The free market menace

The amendments to the Milk and Milk Products Order, announced by the Finance Minister in his Budget speech, will expose the milk cooperatives and the ordinary farmer to the vagaries of the free market.

IN his Budget speech this year, Finance Minister Yashwant Sinha said: "Having achieved great success with the Green Revolution and then the White Revolution, the country is ready for its third revolution, of agricultural diversification and food processing." In order to achieve this, he proposed further decontrol and deregulation of the agricultural sector. His first announcement in this regard pertained to amendments to the Milk and Milk Products Order (MMPO), 1992, which would remove the last vestige of government control on the industry and possibly the last bit of protection given to the dairy sector.

The immediate amendments will include the removal of restrictions on and the need for registration of new milk processing capacities and the scrapping of the milkshed concept. The provision in the present MMPO that requires any dairy plant handling or processing more than 10,000 litres of milk a day to obtain a license from the government will be done away with. More important, every dairy holding a registration certificate is at present allotted a milkshed, a geographically demarcated area, to collect milk from which it is given the exclusive rights, and if the milkshed concept is scrapped that would end the monopoly enjoyed by a particular dairy in procuring milk from a specific area. It would also mean that every developed milk-producing region will be thrown open to anyone who wants to set up shop there.

Deregulation and decontrol are expected to have a severe impact on the dairy sector. Until now protected, the cooperative and the farmer will be exposed to the uncertainties and vagaries of the free market. In fact, the existence of about 70,000 village cooperatives, the backbone of the dairy industry in India, will be under threat. Moreover, the livelihoods of nearly 72 million small and marginal farmers, who are the primary milk suppliers, are likely to be affected.

Dr. Varghese Kurien, Chairman of the National Cooperative Dairy Federation of India, decried the government's decision. "I suppose the amendments to the MMPO have been proposed with the simple assumption that the pace of investment in the dairy sector will be accelerated," says Kurien, who is referred to as the father of the White Revolution (see interview). However, he says that the processing capacity registered under MMPO (as of June 2001) is already almost close to saturation. "In the circumstances, there is very little scope for fresh investments in new milk processing capacities." Kurien says that scrapping the milkshed concept will most likely result in unhealthy competition, which will hurt all players in the industry, especially the milk producers.

With regard to regional imbalances that may result from the scrapping of the milksheds, Kurien says that no one - except perhaps the dairy cooperatives - may be interested in developing dairy in areas with medium to moderate potential. He said that it will be difficult to find a private sector company or a multinational corporation that would like to establish its dairy business in anywhere but in high-yielding areas.

Apparently, successful ventures like the Gujarat Cooperative Milk Marketing Federation (GCMMF) may not be affected by the amendments as each milk producer earns a good amount by being part owner of the cooperative. However, Kurien says: "By and large the milk producer would continue to be loyal. But the lure and temptations of the market are difficult for even the well-educated and intelligent to avoid." He says that in a liberalised economy it is easy for multinationals to influence governments in order to weaken the cooperative structure. "The threat lies in the new economic policies, which allow the mighty and the powerful to eat overnight into the strengths of the weak and the marginalised, which they have painstakingly built over the decades. This is the basic issue."

Another expert on the industry, Dr. Narayanan Nair, Professor at the Centre for Development Studies in Thiruvananthapuram, agrees with the assessment that the new policies will affect the dairy industry. "My worry is that with the opening up, the private sector will be able to import raw milk and milk derivatives," he said. "Surplus milk from Europe or Canada will find its way here. That much we know from WTO (World Trade Organisation) discussions. What will then happen to our milk producers, particularly those whose only source of livelihood is the sale of milk."

PREDICTABLY, the cooperatives, including the ones in Maharashtra (the State has several highly productive milksheds), are up in arms against the amendments. Amul, the pioneer of the dairy cooperative movement, has lodged a strong protest. In fact, intense lobbying by Amul had scuttled in 1998 a move to amend the MMPO when it came up in Parliament.

"Over the past several decades we have nurtured and developed our milkshed to become the leading producer of milk. Now the government wants to let everyone in on our territory," said R.S. Sodhi, general manager (marketing), GCMMF. Amul has provided a huge support structure to its farmers. It has worked hard to produce a good breed of cattle in the region. "It is like an individual growing a crop, nurturing it and then the government saying that anyone can harvest and take the benefits from the crop," Sodhi told Frontline. He said that the purpose of developing the dairy industry was to provide a steady supplementary income to farmers. In fact, the government should be promoting the establishment of milksheds to achieve this objective, he said. "Now everyone will put up factories where the milk production is good. There will not be all-round development. The whole purpose behind the White Revolution is defeated. Amul's fears are not so much for the future as it is for the short term. There will be chaos in the market. Moreover, what will happen to the small dairies? Currently, we are number one in the world in milk production. When things are going good, why can't they let it be? They are doing this just to please the multinationals," Sodhi says.

Interestingly, some top private companies have joined the cooperatives in opposing the government move. Nestle India Private Limited, the largest private company in the dairy sector in the country and a multinational, is upset by the proposal. Nestle's milkshed covers 7,360 square kilometres around its plant in the Moga region of Punjab. For more than four decades the company has been developing the demarcated area. Carlo M. Donati, managing director, Nestle India, told Frontline: "Milksheds are earmarked territories for companies, which are expected to invest resources required to develop the milk economy in the area. These investments are expensive and take very long to show results."

Nestle, Donati says, has invested large resources in its milkshed, which comprises 1,599 villages. It has built up in the farmers a feeling of trust in it and the milk trade. Donati says that Nestle has provided several services to ensure high-quality production. These include cooling tanks at the collection centres, milking machines, cattle feed, veterinarians and agronomists to train and assist farmers, and methods of fodder development and clean milk production. "If companies are to continue making such large investments in improving the quality and quantity of milk output, they will require some confidence that their investments are protected. The removal of milksheds may not be in the long-term interest of the industry since lowered commitment may lead to lowered investments and the quality of milk could deteriorate and affect the farmers' income," he says.

However, not all private sector companies share Nestle's view. Dynamix Dairy Industries Limited, the largest private diary in Maharashtra, is not worried about the MMPO amendment. Deepak Jain, its managing director, said: "The issue really is not about who pays the best price but about who provides additional and better support services." The milkshed of Dynamix covers seven districts in western Maharashtra. Dynamix has made substantial investments in setting up bulk cooling facilities - which protect the milk from contamination - at several collection centres around its plant in Baramati. Moreover, the company works with the Baramati Milk Union Cooperative to create awareness among farmers on hygiene and veterinary care.

In Maharashtra, to procure milk the dairy has to go through a cooperative (Frontline, March 1, 2002). "Through an agreement with the cooperative, we have been able to establish a system that ensure the supply of high-quality of milk. We pay the farmer according to the fat content. More often he gets a better price than when he supplies directly to the cooperative. Why should they abandon us or the cooperative for someone they do not know? In any case, we currently have a surplus. Rather than declare milk holidays it would be better for all if there is a buyer for the entire amount of milk produced," says Jain. However, Jain believes that Maharashtra may not benefit from the amended MMPO as the procurement policy and price control by the State hinder private dairies from coming in.

While the Baramati cooperative has a regular buyer in Dynamix, the Warana Milk Cooperative Dairy in Kolhapur is not so secure. The Warana dairy is among the largest and the most profitable dairies in Maharashtra. Apart from the standard support services, it recently initiated a programme where veterinary surgeons can be consulted on a wireless system set up in each village collection centre. "After putting in so much investment, why should we allow others in?" a member of the cooperative asked. He argues that unlike the cooperative, the private sector is driven by the profit motive and has no incentive to pay a higher cost of production in the form of returns to farmers.

UNTIL 1991, the dairy sector was licensed under the Industries Development and Regulation Act (IDRA), 1951. Although delicensing attracted a number of players, concerns about excess capacity and sale of contaminated/substandard quality of milk made the government promulgate the MMPO. However, cooperatives continued to be shielded from competition. The order did not require a licence for units handling less than 10,000 litres of liquid milk a day or milk solids up to 500 tonnes per annum. But it laid down that plants producing between 10,000 and 75,000 litres a day or manufacturing 500 to 3,750 tonnes of milk solids a year should be registered with the respective State government. Dairy plants producing over 75,000 litres a day or more than 3,750 tonnes a year of milk solids have to be registered with the Central government.

According to a report by India Dairy, a non-governmental organisation (NGO), the stringent regulations, government controls and licensing requirements for new capacities have restricted large Indian and multinational players from making significant investments. The proposal to amend the MMPO and open up the dairy sector was made in 1998 by the then Agriculture Minister Som Pal, currently a member of the Planning Commission. As the existing dairy industry - launched by Operation Flood - is considered a success, the suggestion to liberalise the sector generated considerable debate. With people such as Dr. Kurien and Dr. Amrita Patel, former Chairman and Managing Director of the National Dairy Development Board, lobbying for the retention of the current order, any change seemed impossible at the time. However, the MMPO is not an Act. It is an order which forms part of the Essential Commodities Act, 1955. The legal implication is that it can be abrogated by the Central government without sanction from Parliament.

Initially, the amendments announced by the Finance Minister will be incorporated in the MMPO. S.K. Srivastav, Director of the Central government's Department of Dairy Development, said that more were expected. "It is still premature to state what the impact might be on the sector," Srivastav told Frontline. He said there was pressure on the Finance Minister to do away with the regulations and that was why he took the bold step. Srivastav said that while the government would not insist on registration of dairies, it would continue to regulate health and safety conditions.

A report on the dairy industry, "The White Challenge" (1999), brought out by Initiatives, an NGO, says that while the cooperatives and the private sector are involved in a battle for territory, the real issue is how to extend the benefits of the industry to increase the returns for farmers. The report says there are larger policy issues to work on in the dairy industry. For instance, each State should periodically announce an assured minimum price that the farmers must be paid by the processors. The government should stop the practice of providing extension services to farmers and instead make the processors responsible for that.

Although India is the largest producer of milk in the world (78 million tonnes), it does not figure anywhere on the world dairy export map. According to Dairy India, India also has the largest population of cattle in the world - about 313 million. More than 50 per cent of the world's buffaloes and 20 per cent of cows are in the country. Most of these are milk cattle. But milk yield per animal is very low. The productivity of a country like Norway, with about four lakh cattle is six times more than India's. The report of Initiatives says that India needs to concentrate on tapping the dairy industry's potential. Even if it cannot bring in huge amounts of foreign exchange, it will at least be able to stand by its first objective of providing a supplementary income or, in these times, the only income to the farmer.