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Milk: The road to perdition is often through subsidies

Subsidies threaten an industry that can single-handedly change the fortunes of millions of dairy farmers in the country.

April 14, 2020 / 11:17 AM IST
Representative Image

Representative Image


India’s milk industry–the largest in the world–is in danger. Subsidies, the most seductive of the weapons, are being deployed to destroy the sector that provides livelihood to millions of farmers across the country. At stake is the growth of the industry. Subsidies could fragment it and damage milk pricing. 

To understand the problem, we will first examine India’s emergence as a milk power.

Kurien’s vision

When Verghese Kurien ushered in Operation Flood in 1970 that led to the “White Revolution”, he knew he was on to something. By 2000, thanks to the tireless efforts of the Gujarat Cooperative Milk Marketing Federation (GCMMF), India became the world’s biggest milk producer. Kurien knew that India could win this game, provided three conditions were met:

  1. Farmers continue getting the lion’s share of the market price. If farmers get more, they will produce more.

  2. Imported milk should not be allowed to create a surplus in the market or sold at a lower price and thus, adversely affect farmers’ fortunes. To ensure this, he in pre-Operation Flood days persuaded Lal Bahadur Shastri, the then prime minister of India, to transfer National Dairy Development Board (NDDB) to him and used it as both market maker and dairy promoter.All imported milk was to be given to NDDB, which would release it gradually at market prices. NDDB would use the surplus to create a milk-promotion fund. Since NDDB did not depend on the government dole and since the milk industry grew without subsidies, both steered clear of any adverse remarks from the World Trade Organization, which frowns at subsidies as distorters.

  3. The milk cooperatives should be aimed at maximising farmers’ incomes and not of the promoters or managers of the cooperatives.

To achieve these goals, Kurien kept the cooperatives away from politicians and bureaucrats. Though he was the architect of India’s milk revolution, there was no love lost between the officialdom and politicians and Kurien, who died on September 9, 2012 at 91.

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Through the last seven decades, politicians have eyed the milk cooperative votebank. Farmers number more than 10 million--Amul cooperatives have 3.6 million farmers-- assuming four people to a household, the number climbs to 40 million people. These do not include indirect beneficiaries like traders, distributors and consumers. And till Kurien was around, no politician dare interfere with milk cooperatives.

 The new order

After Kurien stepped down as the chairperson in 1998, his successor, Amrita Patel, changed NDDB’s structure. With it, the approach towards the milk industry also changed.

Patel corporatised Mother Dairy, which was a division of NDDB providing a marketing outlet for surplus milk. She sought the status of a financial institution for NDDB, though it was designed to be a milk cooperative promotional body. Politics had begun creeping into the milk sector.

 Maharashtra’s cooperatives

Maharashtra’s cooperatives didn’t follow Kurien’s model. They wanted cooperative promoters to have the right to decide where the benefits from milk would flow. There functioning was different from GCMMF, where more than 80% of the market price went to farmers.

The GCMMF-Amul structure became the most efficient milk producer in the world, managing procurement, processing, marketing, distribution and new product creation within 20% of the market price. Other cooperatives gave barely 50% to their farmer members.

One reason is that unlike GCMMF, which operates under the Amul brand, Maharashtra has over 60 brands, each with their own production, processing and marketing.

Second, farmers say a lot of milk money is used for financing politics. Third, since milk and sugarcane cooperatives often work under the same management (politician), they are wedded to the liquor industry, too, which finances politics and generates huge cash.

This is because molasses, a raw material for distilleries, is the byproduct of the sugar industry. But, the distilleries and their profits are run not as part of cooperatives but as private companies. It is the same old story– privatisation of profits and socialisation of losses.

Maharashtra cooperatives are big money-spinners. They run cooperative banks. In Maharashtra, even the promoters’ capital of 10% in a bank is provided by the state without insisting on a seat on the board of directors. Thus, with no skin in the game, Maharashtra’s cooperatives have learnt to play with other people’s money.

When the former chief minister Devendra Fadnavis tried to coerce cooperatives into giving more money to dairy farmer-producers, the cooperatives pleaded financial helplessness. The state then gave them a subsidy of Rs 5 per litre, paid for by taxpayers, but it was withdrawn subsequently in face of strong opposition from other (non-cooperative) politicians.

 Karnataka too

This southern state has the second-largest milk cooperative after Amul, with 2.25 million milk producers. It is believed that many of these cooperatives work under the same leadership as sugar cooperatives. Karnataka, like neighbouring Maharashtra, is also a big liquor producer.

It offers a subsidy of 20% on milk–Rs 6 per litre. A litre is priced at Rs 30. While this subsidised milk finds its way into Maharashtra, the government there doesn’t slap an entry tax of Rs 6 per litre on milk, like its does with the liquor coming from Karnataka, clearly showing where the priorities lie.

 Back to Gujarat

In Gujarat, cracks in the citadel that Kurien built were beginning to show. These cracks were minor–some caused by Patel.  But a few years ago, a maverick milk cooperative promoter, Vipul Chaudhary, considered close to the BJP, set up milk-processing capacities over a three year period without consulting the federation.

He began procuring milk from non-cooperative producers in violation of the federation and cooperative rules. He wanted GCMMF to purchase the additional milk but was politely refused. Chaudhary then asked GCMMF to reimburse him the losses, which he claimed were in excess of Rs 1,000 crore. His demand was turned down, so in 2019 he decided to break away from the Amul-GCMMF.

Fortunately, saner counsel prevailed. Chaudhary realised that without the Amul brand, he would not be able to sell his milk let alone the augmented capacity. It is not known whether he kept the additional capacities outside the cooperative structure. But he had surplus milk–dairies must convert the unsold stock into skimmed milk powder (SMP) to give it a longer life.

The domestic market was flush with the stock. He tried exporting the milk powder but international prices crashed. He, therefore, asked the government to subsidise his exports. Rather than giving subsidy to an individual, the government decided to provide subsidy to all SMP exporters.

 The problem with subsidies

The problem with subsidies is that they distort markets. They reward the inefficient and create pressures on the profitability of the efficient. For instance, GCMMF, which is a cooperative, and Hatsun, India’s largest milk producer in the private sector, are both efficient. Both pay a large share of the market price to farmers. Both have finely honed production processing and marketing systems.

Now, when they watch another producer company making the same profits without being efficient, they feel demotivated. They, too, are tempted to take the subsidy route and reward their managers, confident that the largesse would be met through subsidies.

Till now the milk industry has grown because it was free of government interference and without subsidies. It remained healthy through efficiency and integrity. The government mustn’t allow it to become sick.

After all, it is the largest in the world, the most farmer-friendly organisation globally and offers the shortest route to rural prosperity.

In places where the Amul-Hatsun-Nestle and other good and efficient players have stepped in, dairy farmers can make a profit (income-less actual expenditure) of Rs 100 per head of cattle per day for 300 days in a year (the remaining are used to ready the cattle for insemination and subsequent lactation).

If the milk industry becomes sick, the losers will be farmers. The government’s penchant for subsidies will ring the death knell for this immensely successful industry.

(The author is a consulting editor with Moneycontrol)
RN Bhaskar
first published: Apr 14, 2020 11:17 am
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