2.2 Structural Changes in the Dairy Sector and Equity Issues

In India, as in many developing countries, dairying is a supplementary enterprise to crop farming and highly integrated with the crop production sector. Crop residues are used to feed animals, and animal manure is used in the fields as organic manure and as a fuel in rural areas. Milk production in India is a low-input, low-output farm activity with a smallholder production system, with about three-quarters of rural households owning two to three milk animals.

Table 2.5 Statewide yield rate of milk (kg) per animal per day of cow and buffalo in milk (1996-97)

Source: GOI, Basic Animal Husbandry Statistics 1999, Department of Animal Husbandry and Dairying, Ministry of Agriculture, Government of India

2.2.1 Characteristics of the Indian Dairy Sector

Some of the structural shifts that have taken place in the Indian dairy sector include (i) an increasing shift to milk production as a major objective of rearing bovines, (ii) replacement of animal power with mechanical power in developed regions of the country, and (iii) increasing proportions of crossbred cattle in the total cattle population.

In states like Kerala and Punjab, crossbred cattle have virtually replaced indigenous cattle; they account for over three-quarters of the total milk cattle population in Punjab and 70 percent in Kerala (GOI, 2003). The other states with high crossbred cattle populations are Haryana, Uttar Pradesh, Tamil Nadu, Maharashtra, and West Bengal, though breedable female crossbreds account for less than 10 percent of total breedable females in Uttar Pradesh and West Bengal (Annex Table 2.6).

No reliable macro-level data about size distribution of livestock are available, so it is extremely difficult to describe the structural changes in milk production activity. The number and species of milk animals kept by farmers varies considerably across regions/states, but the average number of dairy animals hardly exceeds three to four in most parts of the country. However, in certain parts of Punjab, Haryana, Gujarat, and Uttar Pradesh, dairy animal holdings are larger. Certain micro-level studies indicate that there has not been much change in the average size of milk animal population in most parts of the country, except in a few pockets in the northern and western region. A study by Shukla and Brahmankar (1999) showed that the scale of milk production had not changed significantly in Operation Flood areas between 1988-89 and 1995-86. The average milk animal holding size has remained more or less same in all zones (south, east, and west) during this period except for the north, where the proportion of households having four or more milk animal increased from 24 percent in 1988-89 to about 30 percent in 1995-96. On the other hand, in the eastern region, the proportion of households having at least one animal increased from 44.9 percent in 1988-89 to 60 percent in 1995-96. At the national level, the distribution remained almost the same between 1986-87 and 1991-92 (Table 2.6).

Table 2.6 Changes in average number of bovine population in India: 1986-87 and 1991-92

Source: GOI, 2002.

2.2.2 Livestock Holding Pattern and Equity Issues

Dairy farming has been a part of the mixed crop-livestock farming system in India for centuries. The animals feed largely on the crop residues/crop by-products and contribute in return dung for fuel, manure for fertilizer, and farm power for crop production. Livestock holding in general and milk animal holding in particular, appear to be far less inequitable than land holding. The marginal and small farmers together owned about 60 percent of female cattle and nearly 54 percent of female buffaloes in 1986-87. Their share in 1991-92 remained the same in the case of cattle, while for buffalo it increased to about 58.5 percent. In contrast, the share belonging to large farmers fell during the same period (Table 2.7). The gini coefficient representing the index of inequity in ownership of dairy stock shows a perceptible decline, from 0.43 in 1961 to 0.37 in 1971 and further to 0.28 in 1991.

Table 2.7 Distribution of livestock according to size of land holding: 1986-87 and 1991-92 (thousands)

Source: GOI, Basic Animal Husbandry Statistics 2002, Department of Animal Husbandry and Dairying, Ministry of Agriculture, Government of India.

The dairy sector plays an important role in supplementing family incomes in rural areas. The sector is highly livelihood intensive and gender sensitive. It provides supplementary income to over 70 percent of rural households, and over 90 percent of the activities related to care and management of dairy animals are carried out by the women. Shukla and Brahmankar (1999) provide interesting insights into the impact of milk production on the economy. Milk production contributes on average 27 percent of the household income; its contribution varies from about 19 percent in the case of large farmers to about 53 percent in the landless category. Milk is also an important source of nutrition in rural areas, thanks to easy availability and the vegetarian diet of most of the population.

2.2.3 Structure of the Milk-Processing Sector

Dairying has historically been an unorganized activity in India. The traditional or unorganized sector consisting of milk vendors/dudhias and sweet shops, as well as numerous other types of market factors, is still a dominant (84%) sector in the liquid milk market. Like nearly all developing countries, India exhibits coexisting "organized" and "unorganized" sectors for the marketing of milk and dairy products. Sometimes called the "informal" sector, the unorganized sector may be more usefully thought of as the traditional milk market sector, comprising the marketing of raw milk and traditional products such as locally manufactured ghee, fresh cheese, and sweets. The organized or formal sector is relatively new in historical terms, and consists of western-style dairy processing based on pasteurization, although adapted to the Indian market in terms of products. In some cases, the traditional sector is quite well organized, with a complex net of market agents. It may also be relatively formal, in that market agents may pay municipal fees and have vendor licenses, albeit not specifically for the dairy trade.

The reasons underlying the existence of a large informal or traditional sector are the same as in other countries where it is important: consumers are unwilling to pay the additional costs of pasteurization and packaging, which can raise retail prices by over 100 percent, and consumers often regard raw milk and traditional products obtained from reliable vendors as of better quality than formally processed dairy products. It should be noted that, unlike some countries, in India the government has generally adopted a laissez-faire approach to the informal sector, which has allowed it to expand with the growth in demand and serve both small farmers and resource-poor consumers. Of the estimated milk production of about 78 million tons during 1999-2000, the organized sector, primarily through dairy cooperatives and organized private dairies, handled 10 to 12 percent of the total milk production or 15 percent of the marketed surplus, and large, complex, highly differentiated traditional private trade in milk and dairy products handled the rest.

Smallholder farmers are caught in a situation of low returns, inaccessibility of resources and markets, non-availability of adequate production inputs and services, and many other social and economic constraints. The service sector, which is mostly managed and controlled by the government, is often inadequate and sometimes insensitive to farmers' needs. In the first two decades of Indian independence, milk production was stagnant, and the only successful experience was of the Kaira District Cooperative Milk Producers' Union, better known as Amul or the "Anand Pattern." Amul's experience inspired the then prime minister of India Shri. Lal Bahadur Shastri to establish the National Dairy Development Board (NDDB), which was set up in 1965 to promote the dairy industry in rural India by replicating the Anand Pattern. The Anand Pattern is a three-tiered structure in which farmers organize themselves into dairy cooperative societies at the village level; these village level cooperatives are organized into a district-level union; the district-level unions federate into a state-level cooperative organization (Figure 2.6). At the national level, the National Cooperative Dairy Federation of India (NCDFI) coordinates the efforts of all state-level cooperative dairy federations.

The organized sector, consisting of 678 dairy plants registered under the MMPO, mainly in cooperative and private sector has grown rapidly during the last decade. The statewide number of milk-processing plants registered under the MMPO is given in Annex Table 2.5. By December 2002, about 101,000 dairy cooperative societies were organized, involving about 11.2 million farmer members. The average milk procurement during April-December 2002 was 17.24 million kg per day (3 percent higher than the previous year), and average milk marketed was about 13.7 million liters (GOI, 2003). The milk-processing capacity in the country has increased substantially: from 10,000-20,000 liters per day in the 1950s to 100,000 liters per day in the 1970s, 500,000 liters per day in the 1980s, and over 1 million liters per day in the 1990s. As discussed in the earlier part of this chapter, until the early 1990s, milk processing was mainly reserved for the cooperative sector through licensing.

However, as a part of domestic economic reforms and commitments to the WTO, the Indian dairy sector was liberalized in a phased manner starting with partial opening-up in 1991; in March 2002, the government removed all restrictions on setting up new milk-processing capacity.

Following partial decontrol of the dairy sector in the early 1990s, many private sector players entered the market and set up milk-processing facilities, mostly in milk surplus areas. Some of the private sector plants also adopted the Amul model by creating informal contacts with local farmers and providing various inputs and services to the farmers. For example, Nestle has made large investments in its milkshed to improve productivity levels and the quality of raw milk. However, a large proportion of private dairy plants depend on contractors/subcontractors to meet their raw material requirement. Some of the arrangements between processors and producers are shown in Figure 2.7.