phase three emphasized research and development in animal health and nutrition. Impacts of Operation Flood Operation Flood has had far reaching impacts on the development of modern dairying facilities in the country. It has not only impacted growth in production and distribution of milk and milk products, but also dominated the rural development scenario by providing sustainable livelihood options to millions of rural farmers. A World Bank audit showed that of the Rs. 200 crores invested in Operation Flood (II), the net return into the rural economy has Rs crores per year over a period of ten years, or a 2 Source: National Dairy Development Board Website: 3

4 total of Rs. 240,000 crores in all. No other major development programme in the world has matched this input-output ratio 3. The impact of Operation Flood on India s modern dairy sector has been paramount. From an insignificant 200,000 litres per day (lpd) of processed milk in , the organised sector is presently handling more than 25 million lpd in more than 400 modern dairy plants setup in different milk sheds in the country. One of the largest liquid milk processing and pasteurizing plants has been established in Delhi handling over 800,000 lpd (Mother Dairy). India s first automated dairy plant with handling capacity of 1,000,000 lpd has been established at Gandhinagar near Ahmedabad in Western India. Several domestic cooperatives have mushroomed, and many of them are now emerging as major players in the global market. The Gujarat Cooperative Milk Marketing Federation Limited, with its popular brand Amul, has become the one of the largest food companies in Asia, with annual turnover in excess of Rs. 30 billion. Operation Flood offers some very crucial lessons for policy-makers. The first lesson is inclusive growth. By establishing dairy cooperatives at the grassroots level, it brought the milk farmers into its ambit, and placed control in their hands to decide what and how much to produce and sell. This market-oriented, participatory approach to development led to many grassroot-level innovations in designing of the supply chain in dairy. Secondly, efficiency is the key to success in food processing industries such as dairy, and thus, streamlining and strengthening of the supply chain holds paramount importance. With setting up of a strong supply-chain network, leakage from the system to middlemen can be checked and more returns can be realized for the milk producers (who are the ultimate stakeholders of the system). Thirdly, for higher price realization, one needs to graduate from simple, low-value commodities to high-value added processed products. Marketing holds the key to ensuring that products are available at the right place, at the right time, at the right price. Brand building is an essential exercise for all dairy companies to exploit the full potential of the dairy value-chain. Finally, the most crucial lesson of Operation Flood to all policy makers is that growth and development should be market-oriented and market-led. By developing the market forces, and ensuring healthy competition among different players in the market, a robust and transparent system can be developed, which benefits both the producers and consumers by ensuring quality products at value-for-money prices. There are, however, many pitfalls in the Operation Flood. 3 Source: The Indian Dairy Industry Website: 4

5 Operation Flood Successful in Limited States Only: The success of dairy cooperatives has been largely confined to a few states in India such as Gujarat, Punjab, Andhra Pradesh and Rajasthan, where brands like Amul, Verka, Vijaya and Saras have become household names. However, a large number of dairy cooperatives, unions and federations are defunct and are not able to create value for their members. Cooperatives in Uttar Pradesh (Parag Dairy), Kerala (Milma), and Madhya Pradesh (Uttam Dairy) are largely loss-making. A lot needs to be done to strengthen such non-performing cooperatives. Excessive Government Interference in Decision-Making: Excessive government interventions in the cooperatives due to vested political interests have led to massive politicization of dairy cooperatives. These cooperatives have a very large rural base, with millions of farmers as members, and they could play a major role during political elections. With electoral forces, and not market forces guiding the decision-making of the cooperatives, most cooperatives have become agencies for implementing the populist policies of the government, and thus unprofitable and unviable business units. Limited Sources of Finance: Limited sources of finance available to these cooperatives also hinder the smooth functioning of many dairy cooperatives. The cooperatives cannot raise equity from the market, and have to depend either on their own retained earnings or on equity from member farmers. Both these sources are woefully inadequate for meeting the financial needs for technological upgradation and innovation, and thus the cooperatives have to resort to government loans and grants. This in turn makes them an easy prey for government interference in decision-making. Politicization of Cooperatives: Politicization of cooperatives has caused a plethora of problems. Overstaffing, low capacity utilization, weak market orientation and poor financial controls have become the norm rather than exception in case if most Indian dairy cooperatives. Appointment of bureaucrats as managers of the cooperatives has been the case in Madhya Pradesh, Orissa and Uttar Pradesh. These bureaucrats do not have the professional skills required to manage such producer cooperatives. Consequently, under such bureaucratic heads, the cooperatives fail to respond to neither the needs of the producer farmers, nor the needs of the industry. Government dictated input-output pricing: In case of most cooperatives the state government fixes the minimum producer price. For instance in Maharashtra and Punjab, the State Government fixes the selling price of milk to government dairies. The selling price is determined by the government through on the spot interventions in case of Andhra Pradesh and Karnataka. This has caused inevitable distortions in the pricing of processed dairy products, and has adversely affected the financial health of the cooperatives. 5

6 Inability to Meet the Stringent Sanitary and Phyto-Sanitary Standards for Exports: Indian dairy industry, on an average, falls short of meeting the Sanitary and Phyto-Sanitary (SPS) requirements of the WTO Agreements, and thus is not able to compete in the global markets. As a direct consequence of this, most of the Indian dairy exports are directed to the Middle East and the developing nations of Asia and Africa where the SPS and other export regulations are not all that stringent. However, in order to be able to compete in the more remunerative markets of the West such as Europe and the US, there has to be a more concerted effort to make our dairy plants truly of global standards. As shown in figure 6, Bangladesh and UAE account for around 45% of dairy exports from India. Indian exports to remunerative markets of USA, EU, Canada and Australia have been quite low. One reason for low exports of dairy products from India to these markets is that these developed nations are also the major milk producing nations of the world. Thus there does not exist much scope of meeting the unsatisfied demand in their economies. Also, these nations have very high and stringent SPS and FDA norms, which most Indian dairy manufacturers find difficult to comply with. The recent Clean Milk Production (CMP) campaign of the NDDB is a step in total quality management in dairy products. In other words, total quality management at every step from the cow to the consumer. This has been initiated keeping in mind the growing quality consciousness among consumers in domestic as well as in international markets. Steps to Revive Dairy Cooperatives Assistance to Cooperatives: Under the scheme of revitalizing sick dairy cooperative unions and federations, 12 milk unions in Madhya Pradesh, Uttar Pradesh, Karnataka, Kerala, Maharashtra and West Bengal have been proposed for rehabilitation with an estimated outlay of Rs. 87 crores approximately. The scheme is implemented on a 50:50 partnership between the state and the union government. Though such rehabilitation plans do provide these cooperatives with much-needed financial support in the form of grants, they on the flip-side bring with them more government interference in the management of these cooperatives. Thus, on the one hand such rehabilitation and revival packages for the cooperatives do provide short-term solutions to make the cooperatives function; they on the other hand do not address the long-term issues of bureaucratic interference in management of these cooperatives. What required are not more grants or loans from the government. Allowing the cooperatives to raise funds from the markets and other financial institutions at competitive rates, and more professional management of the cooperative are the structural solutions needed to make these cooperatives vibrant business entities. The Producers Companies Act (2002) is a pioneering step in the direction of 6

7 making the cooperatives less dependent on government sources of funding, and enabling them to restructure their debt-equity ratio on prudent financial lines. Dairy Development in Non Operation Flood, Hilly and Backward Areas: In continuation of the centrally sponsored scheme to promote dairy development, an outlay of Rs. 250 crores was made in the 9 th Plan. Under this scheme dairy cooperatives are to be promoted and strengthened in hilly and backward districts of the country. The focus of the programme is two-pronged of not only giving a thrust to dairy in these regions, but also sustainable livelihoods to the poor. The Anand experience of dairy development has been of understanding the importance of valueaddition, marketing and branding for higher price realization. In the light of the above, the National Dairy Development Board has launched a Mnemonic Campaign to develop a common, umbrella brand, with standardization of logo, artwork and retail outlet design for faster brand recall for these cooperatives. The regional dairy cooperatives, upon paying a consideration to Mother Dairy, can use the Mother Dairy brand for selling their milk; however Mother Dairy shall ensure quality control and inspection of these regional cooperatives. This has been allowed to reap the mileage of the Mother Dairy brand by smaller, upcoming cooperatives which did not have the wherewithal to establish their own brands. De-licensing (1991) and Milk and Milk Products Order (MMPO), 1992 Post 1991, milk processing in large-scale plants was de-licensed and opened for domestic and private players to participate. The Indian Dairy sector, at the time of liberalisation, was replete with many inefficient, obsolete and sub-scale units, which faced direct threat from domestic and foreign competition. Keeping in mind the employment and livelihoods contribution of these small and cottage dairy processing units, the Government of India announced the Milk and Milk Products Order (MMPO) in 1992, under the provisions of the Essential Commodities Act, The operation of MMPO was largely limited to registration of dairy firms in the organised sector, though as a policy, it had three major objectives: Augment the supply of milk in milk deficient regions of the country, and ensure a certain minimum quality standard. Inspection and certification of dairy units for quality control, health and hygiene. Maintain a database on the status of the organised dairy sector in the country. 7

8 MMPO required that the large-scale processing units having capacity of more than 10,000 lpd or 500 tonnes milk solids a year could operate only after a license from the government. It is ironical that the government which liberalized the economy did not allow the dairy companies to operate without government licenses and permits! Licenses for milk processing capacities above lpd were only granted by the Central Government, while permission for capacities below lpd but more than lpd was granted by the state governments. For capacities below lpd no license was needed. The granting of government licenses was a political exercise, not in sync with the market demands but directed by the vested interests of the political power-groups and farmer unions. Government granted licenses based on its calculations of the difference between the marketable surpluses in different areas, while keeping in mind the processing capacity already installed. This did not permit healthy competition to develop the dairy sector, and many small, sub-optimal, sub-standard and inefficient dairy plants got indirect protection and respite from the growing competition. Rampant corruption also made the license system difficult to deal with for new start-up enterprises. Clearly, the MMPO was a disincentive to larger capacities, which could show greater economies of scale. Large-scale plants necessarily require backward integration and substantial extension work for ensuring stable procurement base of milk. As a result these large-scale units are most likely to help increase milk yields and, in turn the output of processed dairy products. MMPO encouraged companies to by-pass regulation, resort to sub-optimal units and poaching of milk from the cooperatives. However, keeping in mind the growing pressure of competition from global players in the dairy sector, the tightening of the WTO Agreements, and the anomalies in the license structure, the government made an amendment in the MMPO (1992). The amendment allowed the dairy players to setup dairy processing units wherever and whenever they felt like. In other words, licenses need not be taken now for setting up dairy units. However, these dairy plants have to still seek government registration for purposes of ensuring sanitary and hygienic conditions and quality of products. In order to check red-tapism and bureaucratic delays, the registration procedure has to be completed within 45 days by statute. In a nutshell, the salient amendments in the MMPO in 1999 are as follows: The provision of assigning milk sheds has been done away with, giving full flexibility and freedom of choice to private enterprises and dairy cooperatives to procure and market milk in any region of the country. 8

9 The registration under MMPO-92 will now not be for capacity installation, but only for sanitary and hygiene conditions, quality and food safety. The provision of inspection of dairy plants has been made more flexible. The provision to grant registration in 90 days has now been reduced to 45 days. Abolition of Quantitative Restrictions (QR) in Dairy Imports, 2001 Dairy imports became liberal after the Quantitative Restrictions on such imports were done away with in The Government of India, in an agreement with the Government of United States, removed QR from a plethora of dairy products. Table 5 highlights the trend in milk and milk products imports over the last few years, and a percentage of dairy imports in the total agriculture imports in the country. The dairy imports were particularly high in the year This was on account of dip in domestic milk production, and a subsequent dip in the production of milk powder. Milk powder production declined by 10.9% on a year-to-year basis in Total milk powder production during April to September 2003 dropped by 12.7%. The below-normal rainfall over the past three years had resulted in insufficient calving. Given this crisis, many cooperatives for instance, in Maharashtra sought help from the NDDB seeking around 1400 MT of skimmed milk powder. It was also reported that in Gujarat, procurement from 12 milk sheds declined by 9.6% to thousand kgs per day as against 4986 thousand kgs per day in the same period in the previous year 5. In wake of the above crisis of fall in milk production and procurement from major milk sheds in the country, the Union Government allowed the NDDB to import 6000 tonnes of milk powder to ease the supply shortage. Many states had openly objected to this decision of the Central Government. For instance, Punjab one of the largest milk producing states had raised objections citing that such imports would reduce milk prices, adversely affect farmers interests and result in large-scale killing of unproductive animals! However, states like Maharashtra cleared a proposal by the State Cabinet to increase the procurement price of milk from dairy cooperatives by Re. 1 per litre in order to increase procurement from the village cooperatives. What comes as a surprise is that the cooperatives had to wait for a government clearance to increase procurement prices! Rather than politics, it should have been the market that should have decided when and by how much to increase the procurement price. 4 Source: Centre for Monitoring Indian Economy (CMIE), Monthly Review (December 2003) 5 Source: Centre for Monitoring Indian Economy (CMIE), Monthly Review (December 2003) 9

10 Industry Structure Liquid Milk and Milk Products A total of 45.7 million tonnes of milk was processed into milk products in the year , out of which the share of the organised sector (including all cooperatives) was an abysmal 10%. On the other hand, 38.9 million tonnes of liquid milk was produced in India in , out of which only 15.4% was processed, and the rest was sold unprocessed 6. In both the above categories we clearly see that the industry is dominated by small, informal and unorganized dairy units. In the absence of adequate integration and economies of scale, most of the milk and milk products are either sold unprocessed, or processed locally into low value-added products. Such products in absence of hygiene, quality and safety are unable to command premium prices from the consumers. Few reasons why the informal sector is able to survive and compete in the market with organised dairy players are as follows. First, the informal milk vendors (colloquially referred to as dudhias) are able to work with very low levels of investments. Thus despite low volumes, they are able to compete with the organised players. They procure milk daily from the farmers, and supply within hours to the nearby consumption centres (urban areas), and thus do not have to invest heavily in chilling and pasteurizing units, unlike the case with organised players. Second, most of the small, informal milk vendors have very small operating cycles, and are able to turn their stocks daily and recover their money from the business. In such a scenario, they are in a position to pay higher prices to farmers than most cooperatives and are able to procure milk from the members of the cooperatives without making any significant investments in developing a procurement base. Third, the concept of pasteurized milk has not yet taken off well with most middle-class Indian households, which still feel that fresh milk from the local milk vendors (dudhias) is the best and the most nutritious. The misconception that pasteurization kills not only the germs, but also the nutritive value of milk has made the acceptance of pasteurized milk rather difficult in many small towns in the country. It is in these small towns that most informal milk vendors have a flourishing business as they are able to encash on the misconceptions of the consumers. Finally, in products like paneer (cottage cheese), the entire market is almost dominated by informal players as they are able to service the market far better than any organised player. Cost effectiveness and freshness are the two most important drivers in sale of cottage cheese. The informal milk vendors 6 Source: CII-McKinsey FAIDA Report Realising the Potential

11 with their small markets and fast operating cycles are clearly able to outsmart the organised players in the industry. The branded frozen cottage cheese hygienically tinned and canned is still not very popular primarily due to the notion of freshness that dawns heavy on the psyche of the buyers. It is only in product categories like table butter, milk powder and ghee that the organised players are able to gain a substantial market share because such products do not fall under the fresh food category. Dairy Industry in New Zealand: A Snapshot New Zealand has a vibrant dairy industry, and accounts for approximately 35% of the world s trade in dairy products, despite just 2% of the world s dairy production. The success of dairy in New Zealand has been attributed to efficient vertical integration by large-scale cooperatives upto the grassroot level dairy farmers; economies of scale in processing; research and development; quality control and aggressive yet creative marketing. Value addition has been at the very core of dairy industry in New Zealand. Most dairy cooperatives in New Zealand have invested heavily in expanding their product lines to launch newer and more innovative dairy products. There has been a growing trend among dairy firms in New Zealand towards production of high-value added functional foods like low fat, high calcium and protein milk, and biomedical foods like colostrums-based health supplements and products made from organic milk. The market in dairy in New Zealand is very well organised, as compared to the unorganized, informal dairy markets in India. About 96% of the milk production in New Zealand is handled by the cooperatives and the rest 4% by small private entrepreneurs that look at production of very specific niche varieties of dairy products especially cheese and yogurt. Mergers and acquisitions have been common in dairy industry in New Zealand, primarily to obtain economies of scale. In the past 20 years, there has been a large reduction in the number of independent dairy cooperatives from 36 in 1983 to only 3 large cooperatives in The largest dairy cooperative Fonterra was formed in 2001 following industry reform and legislative change to unite the once-fragmented dairy industry in New Zealand. This was done to provide the critical mass and efficiencies needed for competing in the global economy. The entire population of dairy farmers in New Zealand (around 14000) is vertically integrated with either the cooperative or the private dairy firms. The picture in India is much different than what exists in New Zealand. Given the sheer number of dairy farmers in India, it is not possible for any dairy cooperative or private firm to vertically integrate with all of them. Also, the in absence of the necessary financial 11

12 wherewithal and other support services, most dairy firms in India have struggled to attain large volumes and scale economies. The Indian dairy market as a result has remained cluttered with large number of unorganized players with sub-optimal capacities, thereby putting considerable constraint on value addition. The MMPO (1992) had also put barriers to installing capacity or mergers and acquisitions in dairy industry, thus affecting the scale-economies of dairy units in the country. However, with the amendment in the MMPO in 1999, such restrictions on capacity or mergers and acquisitions have been removed, which is a positive step in the consolidation of dairy units in the country. New Zealand exports over $NZ5.7 billion worth of dairy products each year. Fonterra, the largest dairy company in New Zealand, represents more than 20% of total New Zealand s exports and 7% of the country's GDP 7. The major export markets for New Zealand are USA, UK, Japan, Singapore, Taiwan, Hong Kong and Belgium. It is important to note that not only New Zealand exports value-added dairy products, but also to nations which have high quality and SPS standards. Around 36% of New Zealand s dairy exports are high value added, and there is an increasing trend on the same. India, on the other hand, finds it difficult to export its dairy products to the affluent nations of the West primarily on account of lack of adequate exportable surplus, and also its inability to meet the stringent quality norms of the importing nations. Thus, much of Indian dairy exports are confined to the Gulf and the SAARC nations, where quality norms are not very stringent. Cluster development has been the approach for dairy development in New Zealand. North Island accounts for 85% of dairy production in New Zealand. Within North Island, clusters for dairy have been developed in South Auckland region. Clusters have also been developed in Otago and Southland focusing on specialized areas like producing sheep milk for cheese plants, milk products for biotech applications and a dairy education and innovation centre at Manawatu. Invention and innovation are the major drivers of growth in New Zealand s dairy industry, both in domestic and export markets. For instance, a break-through project by Fonterra with researchers at Massey University s Riddet Centre aims to pioneer a novel food delivery system called POSIFoods or point-of-sale individualized foods. Such fast, nutritious snacks, tailored to individual s dietary needs and taste preferences, all at the touch of a button, are going to be the convenience foods of the future. The only way in which any dairy unit could hope to compete is to invest in R&D and innovation, and come out with more customer-centric offerings. 7 Source: This is New Zealand s official online trade development system. 12

13 Despite there being a world of difference between the nature of dairy industry in India and New Zealand, there are a few lessons that Indian dairy firms, as well as the government, can learn from their counterparts in New Zealand. First of all, vertical integration is important for maintaining efficiency in the procurement supply chain, and this is best demonstrated by the cooperatives. Vertical integration also helps in reducing wastage, ensuring quality standards and attaining scale economies in dairy processing. Development of cooperatives has to be promoted, and reckless government intervention in management of cooperatives should be checked. Secondly, consolidation of dairy units is important to help these dairy plants attain economies of scale, reduce costs and become competitive. In this respect, cluster development can be looked at as an alternative for development of dairy processing in India. By cluster development, all dairy units shall be able to consolidate their procurement base and production structure, share the infrastructure costs among themselves (for instance power, cold storage, refrigerated rail transport etc.), and add value to the produce at lower costs. This shall put them in a position to compete with the informal players in the price sensitive market by offering higher quality at affordable prices. Thirdly, innovation and invention is the crux for surviving and competing in the market place. A tieup of dairy units with research institutions can give a fillip to market-oriented R&D, which is essential in today s competitive marketplace. Concluding Analysis To conclude the study on the impact of policies on the growth trajectory of dairy processing in India, a regression analysis was performed on the effect of the major policies in dairy on the growth of milk and milk products. The three major policies that had a land-mark effect on dairy, and have been included in this analysis are: Operation Flood (and establishment of dairy cooperatives) in 1970 Delicensing of dairy sector in 1991 MMPO (1992) and its Amendment (1999). In addition to the above three major policies, a fourth variable, namely the effect of milk production in (t-1) year on the growth of milk production in t-year has also been used in the analysis. The underlying reason being that milk production has a slight element of cyclical production, and this variable helps to capture the variance in growth rates due to such cyclicality of milk production. In absence of adequate data for all dairy products in all the years from 1952 to 2004, milk production data has been used, and the assumption made that more milk production leads to more milk processing. 13

14 From the analysis shown in figure 9, we find that variables Flood (Operation Flood), DELIC (delicensing), AR (1) (Previous years growth rate of milk production) and the constant C are significant i.e. explain the maximum variance in growth of milk production over the years. Clearly, the Operation Flood and Delicensing have been the two most important policies in favour of dairy development in the country. Operation Flood, through setting-up of village dairy cooperative societies and development of milk sheds, and delicensing through encouraging large players to enter the dairy sector and operate at optimal scales, have contributed positively to the growth of dairy processing in this country. MMPO, to the contrary, had been a bottleneck, but given the short duration for which it was implemented (and later amended) it did not significantly impact (hinder) dairy development on the whole. SWOT Analysis STRENGTHS WEAKNESSES Large production base Large procurement base due to establishment of numerous village dairy cooperative societies (Operation Flood) Large domestic demand Large stock of milch cattle Cheap supply of labour Easy availability of fodder, and animal feed at affordable rates Lowest productivity of milch animals in the world Dairy sector dominated largely by informal, unorganized players Vertical integration (coordination) still not very robust in case of many dairy firms/cooperatives Most dairy brands are nascent and not very popular among consumers weak marketing for processed dairy products Risk management and insurance facilities are still not easily available OPPORTUNITIES Liberalisation of the economy dairy sector open for investment by private and foreign players. Abolition of the Quantitative Restrictions on import of dairy products. Per capita consumption of milk products below international average scope of increasing consumption Amendment of the Milk and Milk Products Order (MMPO) no restrictions on capacity installation and expansion. Amendment in Cold Storage Act (No licenses needed for establishing refrigerated and cold chain units for dairy products) 14

15 Figure 1: Milk Production in Million Tonnes Milk Production in Million Tonnes Milk Production India United States Russia Pakistan Brazil New Zealand Ukraine Poland Australia Argentina Growth Rate Countries CAGR '00 CAGR '01 CAGR '02 Source: Food and Agriculture Organization (FAO), Analysis: IDF Country No. of Cows India Brazil Russia United States Mexico 9000 Ukraine 7000 Germany 6000 France 5000 New 3000 Zealand Poland 3000 Argentina 2500 United 2000 Kingdom China 1500 Table 1, Figure 2: No. of Cows (2002) No.of Cows (in '000) India Total No. of Cows United States Source: Food and Agriculture Organisation (FAO) Germany Poland China Countries 15

16 Country United States 8.4 Canada 7.5 European 5.7 Union Australia 4.8 Poland 3.9 New Zealand 3.7 Argentina 3.6 World 3.1 Average Russia 2.7 Mexico 1.4 India 1.0 Table 2, Figure 3: Milk Production per Cattle Head (2002) Productivity M ilk Per C at t le ( M T ) Productivity of Milch Cattle (2002) Canada Australia New Zealand C o unt ry World Average M exico Source: Food and Agriculture Organisation (FAO), 2002 Figure 4: Per Capita Milk Availability in India Per Capita Milk Availability Milk Availability Per Capita (in grams) Years Source: National Dairy Development Board (NDDB) 16

17 Figure 5: Anand Pattern of Dairy Development: Three-tier Structure Analysis: IDF Village Level Dairy Cooperative Society State Level Milk Marketing Federation Procure Milk, Provide Inputs, Payments for milk Chilling and Processing Facilities for milk and milk products Marketing facilities for dairy unions, quality control, R&D Country % Exports Bangladesh 23 UAE 22 Germany 6 Oman 5 Egypt 4 Saudi 4 Arabia Madagascar 3 USA 3 South 3 Korea Yemen 3 Netherlands 2 Others 22 Table 3, Figure 6: Dairy Export Destinations from India (2002) Source: Table 4: Progress on Dairy Cooperatives Particulars Societies Organized ( 000) (Anand Pattern) * Farmer members (lakh) * Average rural milk procurement (lakh kg/day) Liquid milk marketing (lakh litres/day) % Exports Bangladesh UAE Germany Oman Egypt Saudi Arabia Madagascar USA South Korea Yemen Netherlands Others * till November, 2001 (provisional) Source: Department of Animal Husbandry, Ministry of Rural Development,

18 Table 5: Dairy Imports as a % of Total Agri-Imports (Apr. to Sep) (Apr. to Sep) Product $ Mn % agri imports $ Mn % agri imports $ Mn % agri imports $ Mn % agri imports Milk Products Source: Economic Survey, Figure 7: Share of Organised Sector in Milk and Milk Products (2001) Milk Processing 15.40% 25.40% 59.10% Self-Consumption (not processed) Organised (Processed) Unorgansied Trade (not processed) Source: CII-McKinsey FAIDA Report Realizing the Potential Figure 8: Share of Organised Sector in Milk and Milk Products (2001) Milk Products 10.10% 26.30% 63.70% Self-Consumption (home made) Unorgansied Trade (locally processed) Organised (Processed) Source: CII-McKinsey FAIDA Report Realizing the Potential 18

19 Table 6, Figure 9: Regression Curve for Policies on Growth of Milk Production 1. Dependent Variable: DIFPROD 2. Method: ML ARCH 3. Sample(adjusted): Included observations: 53 after adjusting endpoints 5. Convergence achieved after 37 iterations 6. Bollerslev-Wooldrige robust standard errors & covariance Coefficient Std. Error z-statistic Prob. C MMPO FLOOD DELIC AR(1) Residual Actual Fitted Analysis: IDF

20 POLICY ENVIRONMENT FOR DEVELOPMENT OF HORTICULTURE IN INDIA Harsh Vivek Introduction India is one of the largest producers of fruits and vegetables in the world. Out of the 370 metric tonnes of fruits produced in the world in 2001, India accounted for around 8% of the total production. In vegetables, India produced 71 million metric tonnes in and accounted for around 15% of the world s total vegetable production. However, though it is an honour to be world leaders in production of fruits and vegetables, it is not much of a reason to rejoice in case of India. The volumes in India come due to the sheer size of the country and the amount of arable land put under fruits and vegetables cultivation. Despite large aggregate production of fruits and vegetables, the productivity per hectare of land remains quite low in India. The diverse agro-climatic zones available in India make it possible to grow a vast variety of fruits and vegetables. However, the competitiveness of horticulture sector in the global market shall largely depend on the productivity of the crop. Table 1 shows that though productivity in India for production of grapes, oranges and bananas is far greater than the world average, in most other fruits, India still lags behind other nations. Smaller nations like Cape Verde, Bahamas and Benin record higher per hectare productivity in mango, lemons and pineapples respectively than India. Table 2 shows productivity in India in vegetables in comparison to the world average. Here again, we find that India s average falls short of the world s average in most vegetables. To the contrary, many small nations have productivity several times higher than that of India such as Netherlands in brinjals and tomatoes; New Zealand in potatoes; and Kuwait in green beans. The per capita availability of fruits and vegetables in India is as low as 100 grams per day and 200 grams per day respectively. If we take into account the fact that around 20% of the produce is wasted due to handling and storage losses, the per capita availability of fruit further reduces to just 80 grams per person per day. Per capita availability for vegetables, after taking into account all the wastage and handling losses, comes to a mere 160 grams per day. This is well below the recommended minimum dietary requirements of 140 grams of fruits per day and 270 grams of vegetables per day 9. However, despite the low per capita availability of fruits and vegetables in the country, rising per capita income shall ensure that the fruit-and-vegetable consumption shall grow over the next few 8 Source: Task Force on Agro-Food Processing (2001), Government of India. 9 Source: Food and Agriculture Organisation (FAO) 20

21 years. While the fruit-and-vegetable sector may remain dominated by the fresh market in the years to come, there may still be opportunities for development of successful processing and retailing businesses. This would require prudent vertical coordination among the different players in the value chain; reduction in wastage and improvements in quality of processed fruits and vegetables. Major Fruits and Vegetables in India: Production and Trade 10 a) Mango Total area under mango cultivation in India is around 1.5 million hectares, with the annual production of million tonnes. India accounts for more than 50% of the world s production. The other major mango growing nations are Mexico, Pakistan, Brazil and Thailand. Despite large domestic production of mangoes, India s share in the global trade in mangoes is not very significant. Out of the 0.65 million tonnes of mangoes traded internationally every year, valued at US $384 million, India s share in this trade is only around 3800 tonnes, valued at US $18 million. It must be noted that India s major mango exports are in the fresh form; however, less than 1% of world s trade in mangoes is in fresh form. Bulk of the international trade is in the form of processed mangoes, especially mango pulp. The major importers of mango and mango pulp are North America, Middle East and Europe. The major destinations for Indian mango exports are Middle East and Europe. Our exports to the biggest importer of mangoes, i.e. North America, are almost negligible. Mango market in North America is heavily dominated by exports from Mexico and Brazil. The ratio of cost of production to farm-gate prices in mangoes is quite unfavourable for mango growers in India. This has adversely affected the price competitiveness of Indian mangoes in the global market. Subsidy, either domestic or export, is not a major factor in deciding mango trade in the world as none of the major producers and exporters of mangoes subsidize mango production on any significant scale. Two pronged strategy is needed to increase India s share in world s mango trade. Firstly, while strengthening our stronghold in the trade of fresh mangoes, impetus should be given to trade of processed mangoes as well. Secondly, mango growers, processors and exporters should be made aware of the SPS norms under the WTO and Codex, which are mandatory and stringent for exports. b) Grapes 10 Source: National Workshop on Enhancing Competitiveness of Indian Agriculture organised jointly by Confederation of Indian Industry (CII), Ministry of Agriculture (Government of India) and National Institute of Agricultural Marketing (NIAM) on April 7, 2005 at Scope Complex, Lodhi Estate, New Delhi. 21

22 With around 40,000 hectares of land under grapes cultivation, India produces about 1.2 million tonnes of grapes per year. Grapes are the second most important fruit exported from India, after mangoes. Maharashtra, Gujarat and Karnataka are the major grape producing states in India. Plans are underway for starting grapes cultivation for producing wines in Uttaranchal and Pondicherry. The global trade in grapes is 2.7 million tonnes, valued at US$ 2.6 billion. The major producers of grapes are Italy, France, Spain, USA, Argentina and Chile. The North American and European nations are major importers of grapes, while Latin American nations are major exporters of grapes. India s grape exports are small compared to the world s trade. However, Indian export competitiveness in grapes continues to be high based on relatively lower prices of grapes cultivation in India compared to our Western counterparts. The issues of concern in grape exports are mainly conforming to SPS measures and the establishment of export-oriented infrastructure facilities. There are a few success stories in grapes in India. One such success story is MahaGrapes in Maharashtra which represent vertically coordinated grape production and marketing system. MahaGrapes has a sizeable share in grape exports from India. MahaGrapes has been briefly discussed later in the paper as a case let. c) Banana India is one of the largest banana producers in the world having approximately 0.45 million hectares of land under banana cultivation. The total banana cultivation in India is close to 16 million tonnes. Uttar Pradesh, Bihar, Maharashtra and West Bengal are few of the major banana producing states in India. The availability of banana all year round makes it one of the most widely consumed fruits in the country. Also, there is a preference among Indian consumers for fresh banana, and in presence of all-year round availability, processed banana finds difficulty in getting acceptance from the Indian consumers. Banana is among the world s most widely traded fresh fruits, with annual world trade amounting to million tonnes, valued at US$ 4.3 billion. The international trade in banana is distorted on account of the quotas and preferences used by the importing nations in favour of certain exporting nations. In Europe, the in-quota tariff on import of bananas from Caribbean countries is 0% and the in-quota tariff for certain Latin American nations is 75 euro per tonne. Further still, Out-of quota Most Favoured Nation (MFN) tariff is 750 euro per tonne. 22

23 In 2003, the average price of banana in Europe was US $810 per tonne, and US $385 per tonne in the US. At these production prices, India is one of the most efficient and competitive banana growers in the world. However, Indian firms are not able to compete in the global market place due to the distorted tariff regimes of the major banana importing nations of the world. d) Apple India is not a major player in apple production and trade in the world. The total production of apple in the country is approximately 1.2 million tonnes and the area under cultivation is about 0.24 million hectares. Major apple producers in the world are USA, China, France, Germany and Italy and they contribute a lion s share to the world s annual total apple production of 45 million tonnes. India is a net importer of apples. In , India exported around tonnes of apples, while it imported around tonnes. India s share in the global apple trade is also miniscule. France, Italy, USA and China are the major exporters of apples. The volume of global trade in apples is around 5.6 million tonnes, valued at US$ 2.8 billion. The cost of production of apple in India is relatively higher than in other major producing nations. This is on account of apples being grown in hilly regions in India where accessibility is poor and infrastructure support is weak. The main handicap in apple exports is that of stagnation in upgradation of varieties of apples grown in India for last four decades. The tastes in the world have shifted away from traditional varieties to exotic varieties of apples. Also most Indian apple varieties are not very amenable to processing. e) Potato Potato is one of the major vegetables grown in India. The per hectare productivity of potatoes in India is higher than the international average. The total potato production in the country is approximately 24 million tonnes, and the area under cultivation is 1.2 million hectares. India s share in the world potato production is around 6 to 7%. The total trade in potato amounts to 7.9 million tonnes, valued at US$ 1.6 billion. India s share in potato exports is around 2.5%, with exports amounting to about 2 lac tonnes in Russia, Poland, China, USA and Germany are the major producers of potato in the world. The importers of potato are Russia, Netherlands, Belgium, France and Saudi Arabia. The export destinations of Indian potatoes are Sri Lanka, Nepal, UAE, Mauritius and Qatar. Once again, Indian exports are mostly to the Saarc and the Gulf nations primarily on account of Indian potatoes not being able to meet the stringent quality standards of the lucrative markets of the west. 23