• April 18, 2023

What is raising prices in the milk sector is a huge problem.

GS 2 Government Policies & Interventions GS 3 Indian Economy & Related Issues

In Context

• India is currently experiencing milk price inflation due primarily to a lack of milk fat.
• The price difference between Full cream milk and toned milk has increased from Rs 11 to Rs 16.56 per liter across India.

India’s dairy sector:

• Dr. Verghese Kurien, dubbed the “Father of the White Revolution” in India, is credited with writing India’s success narrative in milk production.
• Dairy is the largest agricultural commodity, contributing 5% to the national economy and directly employing over 8 crore producers.
• India ranks first in milk production and contributes 23 percent to the global milk supply.
• The country’s milk production is projected to increase at a compound annual growth rate of approximately 6.2%, from 146.31 million tonnes in 2014-2015 to 209.96 million tonnes in 2020-21.

Stakeholders in the sector

• Notably, 228 dairy cooperatives serve 17 million farmers, many of whom are likely to have their milk purchased at the right moment and for a reasonable price.This time, private competitors have taken market share from cooperatives by offering higher prices in a thriving market.

Milk price inflation & Causes of Milk fat shortage:

The issue

• The current milk price increase is primarily due to a paucity of fat.
• As a result, dairies have increased the price of full-cream milk or reduced the fat content of existing products through rebranding.
• Branded ghee and butter have reportedly vanished from store shelves.

Possible causes:

Falling contribution of buffaloes

•  This is partially attributed by experts to the declining contribution of buffaloes to national milk production. The proportion of buffaloes; their milk contains an average of 7% fat and 9% SNF, compared to 3.5% and 8.5% for cows.

Demand Supply mismatch

• Demand for ghee, ice cream, khoa, paneer, and other high-fat milk products is increasing.
• However, the supply of low-fat milk-producing crossbreds is increasing. The disparity is driving up fat expenses.

Taxation

• Milk is exempt from the goods and services tax.
• However, skim milk powder and milk fat are taxed at 5% and 12%, respectively.
• Therefore, while dairies pay no tax on milk purchased from producers, they must pay GST on solids. And input tax credit cannot be claimed, as milk is exempt from GST.
• Furthermore, the tax incidence increases as the fat content of reconstituted milk rises.

Exports

• Exports are a more imminent cause of rising fat prices.
• India exported over 33,000 tonnes of ghee, butter, and anhydrous milk fat worth Rs 1,281 crore in 2021-22.
• Increased exports occurred at a time when milk production was declining due to producers underfeeding their animals and reducing herd sizes in response to low prices received during Covid lockdowns, rising fodder and livestock feed costs, and an outbreak of lumpy skin disease among cattle.
• Supply-side pressures intensified just as economic activity resumed and closure restrictions were lifted, reviving demand.

Possibility of Further price rise:

‘Flush’ season in milk

•  The ‘flood’ season for milk is typically October through March, when supply exceeds demand.
•  Dairies transform their excess milk into skim milk powder (SMP) and butter fat.
•  This is accomplished by separating the cream from the strained milk and removing the water through evaporation and spray drying.

‘Lean’ season

•  The same SMP and fat are reconstituted into whole milk during the ‘lean’ summer-monsoon months (April-September), when animals produce less in response to rising demand for curd, lassi, and ice cream.

Further rise

• The ‘flush’ of 2022-23 was a rare season in which milk procurement decreased, leaving dairies with little surplus milk to convert into fat and powder.And with production destined to decline further in the ongoing ‘lean’, the reliance on purchasing milk solids for reconstitution will only increase.

Way ahead

• Rising population, incomes, urbanization, and dietary preferences are driving a rapid increase in dairy product demand.
• With imports ruled out, it is believed that high prices will encourage producers to invest more in their animals and increase production.
• This can be avoided by eliminating the GST on milk solids used for reconstitution. Alternatively, the GST can be reduced to 5% on milk lipids.
• When both SMP and fat are derived directly from milk, it makes little logic to apply different tax rates to the two.
• A 12% GST on milk fat is also an aberration, considering that vegetable fat (edible oils) are taxed at 5%.
• For a sector that supports more than 80 million farmers and can provide a living for many more small and marginal farmers (120 million of them, with plots too tiny for viable agriculture), it is worthwhile to invest in policies that address embedded supply constraints.