In the last issue of ‘Indian Dairyman’ a situation analysis regarding growth in dairy sector was made. It was indicated that there has been deceleration of growth; the sector had a growth rate of 4.25 per cent in the 8th Plan, 4.07 per cent in the 9th and 3.19 per cent only in the 10th Plan. In the 11th Plan, there is likely to be further deceleration on account of poor investment made in the sector.

A recent survey carried out by 64th round of NSS has shown that an Indian family allocates on an average 17 per cent of the expenditure incurred on food products on milk and milk products; with rural families allocating 15 per cent while families in the urban area allocating over 18 per cent. With increasing income the demand for milk is going to rise faster now than seen in the previous decade. Moreover, the overall demand is galloping rapidly compared to milk production. The higher GDP growth rate, enhanced income of rural households through programmes such as NREGA and the farm debt waiver are influencing the demand for milk both in the rural and urban areas.

Apart from the rapidly increasing demand for milk and dairy products, increased cattle feed cost and low availability of farm labour in the rural areas have resulted in increase in the cost of production. The Wholesale Price Index (WPI) for milk has shown a rise of over 22 per cent per annum during the week ending April 3, 2010. These factors have resulted in dairy farming becoming no longer a viable proposition in the rural areas. IDA is concerned and feels that if the situation is not immediately handled with adequate seriousness, the growth of dairy sector would further decelerate and there would be a gap of close to 3 per cent per annum in the production and requirement of milk. In such a case, India would be left with no other option but to import large volumes of milk and milk products.

Foreseeing shortage in milk supplies to cities ahead of summer season, the Government of India has permitted duty free import of up to 30,000 tonnes of milk powder and 15,000 tonnes of butter oil. The imports are, however, subject to tariff rate quota (TRQ) arrangements allowing only certain designated agencies to bring in these goods at nill duty. Milk powder import ordinarily attracts 60 per cent basic customs duty, while the duty for butter oil is 30 per cent. Till now, the TRQ regime permitted milk powder imports of up to 10,000 tonnes at a concessional five per cent duty during any financial year. But through the recent tariff notification CBEC has liberalised the in-quota quantity by trebling it to 30,000 tonnes and also slashing the duty on such imports from five to zero per cent. So far butter oil was not covered under TRQ, with all imports uniformly accessible at 30 per cent. But now even this community (which includes white butter and anhydrous milk fat) has been brought under free import regime subject to quantity of 15,000 tonnes. The CBEC notification of March 12, has however clarified that the duty free import in both cases are subject to “condition No. 1”, that restricts the import to those holding TRQ allocation certificates issued by the DGFT. In case of milk powder, the only entities eligible for allocation by the DGFT are the NDDB and parastatals including STC, MMTC, and Nafed. The DGFT has not yet specified the eligible agency for butter oil, but indications are that here too, only NDDB and the State owned enterprises would be granted TRQ allocations.

Imported skim milk powder is currently available at about $2,800 a tonne, which is on par with domestic prices of Rs. 130-plus a kg and butteroil at $4,000 a tonne, which works out at around Rs. 210 a kg compared to Rs. 250-275 per kg of ghee.

Unfortunately, the Government of India has not so far
declared dairy products as “special” and “sensitive” products.
The Central Government should immediately act on these provisions without further loss of time. Once declared special
and sensitive product, India can impose a heavy import
duty and safeguard Indian dairy industry.

Traditionally India has not been permitting free import of dairy products. However, India is facing strong pressure to open up its market to cheese and other dairy products from Europe, even though the Government of India has expressed fears about how small farmers could be adversely affected due to import liberalisation. Because the dairy sector employs 90 million people, India has advocated that milk and cheese be excluded from the scope of free trade agreement under negotiations with the European Union. EU officials nevertheless have stepped up their efforts to have India’s agricultural market liberalised during the last round of talks which took place in the last week of April. Anti-poverty activists complained, however, that EU has displayed scant concern for the plight of India’s rural poor until now. We feel that scrapping such tariff would leave India’s farmers unable to withstand competition from European imports. Often these imports have been highly subsidized and can be sold at lower prices than domestically produced goods.

Trade analysts say that EU officials have stepped up their efforts to include dairy within the scope of an agreement with India because of the crisis facing European milk farmers which have been badly hurt by a decrease in the price they are being paid in the past few years. These prices prompted the EU to resume paying subsidies to exporters of butter, cheese, and skimmed milk powder in January 2009. Such subsidies - widely considered as harmful to farmers in poorer countries where markets have been flooded by European produce - had been earlier suspended in 2007. The quantum of subsidies are euro 170 per mt for SMP, euro 260 per mt for Whole Milk Powder (WMP), euro 450 per mt for butter, and euro 545 per mt for butter oil. Paul Goodison from the European Research Office, a watchdog on trade relations, noted that the EU has provided 1.6 billion euros (2 billion dollars) in assistance to dairy exporters over the past 10 months. The sum is in addition to the 5 billion euro per year already earmarked to dairy sector under the Union’s common agricultural policy. In a bid to compensate for the troubles facing European milk farmers at home EU is very keen to get any market opening. This is blatantly unfair competition and it is a warning to any developing country. The EU makes its own rules when it is making trade agreements. Needless to say that the Indian dairy sector cannot be opened up without adequate protection to face EU’s highly subsidised and protected dairy sector. This would be a highly uneven competition on unequal terms, disrupting the lives and livelihoods of small and marginal Indian farmers.

Besides facing strong pressure to open up its market to EU, India’s greatest danger is from the proposed free trade agreement with Australia and New Zealand. The agreement would jeopardize India’s problem-ridden domestic milk and its products sector.

India had entered into a Free Trade Agreement with South Korea and ten other countries last year. Now the proposal is to add New Zealand and Australia to this list. According to the agreement both countries will reduce their tariff rate to encourage trade. It is feared that entering into a free trade agreement with Australia and New Zealand would not be in the interest of dairy sector in India. The cost of milk production in Australia and New Zealand is far lower than in India because of their pastural system of production where the animals are reared on grazing lands. In India dairy animals are raised by feeding them concentrate feed and fodder, and therefore, the cost of production is much higher. IDA has advised Government of India to exclude dairy products from the purview of the FTA with Australia and New Zealand.

The collapse of Doha round has provided a major setback to developing countries. However, an important decision which affects Indian dairy industry taken in Hong Kong was concerning “special” and “sensitive” products. The right of a country in respect of assessment of creditability of self selection of special and sensitive products was agreed. The criteria of selection of special and sensitive products is generally based on its impact on livelihood and rural development. This decision is important in India’s context since dairying not only affects the rural development but is a source of livelihood to millions of people in the rural areas. Unfortunately, the Government of India has not so far declared dairy products as “special” and “sensitive” products. The Central Government should immediately act on these provisions without further loss of time. Once declared special and sensitive product, India can impose a heavy import duty and safeguard Indian dairy industry.