Demand outstrips Production

The first is the myth of huge production shortages in India, which will require us to undertake massive imports
that will only go up in the future.

In 2014-15, India’s milk production crossed 140 million tonnes (mt), while registering a compounded annual
growth rate of around 4.5 per cent in the last 10 years. As against this, the average growth of milk production
in the world is 2.3 per cent. India accounts for over 17 per cent of the world’s total milk output.

These figures provide the base for analysing the myth originating from industry experts and survey reports
about how in the last 5-6 years, India’s annual milk production has been increasing by around 4 per cent,
whereas the annual milk demand is increasing by 6 per cent. A foreign expert went a step further, stating that
India’s domestic milk demand is growing by 10 per cent, thus causing a shortage of a whopping 6 per cent
every year.

Depending on whose mantra one takes as sacred or gospel truth, the annual growth gap would range from 2
(Indian expert) to 6 per cent (foreign expert). Either way, it means the country would face a deficit that could
be met either through a massive production increase or resort to huge imports.

For example, a 6 per cent shortage figure would cause a gap equivalent of some 8.4 million tonnes per year. If
this statement is believed, a cumulative shortage of three years would mean that India’s import would exceed
the entire current milk production of New Zealand.

Clearly, it would be impossible to make up for a 6 per cent shortage through imports—when world production
is only growing by 2.3 per cent and a large chunk of world trade of 40 per cent is accounted by New Zealand.
Even the world as a whole will not be able to supply India, if its demand is outstripping production by 6 per
cent.

Even if we consider the more conservative 2 per cent shortage figure, over the last six years this would add up
to 12 per cent. That, on a production of 140 million tonnes, comes to around 17 million tonnes—which is the
actual shortage India should have experienced and this would have needed to import by 2014-15 cumulatively
going by this theory.

The reality is that during the last decade India imported only 120,000 tonnes of milk solids, which is equivalent
to a million tonne of milk. On the other hand, the country actually exported over 1 million tonne of powder
and casein during this period. Effectively India has been a new exporter during the last decade.

It raises a simple question: Could the country have really been in a position to export over eight times the milk
that it imported if there was a shortage? The experts would, then, cite rising milk prices to support their case.
But even this argument rests on thin ice: Milk prices have, no doubt, gone up in recent times. But the
cumulative increase in the wholesale price of milk from 2004 to 2012 was 110.4 per cent as against 113.8 per
cent for all food articles and 115.9 per cent for foodgrains. It is much lower than the 153.2 per cent increase in
the wholesale price index for the ‘eggs, meat and fish group’.

During 2015, the cooperative and private dairies held a surplus milk powder stock of 120,000 tonnes—again
equivalent to one million tonnes of milk. This is after exporting 8.5 million tonnes equivalent of milk products
in the last decade. The dairy sector has been seeking intervention of the Government of India to incentivise
exports. And, many processors today are paying lower prices to milk producers or cutting down on milk
procurement volumes.
So, where does the question of a ‘structural shortage’ arise? Dairy exporters in several countries are
pressurising the Indian government to lower import duties as well as sign free trade agreements (FTA) in a bid
to access the country’s huge market. One could perhaps surmise that such a myth has been created by such
lobbyists who want India to be soft on allowing imports of milk products through lower import duties and FTA!

Milk is a source of daily cash for the rural households. Its price is relatively stable and bereft of volatility
exhibited by most crops. Milk withstands climatic vagaries and natural setbacks better than agriculture. The
challenge ahead is to give remunerative price to the farmer, increase productivity of milking animals, bring
down production cost of milk thereby increasing profitability of the farmers and helping them stay in the dairy
sector.

With regard to demand and supply of milk and milk products, it has been propagated that India’s demand
would outstrip its supply and hence, there is a need to permit import. This argument has been negated by a
recent report published by Niti Aayog, which has projected India’s milk production to touch 330 million tonnes
by 2033, as against the project demand of 292 million tonnes. This clearly indicates India does not require to
import milk or milk products to feed its population even after a decade. This was further corroborated by the
recent report “OECD‑FAO Agricultural Outlook 2019‑2028” mentioning that “… In the coming decade, (India’s)
domestic production is expected to keep up with growing population and higher incomes, with little change in
its overall trade position…”.

To sum up, I believe that RCEP in dairying would jeopardise and adversely affect the small holder dairy
production systems and farm sustainability and hence the livelihood of millions of dairy farmers, who have
assiduously built the system since over five decades and I therefore propose that dairy sector be kept out of
RCEP treaty.

A change in trade policy affects the dairy products market equilibrium, domestic production,

consumption and price. Trade barriers, in general, increase domestic prices and domestic

production while decrease domestic consumption. On the other hand, tariff elimination leads

to a reduction in the domestic price benefiting domestic consumers while domestic producers

reduce their production. This leads to an increase in consumer surplus/welfare and a decrease

in producer surplus/welfare (Francois and Reinert, 1997; Wijegunawardane, 2002). In

addition, FTAs can affect the economic welfare of non-FTA countries. They are likely to

reduce their export prices to compete with FTA countries (Chang and Winters, 2002).

Under the floating exchange rate system, export and import prices are affected by exchange

rate movements and tariff changes. Exporters who have market power in destination markets

can practise pricing-to-market (PTM) by adjusting their mark-ups in the domestic currency

according to exchange rate variations and tariff changes. As a result, import prices are

partially affected in the importing country currency (Lee and Tcha, 2005; Tantirigama, 2006).

New Zealand and Australia play major roles in the Thai dairy import market. Both countries

have the market power to influence import price changes in the Thai dairy market. When free
trade agreements are in force, they compete fiercely with each other in regard to dairy export

prices. There is a gap in the research on pricing-to-market or pass-through behaviour focusing

on New Zealand and Australian dairy exports to Thailand. Studying pricing-to-market and

pass-through reinforces the importance of understanding pricing behaviour of New Zealand

and Australian dairy exporters.

The economy of each country is linked to other countries by international trade. International

trade has become an important engine for economic growth globally. According to Krugman

and Obstfeld (1997), countries involve in international trade because of two main reasons.

Firstly, countries trade because they differ from each other in terms of resources availability.

Therefore, each country produces different products and they can gain from their differences.

Secondly, countries trade in order to achieve economies of scale in production. If each

country produces and exports a limited choice of products, it can produce at a larger scale and

hence more efficiently than if it tries to produce everything in a smaller scale. Trade theories

explain how countries trade and gain from trade.

David Ricardo (1817) argued that it is possible for a country to have absolute advantage in

every product, then the concept of absolute advantage does not indicate the pattern of trade

(Lawler and Seddighi, 2001). In order to remove the shortcoming of the absolute advantage

principle, Ricardo presented the concept of comparative advantage in describing international

43

trade. A country has a comparative advantage in producing a good if the opportunity cost of

producing that good in terms of other goods is lower in that country than in other countries.

Trade between two countries is beneficial if each country exports the good in which it has a

comparative advantage or a lower opportunity cost than another, and imports the good in

which it has comparative disadvantage or a higher opportunity cost than another. In the

Ricardian trade model, labour is the only factor of production, and the opportunity cost of a

product in terms of another product is the ratio of unit labour requirements (the productivity

of labour) in producing two different goods in two countries (Krugman and Obstfeld, 1997;

Lawler and Seddighi, 2001).

According to Wreford (2006), Ricardian gains from trade can be described by a country’s

production possibility frontier (PPF) and indifference curve (IC) as shown in Figures 3.1 and
3.2. The PPF represents the supply side and the IC represents the demand side. In Figure 3.1,

a country’s equilibrium under autarky is demonstrated at point A, where the production

possibility frontier (PPF), the indifference curve (IC1) and the price ratio (Pa) are tangent to

each other. Equilibrium occurs when three conditions are met: (1) the consumer’s marginal

rate of substitution (the slope of the indifference curve) is equal to the price ratio, which

would maximize consumer’s utility; (2) the producer’s marginal rate of transformation (the

slope of the production possibility frontier) is equal to the price ratio, which would maximize

producer’s profit; and (3) the quantity of each good produced is equal to the quantity of

consumed. Therefore, the domestic production and consumption equilibrium of the

combination of two goods, say wine and cheese occurs at point A (see Figure 3.1).

Note on Production and Consumption of milk and milk products – Evidence

from OECD-FAO Agricultural Outlook (2019)

The OECD-FAO recently published “Agricultural Outlook (2019-2028)” with an aim

to provide a comprehensive medium-term baseline scenario for agricultural
commodity markets at national, regional and global levels. It also provides a
consensus assessment of the ten-year prospects for agricultural and fish commodity
markets at national, regional and global levels.

As per the OECD-FAO Outlook (2019-2028) dataset extracted from their Website:

 The consumption of major milk products in India is largely met through domestic
production, which implies that the domestic supply of milk is adequate to meet
the demand during 2019-2028.

 The strong growth in India’s consumption and production of dairy are expected
to have little effect on global markets. The country continues to be self-sufficient
in meeting the domestic demand for milk and milk products.

 “Fresh dairy products” including liquid milk continue to dominate with share of
more than 95% of total consumption, distantly followed by “Butter” with a share
of 3-4%.

 From the Annexure attached, it may be observed that barring “whey powder”, the
trade balance is positive for all commodities.

Table: Production and consumption of major dairy products (in ‘000 tonnes)
Fresh dairy Skim milk Whole milk Whey
Butter (pw) Cheese (pw)
Year products powder (pw) powder (pw) powder (pw)
 Prod. Cons. Prod. Cons. Prod. Cons. Prod. Cons. Prod. Cons. Prod. Cons.
2017 113,011 113,011 4,320 4,316 3.6 0.0 230.2 221.0 5.0 3.5 0.7 6.3
2018 117,904 117,904 4,482 4,477 3.9 0.0 231.2 222.8 5.1 3.6 0.8 6.6
2019 123,447 123,447 4,610 4,606 3.9 0.0 241.6 229.4 5.3 3.7 0.8 6.8
2020 129,074 129,074 4,743 4,739 4.0 0.0 247.8 236.4 5.6 3.8 0.8 7.1
2021 135,169 135,169 4,881 4,877 4.0 0.0 253.8 243.3 5.8 3.9 0.8 7.3
2022 141,395 141,395 5,031 5,026 4.1 0.0 259.8 249.3 6.0 4.1 0.8 7.6
2023 147,546 147,546 5,191 5,185 4.1 0.0 265.2 255.4 6.3 4.2 0.8 7.8
2024 153,756 153,756 5,351 5,344 4.2 0.0 270.5 261.4 6.5 4.3 0.8 8.1
2025 159,824 159,824 5,517 5,510 4.2 0.0 275.8 267.3 6.7 4.4 0.8 8.3
2026 165,743 165,743 5,689 5,681 4.3 0.0 281.0 272.8 7.0 4.6 0.8 8.5
2027 171,620 171,620 5,866 5,857 4.3 0.0 285.9 278.0 7.2 4.7 0.8 8.8
Note: Fresh dairy products contain all dairy products and milk which are not included in processed products
(butter, cheese skim milk powder, whole milk powder and, for some cases casein and whey). The quantities are in
cow milk equivalent.

The detailed dataset for India is attached at Annexure.

Dataset: OECD-FAO Agricultural Outlook (Edition 2018)

Country India
Time 2017 2018 2019 2020 2021 2022 2023 2024 2025
Production 169,319.59 173,769.13 180,880.81 188,130.67 195,909.92 203,970.46 212,085.13 220,259.26 228,378.40
Cow
130,165.10 135,110.28 138,574.96 141,787.14 145,794.32 150,506.76 155,291.63 159,805.86 164,147.38
inventory
Milk Feed 0.11 0.11 0.11 0.11 0.12 0.12 0.12 0.13 0.13
Yield 1.30 1.29 1.31 1.33 1.34 1.36 1.37 1.38 1.39
Producer
36,460.14 29,400.55 31,113.89 33,102.39 33,891.24 33,219.59 32,315.12 31,804.38 31,344.90
price
Production 113,011.18 117,903.69 123,446.61 129,074.50 135,169.30 141,395.40 147,546.41 153,756.41 159,823.57

113,011.18 117,903.69 123,446.61 129,074.50 135,169.30 141,395.40 147,546.41 153,756.41 159,823.57

Consumption
Fresh Food 113,011.18 117,903.69 123,446.61 129,074.50 135,169.30 141,395.40 147,546.41 153,756.41 159,823.57
dairy Producer
products 47,785.11 39,895.80 42,069.88 44,580.76 45,736.92 45,261.65 44,553.40 44,306.89 44,149.39
price
Human
consumption 84.39 87.07 90.19 93.32 96.73 100.18 103.53 106.88 110.08
per capita
Production 4,319.92 4,482.00 4,610.36 4,742.97 4,881.00 5,030.84 5,190.68 5,350.63 5,517.26
Imports 3.90 3.46 3.69 3.78 3.75 3.54 3.34 3.16 2.98

4,316.32 4,476.93 4,606.08 4,738.99 4,876.92 5,026.06 5,185.14 5,344.37 5,510.19

Consumption
Ending
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
stocks
Exports 7.50 8.53 7.97 7.76 7.83 8.32 8.87 9.41 10.04
Trade
3.60 5.07 4.28 3.98 4.08 4.78 5.54 6.25 7.06
Butter balance
(pw) Crush 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Feed 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Food 4,316.32 4,476.93 4,606.08 4,738.99 4,876.92 5,026.06 5,185.14 5,344.37 5,510.19
Biofuel use 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Producer
367,293.04 255,773.80 273,925.75 296,014.92 299,467.24 280,094.08 256,376.52 237,646.86 218,888.33
price
Human
consumption 3.22 3.31 3.37 3.43 3.49 3.56 3.64 3.71 3.80
per capita
Production 3.57 3.92 3.91 4.02 4.02 4.10 4.15 4.18 4.22
Imports 2.54 2.43 2.44 2.41 2.41 2.39 2.37 2.36 2.35

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Consumption
Ending
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
stocks
Exports 6.10 6.35 6.35 6.43 6.42 6.48 6.52 6.54 6.58
Trade
3.57 3.92 3.91 4.02 4.02 4.09 4.15 4.18 4.22
Cheese balance
(pw) Crush 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Feed 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Food 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Biofuel use 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Producer
230,769.90 226,851.83 236,983.02 247,258.09 255,210.61 264,499.13 272,425.69 280,722.77 289,993.56
price
Human
consumption 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
per capita
Production 230.21 231.21 241.65 247.78 253.75 259.76 265.23 270.47 275.82
Imports 0.16 0.15 0.12 0.13 0.14 0.14 0.14 0.14 0.13
Skim
milk 220.97 222.82 229.43 236.37 243.27 249.35 255.36 261.36 267.28
powder Consumption
(pw) Ending
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
stocks
Exports 9.40 8.55 12.34 11.54 10.63 10.55 10.01 9.24 8.67
 Trade
9.24 8.40 12.22 11.41 10.49 10.41 9.87 9.11 8.54
balance
Crush 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Feed 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Food 220.97 222.82 229.43 236.37 243.27 249.35 255.36 261.36 267.28
Biofuel use 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Producer
133,049.27 140,631.11 150,512.17 160,102.20 170,143.40 180,442.89 190,979.99 202,089.64 213,693.92
price
Human
consumption 0.17 0.16 0.17 0.17 0.17 0.18 0.18 0.18 0.18
per capita
Production 5.00 5.13 5.34 5.56 5.79 6.02 6.26 6.50 6.74
Imports 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10

3.50 3.61 3.71 3.82 3.94 4.06 4.18 4.30 4.43

Consumption
Ending
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
stocks
Whole Exports 1.60 1.63 1.73 1.83 1.95 2.07 2.18 2.30 2.41
milk Trade
1.50 1.53 1.63 1.73 1.85 1.97 2.08 2.20 2.31
powder balance
(pw) Crush 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Feed 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Food 3.50 3.61 3.71 3.82 3.94 4.06 4.18 4.30 4.43
Biofuel use 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Human
consumption 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
per capita
Production 0.69 0.76 0.75 0.78 0.78 0.79 0.80 0.81 0.81
Imports 5.86 6.04 6.28 6.58 6.85 7.08 7.34 7.58 7.83

6.33 6.56 6.78 7.09 7.34 7.57 7.82 8.05 8.30

Consumption
Ending
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
stocks
Exports 0.22 0.23 0.25 0.27 0.29 0.30 0.32 0.34 0.35
Trade
Whey balance
-5.64 -5.80 -6.02 -6.31 -6.56 -6.78 -7.02 -7.25 -7.48
powder
Crush 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(pw)
Feed 6.33 6.56 6.78 7.09 7.34 7.57 7.82 8.05 8.30
Food 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Biofuel use 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Producer
78,560.05 77,371.60 83,101.64 82,981.17 87,938.52 93,134.60 99,049.90 104,035.29 110,865.55
price
Human
consumption 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
per capita
Data extracted on 23 Jul 2019 12:52 UTC (GMT) from OECD iLibrary

4.2.3 Relationship between Herd and Farm Size

Indian milk production is dominated by marginal and small holders, together they account for about
80 per cent of total milk production in the country (Kumar et al., 2008). The trends in bovine holding
at household level will be helpful to understand the dynamics of dairy herd size across different
categories of farming households. The numbers of bovines per holding and per hectare are given
across different size of holdings. There exists a clear and direct relationship between the holding size
and bovine per holding. It implies that large farmers are able to support higher number of bovines
because of their higher resource base. However, there is an inverse relationship between the size of
holdings and per hectare bovine. The livestock production system seems to be more intensified at
the small holders. This also indicates that the role of milk production activities is critical to sustain
the smaller land size farms. The higher intensification of bovine at smaller farms however poses
challenges of allocation of meager land resource among crops and dairy production. The trade-off
between the competitive uses of scarce land resources will be intensified with the increasing
commercialization and intensification of Indian dairying. The synergy between milk production and
crop production has to be maintained to ensure sustainable growth of this important sub-sector of
Indian agricultural economy. The number of bovines per holding has decreased across all sizes of
holdings except marginal holdings. (Table 4.3) The similar trend was observed in the number of
bovines per hectare. The increase in livestock holding for the marginal farmers indicates the critical
role of dairy animals for the sustenance of marginal holders.

India’s production of milk has strongly increased over time with significant policy support, notably
Operation Flood (1970-1996). As regards demand, dairy products fit quite well in the Indian diet and
cultural tradition, which is a positive factor contributing to the increased demand for dairy products
as a protein source. Annual per capita milk consumption has substantially increased during the past,
but is still likely to increase further. In order to have production following the strong increase in
demand, a new program is announced for the next decade, which should lead to a milk production
of 180 million tons in 2021 (66% increase to current milk production). Although in the past India has
been able to achieve high growth rates in milk supply, it has to be seen whether these can be
maintained for the future. Up scaling dairy production in a smallholder setting is a real challenge and
will require improvements in terms of knowledge, services provided to dairy farmers (extension,
veterinary services), and feed availability. If the projected supply would be realized, India could even
become a significant exporter of dairy products.

Milk markets in India are still by and large informal, with about two thirds of the marketed surplus
sold in informal markets. Organized markets comprising cooperatives and private sector processors
share the rest, and almost in an equal proportion. Whereas the informal sector is dominant and has
been persistent, because of increasing income (in particular of the middle class), urbanization,
increased awareness of issues of food quality and safety, and changing consumer preferences for
processed food, the expansion of modern milk processing and marketing chains is expected to
accelerate. In the Indian dairy marketing landscape, Amul and Mother Dairy are special examples of
non-private firms active in the dairy market. In particular since the amendment of the Milk and Milk
Products order in 2002, the possibilities for private sector companies to enter the dairy market have
been increased, with Hatsun Agro Limited and Heritage as notable examples of private businesses of
Indian origin. The presence of international players in the Indian dairy processing is limited, with
Danone and Nestle being notable exceptions.

The study has revealed that the Indian dairy sector has undergone significant structural changes with
time and there are some interesting patterns unfolding all along the milk value chain. Noteworthy
among them are the changes in production of milk, composition of livestock population (increase in
cross-bred population), marketing of liquid milk pioneered by cooperative networks, increase in
participation of private players in the milk processing sector. These changes have contributed
significantly to the growth of Indian dairy sector--- popularly known as ‘White Revolution’. Though
there has been a significant improvement in the milk production and per capita milk availability at
the national level, there are several concerns that take away the shine from the glorious
achievements in the Indian dairy sector. Despite breakthroughs in milk production and increase in
crossbred, high yielding livestock species, productivity of milch animals is quite low in India. This low
productivity could be the result of many factors which include: poor genetic make-up of animals,
shortage of feed & fodder, inadequate animal health care coverage, inappropriate dairy
development policies, lack of market integration between producers and consumers, lack of
conducive environment, etc.

Notwithstanding these constraints, India has experienced a significant growth in milk production.
The structural changes in the production of milk have been quite visible and the composition of
milking animals has tilted in favour of improved crossbred cattle. Further, the role of some new
states in augmenting milk production in India is visible. The growth in milk productivity has been
considerable and milk productivity growth is reflected in its contribution to output growth. More
than half of the growth in milk production during the past two decades has been contributed by the
growth in milk yield. The major determinants of milk yield include technological change and quality
of herd, development of the crop sector, improving veterinary care and animal health care services,
expanding network of dairy cooperatives, and improving human resource capacities of the farmers.

Despite tremendous increase in the milk production, the dominance of traditional marketing
channels continues to persist. However, the structure and conduct of milk markets in India has been
undergoing a constant change and the role of formal milk marketing chains in expanding within
formal sector, the importance of private sector is increasing rapidly.

Milk and milk products emerged as one of the most significant components of food consumption
basket of India and the per capita consumption of milk has been steadily increasing.

With increase in income and urbanization, the demand of milk will increase further. The domestic
demand of milk would be 209 million tonnes in 2026-27, up from 116.3 million tonnes in 2011-12.
The supply projections indicate that with existing growth rate of milk production during the last
decade, India would be self-sufficient in milk even in 2026-27. However, any slow down or
deceleration would jeopardize the self-sufficiency status of milk production in the country. If
concentrated efforts are made to accelerate the growth of milk production, India can turn out to be
an important exporter of milk and milk products.

India has the competitive advantage in production of milk. Producer prices of milk are lower in India
than in the leading international exporting countries. The price advantage of India vis-a-vis other
leading countries enhances its prospects of export of milk particularly to the SAARC countries, most
of which are deficient in meeting their domestic requirements..

Achieving a higher growth of dairy sector is essential to ensure long-term inclusive agricultural
growth. The productivity-led growth is the only viable option for an accelerated sustainable growth
of the Indian dairy sector. The status of supporting infrastructures and their delivery is still wanting
and concerted efforts are required to bring the desired improvement. The study has pointed out
several avenues and strategies for policy intervention to support dairy development for enhanced
milk productivity. The analysis has provided a strong case for a continued investment in improved
breeds of cattle and buffalo. The empirical evidence suggested that dairy cooperatives have had
impact on growth of dairy sector by facilitating integration between rural producers and urban
consumers and also through fostering new technology. The strengthening of market linkages either
through expansion sustainable growth of Indian dairy sector.

The liberalisation of the Indian economy since the early 1990s has also led to a fast response from
foreign investors. The introduction of India’s New Industrial policy in 1991, and the signing of several
bilateral and multilateral investment guarantee agreements with its major trading partners,
facilitated a surge in foreign investments into India. This process had also its impact in the dairy
sector. As an example in the early 1990s (1991-1994) about 250 milk processing and dairy
manufacturing licenses were approved by the Indian government. Multinational firms like Nestle and
Unilever expanded their production capacities and widened product offerings (Bhaskaran, 1996).

Trade and investment

As regards trade in dairy products, currently there is only limited trade between the EU and India,
where India imports some dairy products from the EU. Exporters from the EU have to face tariff as
well as non-tariff measures. EU exporters appear to be sometimes confused due to the frequency
with which India adjusts its applied rates to dairy products. As regards the non-tariff measures, the
high Indian health standards (veterinary standards) were mentioned as bottlenecks, alongside with
customs procedures that create uncertainty regarding paperwork and valuation, and notice and
comment procedures that hinder information dissemination about rules affecting imports (see Table
5.1 for an overview).

Export of dairy products to the EU by India are negligible. It turned out not to be easy for India to
overcome the EU’s relatively high tariff measures for dairy products. Moreover, India would also
have difficulty to overcome the EU’s non-tariff barriers, although these are roughly in line with
internationally accepted standard (see Table 5.1). India’s exports mostly go to regional destinations.
Since 2003, India has been a net importer of dairy products, but with a degree of self-sufficiency that
is close to 100%.

As has been described in previous chapters of this report, India’s demand for dairy products is still
growing, where the growth rates tends to outpace the growth in milk supply. Dairy products fit well
in the cultural and dietary habits on Indians (particularly with that of the predominant Hindu
population), which is reflected in a relatively high positive income elasticity for dairy products (per
capita dairy consumption can substantially increase as incomes improve). Moreover there is an
increasing segment of consumers (middle class) demanding better quality of products, where
international brand franchises could operate as a benchmark for quality goods. Although India’s
achievements at dairy self-sufficiency have been commendable (e.g. Operation Flood), its potential
for a significant expansion of milk output seems limited. India faces constraints in increasing feed
and fodder production, shortage of grazing land, and has to cope with inefficiencies in dairy farming
methods.

While India is gaining importance in global dairy trade, as yet, it has not yet managed to obtain
market access to the EU. In this last section, we will explore the future trade relationship between
India and EU.

Recently, the European Commission has published a review of the agricultural commodities outlook
for the period 2009-18.15 This report argues that “over the next decade, world milk production is
projected to increase by roughly 19% with most of the growth generated by gains in productivity per
cow”. Almost half of this growth is expected to take place in China and India, as average productivity
is still very low in the most typical production systems in the latter countries.16 If demand growth in
India outpaces supply growth, India will become a net importer of dairy products again. If current
trends continue, however, supply will increase even faster than demand, and India will strengthen
its position as net dairy exporter. The Indian government seems to aim for the latter scenario, and is
looking out to boost milk production further to 180 million MT by 2020-2021, as outlined in its
National Dairy Plan.

Besides currently low productivity levels, the Indian dairy sector also has to tackle some key
problems in the processing stage. First of all, the average capacity utilization of dairy plants is only
60%, mainly due to the low availability of milk during the lean season; second, lack of scale hampers
investments in infrastructure, quality, transport and market development, keeping the industry in a
static situation. Finally, many Indian ethnic products are not yet commercialized, since they mainly
belong to the unorganized sector and they lack suitable, low-cost packaging solutions that could
improve the shelf life of the products.17

India’s opportunities for exports to Western countries like the EU will crucially depend on the extent
to which India will be able to upgrade the sanitary conditions of its production and processing
facilities, and the extent to which a consolidation of the production base can be achieved. In its
current state, with small farmers delivering less than 10 liters per day (at best) to village level
collection centers of formal companies, and a huge informal sector where quality management is
hardly possible, it seems a huge challenge to consistently achieve Western standards for dairy trade.
On the other hand, India has a huge market closer to home, with most of South East Asia and the
Middle East being milk deficient.

As for EU exports to India, it is expected that, amongst other reasons because of the increase in
foreign tourists in India, as well as the westernization of Indian diets, demand for EU cheeses may be
increasing for still a while to come. Another opportunity for India lies certainly in local production of
European-style cheeses, but so far, few companies have really grasped the existing opportunities.
One of these few is Himalya International, based in Himachal Pradesh, which is producing Italian
cheeses for the US. Its factory is deemed suitable for exports to the US.18 For this, know-how has
been imported from Italy (they have a full-time Italian consultant at their disposal), and machinery
has been imported from Germany.19 Milk is collected through contracts from 50 local farmers,
allowing the company to manage the quality up to a satisfactory level. As such, in the event that
India starts to produce European-style cheeses on a wider scale, there may as well be important
opportunities for the EU to export machinery and technologies to India.

It seems that currently, tariffs are not the main barriers to trade, and should therefore not be the
main target for policy negotiations. Most importantly, sanitary barriers do seem to determine
existing trade flows almost completely, and it seems that discussions on how to make sanitary
barriers surmountable, without compromising consumer health, matter most now.

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