Public Private Partnership in Indian Dairy Industry

Initiating White Revolution - II May 2010

Acknowledgement

We are thankful to Confederation of Indian Industries (CII) for giving us the opportunity to present this background paper for the International Conference on Dairy Industry We would also like to express gratitude to the members of the CIIs National Committee on Dairy for sharing their ideas and knowledge and making their important contribution in preparation of this background paper. We are also thankful to YES Bank & the State Bank of India for their inputs on the banking perspective. Authors Technopak Advisors Pvt. Ltd. Dr. Sukumar Chand Mr. Aneesh Saraiya Mr. V. Sridhar
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Contents
Executive Summary The Indian Dairy Industry: Framing the Perspective Issues & Challenges: Dissecting the Supply Chain Review of Existing Govt. Initiatives: A Reality Check Public Private Partnership: A Win-Win Approach Financing the Dairy Sector: Issues and Way Forward About CII About Technopak 09

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19

25

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Acronyms & Abbreviations

A.I AMUL BMC CII DCS DAHD DVCF Govt. GTIS LPD ISO

A to C

Assistance to Co-operatives Artificial Insemination Bulk Milk Coolers Anand Milk Union Limited

Confederation of Indian Industry Dairy Cooperative Societies Dairy Venture Capital Fund Government of India

Department of Animal Husbandry and Dairying

HACCP IDDP

Global Trade Information Services Litres Per Day

Hazard Analysis and Critical Control Point Intensive Dairy Development Program Milk and Milk Products Order Multinational Companies Million Tons International organisation for standardization Ministry of Food Processing Industries National Dairy Development Board National Dairy Research Institute Non-Government-Organisation Operation Flood Public Private Partnerships

MMPO MNCs MT MoFPI NDDB NDRI NGO OF PPP

NABARD

National Bank for Agriculture and Rural Development

NPCBB PPPAC SME SMP

National Program for Cattle and Buffalo Breeding Public Private Partnerships Appraisal Committee Small and Medium Scale Enterprises Skimmed Milk Powder Ultra High Treated

SIQ & CMP UHT

Strengthening infrastructure and quality and Clean Milk production

Executive Summary
80% of the Indian dairy industry is unorganized

A huge base of around 11 million farmers organised into about 0.1 million village Dairy Cooperative Societies. A demand supply gap has become imminent in the Indian dairy industry.

In India about 55% of the total milk is produced by buffalo

Milk production in India has come a long way over the years from a low volume of 17mn tons in 1951 to 110 million tonnes in 2009 which is projected to reach 115 million tons in 2010*. Today, India is the world leader in milk production and the Indian dairy industry stands at a mammoth size of US$ 70 billion. The Indian dairy industry presently contributes about 15 % to the total milk production of the world. The laurels of this numero uno position emanates from a huge base of around 11 million farmers organised into about 1 lakh Village Dairy Cooperative Societies. The Indian dairy market is currently growing at an annual growth rate of 7% at current prices. In todays context, a demand supply gap has become imminent in the dairy industry because of the dynamic demographic pattern, changing food consumption habits and the rapid urbanization of rural India. This requires an inclusive growth of the dairy sector along with the rapidly growing Indian economy.

Lack of proper cold chain facilities and logistics leads to revenue and milk losses The return of investment for the farmers is on the decline

There is a need for incentives for the private corporate houses and conglomerates to venture into dairy sector

The dairy industry in India has its base in the small holders and marginal farmers. The Operation Flood program might have brought in a plethora of changes in the dairy sector but there is still much to be reformed. This is because about 80% of the dairy industry is unorganized and the raw milk market is still dominated by the local milkman/dhudaiyas and halwai in India. This leads to a complex supply chain that is compounded by a lack of proper cold chain facilities and logistics. The return of investment for the farmers who are a major stake-holder in the industry is on the downside and value percolation to the base of the chain has been minimal. It is estimated that for every litre of milk produced in India the farmer has an expense of about Rs 14 while the price he gets on every litre of milk sold is Rs 16 18 which amounts to a margin of Rs 2 - 4 which is quite less if we consider the labour cost of the farmer himself. A thorough analysis of the existing Govt. schemes for the dairy sector shows that the Govt. patronage to cooperative societies and small farmers has been fostering growth in the sector to some extent but still there are gaps in terms of maximizing the value involved in the entire chain. There has been a dearth of incentives for the private corporate houses and conglomerates to venture into the dairy sector. Though the Government has been promoting some large scale private investments in the food processing sector through the Mega Food Parks and Cold Chain Infrastructure schemes, there has been not much progress in the dairy processing sector. In India, the average milk yield per animal on a daily basis is 6.5 kg for crossbred dairy cows which is quite less in comparision to the yield of exotic varities in temperate countries. This huge gap in the production standards presents for the need for an intervention to boost the overall yield and productivity parameters. It is hence important that the private sector investments get accelerated in this very important space.

Huge gap in the production standards presents for the need for an intervention to boost the overall yield and in productivity parameters.

*Projected milk yield for 2010, Technopak analysis

Public private partnerships (PPPs) in todays context has become an important alternative service delivery mechanism for the Government and public sector institutions to achieve substantial growth in an array of sectors like infrastructure, telecom, rail, road, transport, power, irrigation etc. PPP is any type of collaboration between the public and the private-sector entities in which the partners jointly plan and execute various activities with an agenda of accomplishing certain common objectives while sharing the costs, risks, and benefits incurred in the process. Public-private partnerships are being increasingly encouraged as part of the comprehensive development framework in India. In India about 450 PPP projects worth US $4.8 billion have been instituted till date in the sectors of focus like roads, infrastructure, power and other core sectors. The complexity of the dairy supply chain and still largely unorganized Indian dairy industry provide an ample scope for the private players to come in a PPP mode with the Government and bring a turn around. The need to foster such arrangements in the dairy industry is corroborated by the public sectors inability to provide certain public goods and services entirely on its own in an effective and equitable manner because of lack of resources and management issues. There is an urgent need not only to improve the supply chain and quality parameters but also to remove the bottlenecks in the sector by fostering private sector participation in the areas of project financing, capacity building, operations and better integration of stakeholders. There are certain thrust areas in the Indian dairy sector where the Public Private Partnership model could be taken up as a synergistic collaboration to achieve the social objective of percolating benefits to the last level of the supply chain and on the other hand provide lucrative proposition to the private agencies as well. The potential thrust areas in the Indian dairy industry where the private sector can intervene are in Procurement and Processing, Infrastructure and logistics development, Operations Management, Implementing Quality parameters, Capacity building through training, Research and knowledge transfer,Marketing and Export. Keeping in view the above thrust areas, the perspective of the private as well as the public player should properly fit into each other so that there is a symbiotic understanding of potential risks and other modalities well in advance as in other sectors.

The Indian dairy Industry has a tremendous potential to set new benchmarks in the world dairy market having the largest milch animal base given persistent efforts to increase the productivity. PPP in this context is the best vehicles to achieve all round sustainable development in the dairy sector. There have been certain key recommendations with regard to policy measures and incentives in terms of facilitating subsidy, grant-inaid or in other terms to facilitate a healthy environment for the growth of a well-built symbiotic relationship which can provide a right platform for initiating White revolution II.

The Indian dairy industry has been through an evolution right from the British era till today. It has come a long way over the years from a milk production volume of 17 million tons in 1951 to 110 million tons in 2009. Steadily and firmly, it has cruised to become numero uno in the list of milk producing countries and this success story has been scripted by the small holder milk producers. Today, the Indian Dairy industry stands at a mammoth size of US$ 70 billion1. Given the highest milch bovine population2 of 115.487 million in the world, India exhibits tremendous potential to further strengthen its position in the world dairy market. The operation flood program promoted and implemented by the National Dairy Development Board (NDDB) has been instrumental in bringing about a white revolution in India. Changing lifestyle, feeding habits and urban culture has somewhat effected the transition of the Indian dairy Industry into a more of a demand driven, highly diversified and exciting business proposition. Despite being the worlds largest milk producer, Indias share in the world dairy trade is almost negligible. However, India is a net exporter of dairy products, export volumes of 2008-09 equating to more than 70,790 tons. India exports various categories of milk products including milk powders, baby foods, butter and other fats, casein, milk and cream, cheese, and whey products. Milk powders and baby food exports constituted around 50 percent of the total dairy exports in volume terms during 2008-09, followed by butter and other fats, casein, milk and cream and other processed dairy products.
Indian Exports 2008-09 (April-Feb)

The Indian Dairy Industry

11% 3% 4% 11% 50%

Indian imports of dairy products are not substantial in volume. The volume of imports during MY 2008/09 was approximately 9,130 tons. More than 80 per cent of dairy imports are butter and fats, whey and products, milk and cream, milk powders, and baby foods. However, increased lean-season milk supply shortages and rising demand for full-cream milk and milk fats are expected to lead to a rise in future imports of non-fat dried milk (NFDM) and butter oil.

21% India exported more than 50 percent of its total dairy products shipments to the United States, Bangladesh, U.A.E., China, Egypt, and Singapore during MY Milk Powder, Baby Foods, etc Butter & other Fats 2008/09. The GOI has designated the National Casein Cheese & Curd Productivity Council (NPC) and the Export Inspection Whey Products Milk Cream ( Non. Conc.) Council (EIC), Ministry of Commerce and Industry, GOI Source: GTIS, Technopak analysis as quality auditors for conducting periodic inspection of units registered under the MMPO to ensure compliance with sanitary, hygienic, and food safety measures. Registration of dairy plants with the EIC is mandatory for export quality certification.

Exports Across Major Destinations (000Million Tonns)

28

23

8 8

7.5 5.5

6.5 4.5

9.5 4 2.5 4 2 4 4 3.5

Algeria

2.52.5
Thailand

6.5 2.5
China

10

UAE

Egypt

Singapore Bangladesh Philippines

Saudi Arabia

USA

Others

April 07-March 08
Source: GTIS, Technopak analysis

April 08- Feb 09

Source: Globalanalysis, 2. DAHD Services (GTIS) 1. Technopak Trade Information

According to NDDB the dairy cooperative network includes 177 milk unions operating in over 346 districts and covering 1, 33,349 village level societies is owned by around 13.9 million farmer members of which 3.9 million were women. The Indian dairy industry contributes about 69 per cent to the entire bulk of output from the livestock sector. The dairy sector has grown robustly in the past years and has increased the per capita availability to around 256 grams. The pattern of dairying in India has moved from a rural based location to a periurban set-up where the cattle farms are located on the periphery of the larger cities and metros and so that they stay closer to the processing facility as well as the market. With the advent of better technology and penetration of organized retail into the Indian markets, the dairy industry in India has been able to bring in the ethnic as well as exotic product offerings to the markets. The demand for pure milk has moved a long way from bottled milk to high quality tetra pack UHT milk with increased shelf life and quality. Technological innovation has enabled consumers to choose from an array of milk products based on their calorie consciousness, may it be double toned milk or sugar free ice creams.

India is a low-cost milk producer due to the inexpensive maintenance and feeding costs associated with local cow breeds. Dairy production is an important direct and supplementary source of income for around 75 million rural families (mainly comprising small farmers and landless labourers), which accounts for around 98 per cent of total milk production. The top ten milk producing states of Uttar Pradesh, Rajasthan, Punjab, Andhra Pradesh, Gujarat, Maharashtra, Madhya Pradesh, Bihar, Tamil Nadu, and Haryana account for more than 80 percent of Indias milk production. The Ministry of Agriculture has identified an 11th five-year plan approach for the dairy sector to achieve an overall desired growth of five to ten percent per annum. Despite these goals, the Indian dairy sector is working overcome challenges like low productivity of dairy animals, lack of effective quality and hygienic control systems, and creating an enhanced network of cold chain infrastructure from the producer to the consumer.

Key facts of Indian Dairy Industry 217 233 265

78 1999-00

93 2004-05

115 2009-10*

Per capita availability in grams

Milk production in million tonnes

Source: Global Trade Information Services

The structure of the Indian Dairy Industry

Indian Dairy Industry Organized (20%) Private Dairies (532) Unorganized (80%) Government (46)

Cooperatives Societies(254)

Source: Technopak analysis

Sales Turnover Over Years ( INR Cr )

6705

Dairy Cooperatives account for the major share of processed liquid milk marketed in the country. Milk is processed and marketed by 170 Milk Producers' Cooperative Unions, which federate into 15 State Cooperative Milk Marketing Federations. The organized sector still remains a minor stakeholder and handles about 20 per cent of the milk whereas the unorganized sector of the dudhiyas and mithaiwallas still control about 80 per cent of the industry. The demand for milk and dairy products is income-elastic, and growth in per capita income is expected to increase demand for milk and milk products.

2218

1680 1170

2923

GCMMF

Heritage Foods

1999-00

107 97

1615

2643

3142

5232

Britannia Industries Hutson

2004-05

234 453

Nestle India

2009-2010

792 1013

Source: Technopak Analysis

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Liquid Dairy Products (LDP) represent almost one-fifth of all beverages sold worldwide. Emerging countries like India, Pakistan, China and the Middle East which today account for 68 % of total LDP consumption are expected to continue to drive total LDP consumption worldwide over the next three years. From 2009 to 2012, total LDP consumption is forecast to rise at a 2.2 % CAGR globally to 281 billion litres

Break up of the beverages sold worldover (2009) Alcoholic Beverages & Wine, 14.60 % Water , 15.20% Juice Nectars & still drinks , 10.60%

Carbonated soft drinks , 12.50%

In fact, emerging countries have driven the vast majority of growth in the global dairy industry 95.8% from 2005 to 2008 with growth based primarily on increasing populations and rising household incomes which, in turn, have influenced consumption habits.

Hot tea & Coffee, 29%

Liquid Dairy , 18.10%

From 2008 to 2009, worldwide consumption of milk and other LDP (excluding soy and dairy alternatives) has grown by 1.3%. By the end of 2009, worldwide consumption of LDP is expected to reach around 262.8 billion litres up from 259.4 billion litres in 2008. Since 2005, the global consumption of milk and other liquid dairy products (LDP), excluding soy and dairy alternatives, has reached a compound annual growth rate (CAGR) of 2.4%. LDP consumption hit an all-time high of 258 billion liters in 2008 and is expected to grow by a CAGR of 2.2% over the next three years. Leading much of this growth in the global dairy industry 96% over the past four years are highly populated and emerging markets such as China, India, the Middle East and Pakistan. In these markets, continued population growth and rising household income, along with new dietary trends, consumption habits and preferences are fostering awareness, the demand for and the consumption of dairy products. Driven by steady population growth and rising income, milk consumption and production continue to rise in India the worlds largest dairy producer and consumer. In terms of milk consumption, India tops the charts, consuming 51.5 billion liters of milk and other LDP in 2008 with a CAGR of 2.7% over the last four years. This is almost double the volume consumed by the number two milk consumer, China.
Source: Tetrapack ,Technopak analysis

Since 1999, the Index has found that India has produced more milk than any other country in the world and since 2006, milk production has increased by a CAGR of 4.3%. These high levels of consumption and production in the country are mainly driven by a population of 1.3 billion people, where milk is an integral part of their diet. Since majority of Indian population is vegetarian, milk serves as an important source of protein. In India milk or other LDPs are the most preferred food preparations such as in brewing tea and coffee, in making yogurt or curd and in preparing Indian dishes such as curries. Milk is also a popular beverage for children in India due to its high nutritional value.

India's dairy industry is growing at a 4.5 per cent annual growth rate which is much ahead of the world average rate of 1.35 per cent. If the Govt. can roll out appropriate policy measures and create avenues, then the private players participation can be increased towards an inclusive growth of all the stake holders of the industry USA Germany Russia
CAGR in Top Milk Consumption Markets (2005-2008)

Brazil

Mexico 0.0%

Japan 0.3%

UK

Pakistan 2.5%

India 2.7%

-0.1%

-0.3%

-0.9%

-1.0%

0.7%

China 10.6%

Source: Tetrapack : Technopak analysis

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Self Consumption

Milk Man

MILCH Animal Household

Customers

Dudhaiya / Milk-man

Wholesaler

Distribution Centres
Co-Op Collection/chillin Processing Plant

Retailers

Depots/Trader
Specialty Products

Source: Technopak Analysis

Source: Technopak Analysis

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Issues & Challenges: Dissecting the Supply Chain

In India, rural households consume almost 50 percent of Indias total milk production. The remaining 50 percent of milk production is sold in the domestic market. Of the share of milk sold in the domestic market, almost 50 percent is used as fluid milk, 35 percent is consumed as traditional products (paneer cheese, yoghurt and milk based sweets), and 15 percent is consumed for the production of butter, ghee, milk powder and other processed dairy products (including baby foods, ice cream, whey powder, casein, and milk albumin). The organized dairy sector consumes 15% of Indias total milk production, which it uses primarily for the production of liquid milk, butter, cheese, and milk powder. Although some Typical Milk Consumption in Indian traditional products are manufactured by the organized sector, Household this market is dominated by the unorganized sector. As a result, Cooking in organized sector Indian style paneer cheese production is only other estimated to be 22,000 metric tons. To this diverse forms , 8% Curd or consumption pattern is attached a fairly complex supply chain yogurt Tea or peroration, 1 Coffee model in the Indian Dairy Industry. If we try look at it 7% Whitening separately for the unorganized and organized section of the , 45% dairy induastry then it is would be rather easier to understand the intricacies of the entire trade.
Liquid milk , 30%

Source: Tetrapak, Technopak Analysis

Case Study Saninsbury Dairy Development Group (SDDG)

Sainsbury Dairy Development Group (SDDG), formed by UKs leading food retailer, Saninsburyis a unique forum that brings together farmers, processors and retailers.

Supply chain of the unorganized market: The unorganized dairy market in India is about 80% and still the dudhaiya and halwai dominate this section of the market. In this traditional system the milk produced is directely sold to the consumers at the farm .The other mode is that milk is collected by the milkman from the farmers and then supplied to restaurants or halwai for futher processing from whom the consumers take the value added processed milk products. These milkman also sell and supply milk directly to the consumers at their door steps .

SDDG, has enabled the retailers to work directly with the dairy farmers to increase transparency in the food chains. SDDG comprises of 360 dairy farmers from the direct supplies of Dairy Crest and Rebert Wiseman dairies, who supplies Saninsburys total requirement of 420 million liters of fresh milk each year. The group was formed with objectives of helping members achieve higher levels of profitability by lowering on farm costs and reducing the food miles the produce traveled. It also assists the members in optimizing nutrition, feed efficiency and herd health

Supply chain of the unorganized market: The organized sector basically pertains to the dairy cooperatives and private and Govt dairies which procure, process and market milk and mik products. In this channel, the milk produced is deposited by the farmers in the collection centres at the village level and then this milk is pooled and transferred to the chilling centres and bulk milk cooling units where the milk is cooled to 4C. Then it is filled into insulated tankers and transported to the processing plants where the milk is tested and transferred into milk tankers. This milk received is then processed into various categories of liquid milk and value added products. Then the packaged milk is transported to the milk parlours or retail outlets from where it reaches the consumers. In case of the value added milk products having longer shelf life, they are transported to the distribution centres and carrying and forwarding agent(C& F agent). The C&F agent then supplies the required amount of stock to the various retail outlets and milk parlours from where consumers can bye the products.

Issues and challenges at the Small holder Level:

Inadequate feeding of animals: With burgeoning human population there is an increasing pressure on the land resources for cultivation of food crops and fodder crops are not preferred. This apart the small holders are not able to feed the animals with balanced diet of concentrates and roughages due to lack of financial support. More disease incidence: Small holders who are not members of cooperative societies often get deprived of good animal health care facilities in terms of routine vaccination and prophylactic disease prevention measures. Financial constraints generally inhibit these farmers access to the organized veterinary services and they still rely on the quacks and conventional treatement methods. Low genetic potential of animals: The stock of animals even if cross-bred have less percentage of exotic genes which lowers their milk production. There is indiscriminate artificial insemination without proper record keeping which leads to repeated inbreeding and decreased production potential of the animals.
Key Challenges:

The entire dairy Industry in India has its base in the small holders and marginal farmers. These prime stakeholders of the entire value chain of milk are deprived of minimum resouces of land, labour, capital etc. The other constraints at the grass root levels are

There is an increasing pressure on the land resources for cultivation of food crops and fodder crops are not preferred. Lack of animal healthh care facilities. Low genetic potential of the animals Lack of chilling capacities High production costs lack of financial support.

Lack of good quality animal feed

Lack of chilling capacities: The farmers having high yielding varieties of the cattle and buffalo have a different issue all together. These farmers milk their animals 2-3 times in the day and every time they have to carry this milk to the distant collection centres where there is a cooling facility or else the milk goes waste if there is delay.

Exploitation of farmers. Those farmers who do not conform to any of the cooperative societies get exploited at the hands of the contractors of the private dairies with regard to payment of exact dues as per the fat content of the milk.

High production costs: Compared to the amount of efforts and maintenance costs being involved in the production of milk, the farmers do not get remunerative prices due to low market prices and lack of elasticity in the prices of milk. Delayed payment of dues: The farmers are not only paid less according to the quality of milk but also their payment gets delayed from time to time. This comes in line with the sick and non performing milk cooperative unions which pass on the perils of mismanagement and marketing losses to these poor farmers.

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Issues and challenges at collection level:

Milk base mainly consisting of small holders: The majority of dairy farmers being small and marginal the average holdings of animal comes to around 5 animals per farmer. This brings in the logistical challenge of collecting milk from each and every farmer twice on a daily basis. The farmer usually looses much time waiting in the que to deposit their milk at the collection centres thus resulting in loss of net working mandays. Involvement of too many intermediaries: Keeping in view the large no of intermediaries involved in the milk collection procedures the milk looses its quality in the process. This leads to increased microbial contamination and fluctuation in the volume of the milk before reaching the collection centers and bulk coolers.

Gaps in information: In this era of information technology the dairy sector is pretty unorganized with respect to the support information. There is no record of the milk which is being collected from different milk producers at the collection centres.If any thing goes wrong in terms of the discovery of zoonotic disease organisms at a later stage there is no scope of back tracking to the farmer. Though there has been a success in this regard with the e- governace project being implemented in AMUL with the help of IIM Ahmedabad, it has not been replicated by all the cooperative societies in the sector. Absense of a screening system: Milk before being pooled up at the collection centre from various farms and animals are not subjected to any screening for the zoonotic diseases and adulterants and contaminants in many of the cooperative societies. This often results in spoilage of the entire batch of the pooled milk if one of the milk cans goes undetected. Linking back to source as such is not possible in the absense of a database..

Manipulation of the quality of milk by the farmers: The farmers not being able to get fair and remunerative prices for the milk often tend to give adulterated milk at the collection centres. They often add additives to forge the fat content of the milk and get better price for the lot. Addition of vegetable fat, animal fat,starch,etc. has been quite frequent among the farmers to alter the fat and solid content of the milk.

Lack of Infrastructure: When there is a thrust on increasing the milk production, then there should be ample amount of facilities to handle it. There is a dirth of required infrastructure of chilling plants and bulk coolers due to which so much of milk goes waste due to spoilage.

Issues and challenges at the Processing Level:

Seasonality of production and fluctuating supply : India being a tropical country renders a hot and humid climate for the animals and thus fluctuations in the milk production. There is a flush season in the cooler parts of the year wheareas the production goes down in the warmer months. Thus at times, the surplus of milk exceeds the processing capacity and milk goes waste whereas on the other hand the processing capacity goes unnderutilized in the lean period. Adulteration and Food safety: The most important aspect of milk processing is its purity and wholesomeness. There has been instances of cheap substitution of skimmed milk powder with below standard subtances which is hazardous to health. Even though there are certain Food safety Acts but still every other day we get to know about various tankers of spurious milk being apprehended. Absence quality standards: There is absence of stringent quality standards like HACCP,Codex etc in most of the cooperative milk unions which bars indian dairy products for exports into the foreign market.

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Lack of trained and skilled workers: There is lack of trained and skilled workers who can handle the mik processing operations hygienically and safely.

Milk cans transported by the train and local transport

Issues and challenges at the Storage and Logistics Level:

Lack of cold storage facilities: Milk being a highly perishable product requires to be processed or cooled as soon as possible after milking, so as to prevent spoilage and contamination. However to ensure this there is a need of refrigerated milk silos for storage which are not present at the village levels. Gap in the cold chain and transport facilities: There are long distances to be covered to reach bulk milk coolers from the collection centre. There is a shortage of refrigerated vans and insulated tankers for ferrying the chilled milk to the processing plants

Issues and challenges at the Co-operative Level:

Less number of member farmers: The cooperative model though successful has not been able to include all the farmers into the fold.There are still many potential farmers who use the informal channel of milk sale and delivery. Lower participation in the decision making process: There is huge govt interference in many of the cooperative federation activities which leads to lesser say of the farmers in amny crucial issues. Losses: Poor management of the some of the village cooperatives have led to huge losses in the trade due to which farmers have lost faith in these entitities. Inefficient services: The cooperatives have also failed in many parts of the country in providing the basic inputs in terms of quality feed, exotic germplasm and veterinary services. Insufficient Infrastrucure: Some of the co-opeartives are lacking the cooling and milk testing facility at the village level collection centres. Low prices of milk: The co-operatives declare low prices for procuring milk from the farmers which benchmarks the prices and forces other players to sell milk at the same prices.

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Issues and challenges for Marketing

Majority of the Market is still unorganized: The milk market in India still faces the challenge of getting organized. The unorganized market makes it competes with the organized market in relation to prices. Less penetration to the rural Market: Most of the milk produced by the dairy co-operatives goes to the urban market. The rural cosumers are still dependent on the informal and unorganized market channels.

Acceptibility of the Consumer base: A large fraction of the consumer base in India is yet to accept the clean and supple milk from organized dairies due higher costs. The mindset of buying fresh whole milk from the milkman is still prevalent in the Indian consumers. Lack of transperent milk pricing System : There is no specific minimum support price of the milk in the system which makes it unremunerative for the farmers.

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Review of Existing Govt. Initiatives

Objective is to enhance the milk production, improve the entire dairy supply chain by providing financial aids and technical inputs. Targeted for the non-OF, hilly and backward areas. Beneficiaries are rural milk producers Implementing agency are state dairy federations and district milk unions. Pattern of assistance is 100% grant in aid with a maximum allocation of Rs 300 lakhs/district. A 70 % loan and 30% basis of funding is provided for over 20000 LPD milk processing capacity. Achievement: Adopted by 18.8 lakh farm families, instrumental in organizing about 26888 village level Dairy Cooperative Societies in 207 districts pan India. Milk chilling capacity of 18.49 lakh litres per day and processing capacity of 23.96 lakh litres per day have been created under this scheme. Objective is genetic up-gradation by bringing all breedable females among cattle and buffalo under organized breeding through A.I or natural service of high quality bulls. Implemented through state animal husbandry department and various frozen semen banks in the state

IDDP: Intensive Dairy Development Scheme

Objective is to revive the sick dairy cooperative unions at the district level and cooperative federations at state levels. Implementation through state Govt. by state dairy federations and district milk unions. Grants provided through NDDB Assistance in form of grant is not more than the accumulated losses of the cooperative and viability achievement should be within 7 years. Achievement: 34 rehabilitation proposals of milk unions have been approved by the Govt. by now.

Assistance to cooperative scheme

Objective: To promote clean milk production and creation of necessary infrastructure for it. Target beneficiaries are farmer members of primary dairy cooperative societies. Implementation through state Govt. by state dairy federations and district milk unions. Pattern of funding is in the ratio of 75:25 for purchase and installation of bulk milk coolers at village level Achievement: About 30,468 farmers trained, 1362 no. of Bulk milk coolers with a total chilling capacity of 21.05lakhs LPD were installed and 886 existing laboratories have been strengthened. Aims at promotion of fodder cultivation and animal feed processing. Beneficiaries are farmers at village level Implementation through fodder development centres and Promoting fodder cultivation grassland development and setting up of fodder block making units at village levels.

Strengthening Infrastructure and Clean Milk production Scheme

Central Fodder Scheme

National Program for cattle and buffalo breeding

DAHD

*Source: DAHD, Technopak Analysis

Aims to promote ventures in the dairy sector. Beneficiaries : Urban and Rural beneficiaries Implementation is through NABARD. Assistance is provided to bankable projects with 50% interest free loan component Entrepreneur has to contribute 10%seed amount and arrange 40% loan from local bank. Government of India provides 50% interest free loan The Govt. subsidizes the interest component of the loan if there is regular/ timely repayment.

Dairy Venture Capital Fund Scheme

Objective is to supplying wholesome milk to the citizens of Delhi at reasonable prices Achievement: The initial installed capacity of Delhi Milk Scheme was for processing/packing of 2.55 lakhLPD which is now increased to 5 Lakh LPD. The Delhi Milk scheme was incurring losses due to some operational inefficiency which are currently being looked after by the Govt.

Delhi Milk Scheme

Aims to increase the milk production to about 180 million tonnes annually by 2021-22. Enhancing milk production in major milk producing areas, and strengthening and expanding infrastructure for production process Implementing agency is NDDB

National Dairy Plan

market milk through the existing and new institutional structures This plan also proposes to bring 65% of the surplus milk produced under the organized sector for procurement as against the present 30%.

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The Govt of India has devised many central sector and centrally sponsored schemes for the Development of dairy in India. The processing of the Milk and milk products have moved to the puview of Ministry of food Processing Industries (MoFPI), Govt. of India. The MoFPI also promotes dairy food processing under two schemes which are the Mega Food Parks scheme and Scheme for cold chain, value addition and preservation infrastructure. The MMPO (Milk and milk Product Order) which is a major scheme for the registration of dairy plants after liberalisation of the industry currently comes under the jurisdiction of Food safety and Standards Authority (FSA) in India. Mega Food Parks Schemes: The Mega Food Parks scheme involves the building of food parks under a PPP arrangement with private players. These parks broadly promote food processing industry and dairy comes as small subsidiary in it. There has been not much progress in the setting up of dairy processing units under this scheme as most of the Food Parks are in the pilot stage or in the construction phase till date.

If one looks at all the schemes on a broad basis, the Govt. has subsequently increased the budget allocation from 2004 - 05 onwards to some of the schemes like Intensive dairy Development Project (IDDP), and assistance to co-operatives (A to C) and Dairy Venture Capital Fund Scheme (DVCF). The fig below shows that the budgetary allocation has been reduced to Delhi Milk Scheme (DMS) and Strengthening the Infrastructure and Clean Milk production Scheme (SIQ & CMP). Evaluation studies conducted by Planning commission on some of the schemes like IDDP reveal that these schemes have not performed equally well in all the parts of the country. There were many district co-operative societies which have become non function under this scheme. There are still persisting problems of inadequate availability of fodder/ high price of fodder and lack of facilities for crossbreeding and veterinary services. The Delhi Milk scheme though has increased its milk processing capacity to about 5 lakh LPD yet the dairy is not able to make profits due to certain operational inefficiency and constraints. The SIQ & CMP project has been merged with the IDDP which again upsets the clean milk production activity in existing operation flood areas.
Budgetary allocation to different dairy schemes under DAHD, in INR Crores

Scheme for cold chain, value addition and preservation infrastructure: This scheme aims at building cold chain infrastructure for food processing throughout India. It provides financial assistance to the project proposals received from public / private organizations for integrated cold chain infrastructure development facilities. The pattern of assistance is grant in aid of 50 % of the total cost of plant and machinery and technical civil works in general areas and 75% for NE region and difficult subjected to a maximum of Rs 10 Crores. So far there have been 10 integrated cold chain projects approved out of which there has been no venture in dairy processing. Review of the Schemes related to dairy development:

58 39.76 25.7 24.64 9.82 3.5 2004-05 30.39 12 0

IDDP

52.76

49.9

53.09 35

24.64 15 5 1
Ato C

20.88 5.5 1

21.92 9 1 2008-09
DVCF

2.13 0 2005-06
SQ & CMP

2006-07

2007-08
DMS

Source: Technopak Analysis

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Public Private Partnership: A Win-Win Approach

The PPP framework ensures that the private players finances, builds and operates the project with innovative technologies and professional expertise to attain maximum efficiency whereas the quality of service, price certainty and cost-effectiveness is taken care of by the Govt. agencies. One more important aspect of the PPP model is the amount of risk sharing in the agreement. The government assumes the responsibility for the social, environmental and political risks related with the project whereas the private partner undertakes the onus for the commercial and financial risks to some extent.

Public private partnerships commonly called as PPP is long term formal agreement between government or public bodies and the private sector agencies specifically aimed at providing finance, design and implementation of projects for certain infrastructure facilities and services which were conventionally provided by the public sector agencies only. This type of collaborative ventures encompasses a formal agreement between the partners pertaining to dedicated allocation and utilisation of resources, amount of decision taking power, risks and return.

Understanding the private public partnerships:

Categories of PPP*

There are various models of public private partnerships which can be worked out based on the nature, location and end users of the project. These PPPs can be broadly classified into six categories mentioned under as.

Modalities
The private party procures, operates and maintains an asset for a short period of time. The public sector bears financial and management risks. The private sector operates and manages a public owned asset. Revenues for the private party are linked to performance targets. The public sector bears financial and investment risks Buy-build-operate (BBO) Lease-develop-operate (LDO) Wrap-around addition (WAA) The private sector buys or leases an existing asset from the government, renovates, modernizes, and/or expands it, and then operates the asset, again with no obligation to transfer ownership back to the government Build-own-operate-transfer (BOOT) Build-rent-own-transfer (BROT) Build-lease-operate-transfer (BLOT) Build-transfer-operate (BTO) The private sector designs and builds an asset, operates it, and then transfers it to the government when the operating contract ends, or at some other pre-specified time. The private partner may subsequently rent or lease the asset from the government. Build-own-operate (BOO) Build-develop-operate (BDO) Design-construct-manage-finance (DCMF) The private sector designs, builds, owns, develops, operates and manages an asset with no obligation to transfer ownership to the government. These are variants of design-build-finance and operate (DBFO) schemes.

Service contracts

Operation and management contracts

Leasing-type contracts

Build-operate-transfer (BOT)

Design-Build-Finance-Operate (DBFO)

Source: IMF & European Commission, Technopak analysis

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Compared with the traditional procurement models, the private sector assumes a larger role in planning, financing, design, construction, operation and maintenance of public facilities. Risk associated with the project is transferred to the party best positioned to manage it. The figure below shows the scale of responsibility in PPPs.

Existing PPP Models in the dairy sector at national/ international level.

During the abrupt transition from State to private ownership in the early 1990s, the once vibrant dairy sector in Mongolia collapsed and processed milk sales volume fell from over 65 million litres in 1990 to under 5 million litres in 2002. A number of private dairy enterprises emerged during the 1990s, including former food and dairy processing state-owned companies acquired by the incumbent managers. They tried to revive the situation but many of them failed while the few which survived experienced great difficulty in getting the milk supply and catering to the market. The Government in 2003 sought support from the Japanese Government, The Food and Agriculture Organisation (FAO) and the United Nations for a project to restore the dairy sector in Mongolia under the umbrella of the 'White Revolution programme. A project team was formed and the key partners were Mongolia (Public as well as private sector), Japan and FAO (Food and Agriculture Organisation). The basic models of milk and cheese production were supported by innovative marketing and capacity building features which included Public-private sector partnerships and investments in the modules. Key features of the Mongolia Dairy Food Chain Model: The project shared the investment risks with its partners who invested about USD 1.3 million in equipment and buildings and contributed up-to-date knowhow and limited equipment (approx. USD 350,000). In Mongolia, the Government launched a school lunch scheme in 2006. The scheme was operated under a public-private sector partnership arrangement with food companies bidding for local school lunch contracts. The intense lobbying by the Mongolian Food Industry Association and the dairy project compelled the Mongolian Government to ensure that only on domestic milk produce is used. 80 per cent of the meals supplied in schools are now provided by dairy enterprises. Different dairy products are provided on alternate days and the scheme boosts cash flow and earnings for the concerned dairies and, in turn, milk producers. The school lunch/milk programme is linked to the generic Mongolia milk advertising campaign also. 22 The Mongolia Dairy Food Chain Model

In addition to supplying regular nutrition, the scheme also showcases Mongolian milk and dairy products to tomorrows customers. The scheme current covers about 200,000 primary school children across the country

Productivity enhancement in the rural economy depends on increasing the degree of mechanisation employed in tasks such as feed harvesting. There is a lack of rural labour for such tasks as well. Many farmers, however, may not be able to afford the necessary equipment to boost productivity and ease labour shortages. The Pakistan Dairy Development Company (PDDC) has devised a way to achieve productivity while avoiding unnecessary capital expenditure. A Rural Service Provider (RSP) business model has been developed to meet the gap. Those farmers, who cant afford to have the processing facility of their own, can engage the services of a rural contractor, who owns and operates expensive and specialised equipment. This contractor provides services across a number of farmers, bringing the costs down to acceptable levels. The PDDC aims to increase fodder production by developing fodder harvesting services throughout Pakistan. This is being achieved by either partnering with existing rural contractors to offer additional services or by creating new Rural Service Providers in areas not being serviced by existing contractors. The PDDC in turn, supports the purchase of fodder harvesting equipment besides close supervision and assistance to the private contractors in matters of marketing of the services, as well as monitoring rates charged to farmers, in order to ensure fairness to all parties. Dairy in Pakistan has involved private sector participation in its projects and their implementation strategies. There is also private participation in the form of Board of Directors of the PDDC; financial support has also been taken from these private players. 23 Finance and strategy implementation from private players

Initial results were quite encouraging: By the end of 2007, sixteen commercial modules/ units were in operation. The quantity of domestic milk entering the formal market in 2008 was 24 million litres which was quite up from 2.5 million litres in 2007. The combination of improved cooling and LPs has already reduced the milk losses of one of the private sector partners from 70,000 litres in 2005 to just 2,000 litres The PPP model applied here was service and management contracts type where the core team led by FAO built the infrastructures like model milk collection units, processing units, milk cooling centres and insulated tankers and the private players were entrusted with the operation and maintenance of the same. In the school meals project the Govt. achieved nutrition for the school children popularised Mongolian dairy products as well as collaboration with private dairy organisation resulted in promotion of dairy activity in the country. The Pakistan Dairy Rural Service Provider Programme

Outcomes of the project and future plans

To promote local ownership of project interventions and outcomes, project implementation was decentralised. Three Regional Project Implementation Groups (RPIGs) were established comprising the key public and private sector partners directly involved in operating the model dairy demonstration units being set up by the project. A Dairy Service Centre, run by a private veterinarian was attached to each milk producer group. The centre provided animal health and breeding services, on a full cost recovery basis, plus advice on clean milk production. Later, other services were added such as advice on management and feeding.

Cross Country Partnerships

Grameen Danone Foods Ltd popularly known as "Grameen Danone" is a social business enterprise which was launched in 2006, has been designed to provide children with many of the key nutrients that are typically missing from their diet in rural Bangladesh in association with the Groupe Danone of France.

There has been cross country partnerships in the dairy industry. Japan has partnered through FAO and United nations a revival of the entire Dairy Industry in Mongolia. Grameen Danone food Ltd is yet another example where there has been cross country collaboration towards development of the dairy sector.

Grameen Danone Foods was aimed at reducing poverty by creating business and employment opportunities for local people since raw materials including milk needed for production, will be sourced locally. The companies that make up Grameen Danone Foods Ltd. have agreed not to take out any of the profits out of the company. Instead they will invest these for creation of new opportunities for the welfare and development of people. Hence it is called 'social business enterprise. The joint venture produces a yoghurt enriched with crucial nutrients at a price of 6 BDT (= 0.06 EUR) which even the poorest can afford. Grameen Danone Foods affects people's lives not only by improving their health. But also benefits trickle down the whole value chain. The milk for the yoghurt is purchased from micro-farmers. The production is designed in such a way as to give as many people as possible a job. Sales ladies distribute the yoghurt door-to-door and receive a 10% provision. Unsold yoghurts are taken back. On the whole Grameen Danone Foods has been responsible for the creation of about 1,600 jobs within a 30km radius around the plant. There is also an environmental aspect: Solar energy is used for heating up the water which is used for cleaning the installation and preheating water for the main boilers. In addition the packaging of the yoghurt is fully biodegradable.

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The objective to bring in private participation into the Indian dairy sector through public private partnerships is to provide a comprehensive approach towards overcoming the present challenges in the industry and prepare a long term competitive strategy towards inclusive growth. While we narrow down on the various models of PPP in terms of structure, contracts, and operational details, it is imperative to demarcate the areas where private participation can be promoted by the Govt. and most important the inducements that would accrue out from these PPP arrangements currently as well as in the near future. This section focuses on some of the vital areas of the dairy industry where the private players can integrate into the system and the PPP model can be replicated and transformed in this sector. The potential thrust areas in the Indian dairy industry where the private sector can intervene are Procurement and Processing, Infrastructure and logistics development, Operations Management, Capacity building through training and extension, Research and Knowledge transfer

In this era of inclusive growth, PPPs can serve as a major step towards development of people and economy of India on the whole. The PPP models have been overwhelmingly successful in driving a major wave of urban infrastructure development but now the onus lies on the Govt. to expand the scope of these partnerships into new horizons of rural development. Agriculture being a state subject and confined to the rural India, is yet to get a glimpse of PPPs on the national level but nevertheless opening up avenues for the PPP in agriculture and allied fields like dairy can really churn out benefits in terms of organising the sector as well as diffusing the growth and prosperity to grass root levels.

Transforming Public Private Partnerships in the Indian Dairy Sector

Procurement and Processing

The most vital part of the supply chain in the dairy sector is on the procurement side. The challenge lies in integrating all the unorganized milk producers from most of the untapped milk pockets in India and aligning them with the national milk grid. The participation of private sector in improving the procurement and processing function in dairy can be envisioned through some of these possible interventions. Identification of potential milk pockets, Planning and development of strategic locations for milk collection. Design, build and operate a milk collection network Design, build, own and operate milk processing facility

The major idea behind these initiatives would be to ensure fair amount of remunerative prices to the farmers, create an assured supply base, organize the untapped milk pockets and most important to reduce the time lag between procurement and processing to prevent wastage. The key aspects which can be considered for the promotion of the procurement and processing function are Assigning dairy industry a special priority sector status where various modes of assistance can be devised to promote sustainable development. Provision of special budgetary allocation for capital and operating expenses for the processing function covered under PPP systems wherever applicable. Ensure guidelines on the competitive procurement price of milk at the farm gate. The Govt. can provide institutional finance at reduced rates of interest to kick start the projects.

25

Infrastructure and Logistics Development:

There is a huge disparity between amount of milk produced in India and the quantity of milk processed. The gap in infrastructure and support logistics is probably the most important cause for the minuscule share of processed and hygienic milk in India. The foray of private sector into this thrust areas can actually change the scenario with substantial routing of the unorganized and unprocessed milk through an organized channel of cold chains and processing plants. The PPP in this area can be implemented by the private sector by Planning, Design and Development of Bulk Milk Coolers units (BMC) and chilling facilities for milk at strategic locations so that it can cater to a large milk zone. The cooling or chilling cost of milk can be transferred to the consumer through the processing cost and the farmers would not get taxed for the chilling facilities. Build Own and Operate and transfer laboratories and milk testing facilities to grade and ensure remunerative prices to the farmers. Design, Build and operate Animal feed processing plants, Milk processing plants. Build, own and operate a cold chain having a fleet of refrigerated vehicles and insulated stainless steel tankers. Lease, Develop and Operate the defunct and sick cooperative milk plants.

In addition to the earlier mentioned incentives for procurement and processing, the other major areas where the Govt. can facilitate a conducive environment to foster infrastructure and logistics development in the dairy sector could be in Providing land at a subsidized rate for building bulk milk cooling units and dairy plants to keep the project cost on the lower side. Providing special category status to the land being used for the dairy activities so that the registration and other duties are reduced to a great extent. Promulgate specific policy measures for including certain lucrative funding patterns and incentives. There should be 100% depreciation on all investments on physical assets and a 100% tax holiday on any 10 years out of 15 years of operation after inception of the facility to promote uptake of dairy ventures. Provision of duty exemption on import of capital goods which are essential for setting up BCU and processing plants. Facilitation of commercial lending by banks and financial institutions for the projects by assigning a priority status to dairy sector investment and reduced interest rates. Provision of subsidized electricity supply to the Bulk cooling Units and milk chilling plants to promote more no. of takers for the project.

26

Operations Management:

The key to the success in sustaining a dairy processing plant business is perfect management of its operations like manufacturing and production systems, plant management, equipment maintenance management, production control, industrial labour relations and skilled trade supervision, strategic manufacturing policy, systems analysis, productivity analysis and cost control, and materials planning. In response to such intricacies of the trade, the private sector has achieved a greater level of optimisation of processes and maximum utilisation of resources. PPP in this context can help through contracting-in models which would entail hiring of one or more number of agencies to cater to an array of services such as: Maintenance and upkeep of Infrastructure. Quality testing and nutrient estimation at factory end. Regular maintenance of cleaning in place systems and conformation to quality standards like ISO, HACCP etc. Purchase of inventories and materials management Transportation

This frame of model would ensure efficiencies in operations in terms of technical efficiencies, operational economy, compliance to quality standards, effective resources management and cost effectiveness.

Capacity Building through Training and Extension:

Private players can play a key role in capacity building and training through PPP modes by working in synchronisation with the public sector for the effective utilization of the already existing milk zones and cooperative structures. The existing dairy cooperative societies can be used to link the farmers and the other intermediaries handling milk for training in clean milk production and handling. In addition to the Govt. run schemes, training of farmers by private agencies at the grass root level and assisting them with farm assistance in terms of counselling and orientation can boost the awareness and acceptance of clean and hygienic milk production practices. The govt. can further enable these endeavours by

Allowing corporate entities to set special vocational training institutes for the dairy processing technology where in the work force for the technology ridden milk processing plants can be trained and prepared to handle milk in a much more professional and scientific way. The private sector can also arrange workshops for the training of all the stakeholders involved the supply chain to educate and sensitize the masses towards clean and hygienic milk production. Providing subsidies for the private institutes for infrastructure building, running the courses, and to some extent bear half the fees burden of the students so that dairy education becomes affordable and lucrative.

27

The intervention of private players in research in dairy technology renders tremendous potential. Creation of research facilities in dairy science by private organisations can go alongside the already existing Govt. Research Institutes like National dairy Research Institute etc. A collaboration can be developed in between the two entities where the Govt. can invest in the infrastructure of research facilities and the private player can come in with the expertise through human resources of scientists, biotechnologists, dairy engineers so that they come up with relevant research work that can be applied by the industry. The Govt. can promote these symbiotic research collaborations and knowledge transfer by

Research and Knowledge Transfer

Providing assistance to the private players to set up model farms where they can maintain certain standard practices and try out new research techniques. The farmers groups can be made aware about these best practices in Animal Husbandry and in turn can be motivated to emulate such practices. Providing grants for installation of research equipment and setting up of infrastructure for the research institutions. Providing assistance for building information kiosks and counselling desks at the particular locations not only to provide extension of best practices

28

Financing the Dairy Sector Issues and Way Forward

Dairy development has been acknowledged as the most successful developmental programmes in India substantiated by the fact that the country has achieved the distinctive position of being the highest milk producer in the world with an estimated milk production of 110 million tonnes in 2008 09. India is viewed as one of the worlds largest and fastest growing markets for milk and dairy products with an annual growth of 7.5 per cent in value terms. High expenditure elasticity of milk reveal conducive for the growth of dairy sector and diversification of Indian agriculture. In addition, per capita income and shift in consumption behaviour towards dairy products would lead to quantum shift in demand for dairy products in near future. The sector plays a significant role in supplementing family income and providing gainful employment to the rural masses. The facts that the annual value of India's anticipated milk production amounts to more than Rs.1,430 billion in 2008-09, dairy cooperatives generate employment opportunities for around 13.9 million farm families, livestock contributes about 25.6 per cent to the GDP from agriculture and about 22.45 million people work in livestock sector, which is around 5.8% of the total work force in the country reveal the very pivotal role of this sector in shaping the socio-economic development of millions of rural households and impacting the national economy to a large extent.

Existing situation of dairy financing

The above statistics reveal that the livelihood of such huge work force in livestock sector is greatly dependent on dairy farming. The commercial banks are required to provide credit to the extent of 40 per cent of their total net bank credit to priority sector as a whole. 18 per cent of Net Bank credit should be exclusively for agriculture. Out of the target of 18 per cent for agriculture, at least 13.5 per cent should be by way of direct finance to the agriculture sector. Loans to animal husbandry sector come within the Direct Lending to Agriculture category. As per NABARD Annual Report 2008-09, the ground level credit flow to animal husbandry sector (medium term and long term investment credit) has increased from INR 3097 crores in 2004 to INR 9034 crores in 2008 representing the growth rate of 43 %. The refinance disbursements by NABARD for dairy development from 2000-01 to 2008-09 has been shown in figure 1 below.
Disbursement of Refinance (Rs in crores)
1000 900 800 700 600 500 400 300 200 100 0
909.19 769.39 821.18 754.11 669.15 689.22 605.87 504.02 489.41

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Year

Source: YES BANK

29

The formal financial institutions in the country have been providing the credit in the form of term loan and working capital to the sector to meet the following requirements:

To bring about structural changes in the unorganized sector, measures like milk processing at village level, marketing of pasteurized milk in a cost effective manner, quality up-gradation and up-gradation of traditional technology to handle commercial scale using modern equipment and management skills, a Central Sector Scheme namely, Dairy/Poultry Venture Capital Fund was initiated during the 10th Five Year Plan and continued till the first year of 11th Plan. Subsequently, the scheme Dairy Venture Capital Fund has been separated. Under this scheme, assistance is provided to the rural/urban beneficiaries under a schematic proposal through bankable projects. The entrepreneurs contribution is 10 %, interest free loan from revolving fund provided by GOI is 50% and Bank loan at interest applicable for agricultural activities is 40 %. The cumulative sanctions stood at INR 99.76 crores for dairy as on 31st March 2009.

For construction of shed, purchase of milch animals, milking machine, chaff cutter or any other equipment required for the purpose. Modernization of the milk cooperative societies and for creating infrastructures like construction of milk house, automatic milk collection systems, purchase of transport vehicles and purchase of bulk chilling units. Small and large scale dairy processing and marketing facilities

Critical Issues and Challenges

Under priority sector lending obligation fixed by the RBI, banks have to provide term loans for the purchase of quality milch animals, construction of cattle shed, purchase of milking machines, utensils and other equipments, feed and fodder cultivation etc. As per NABARD reports, the extent of finance to dairy development activities by financial institutions have shown a decline after 2003 as indicated in Figure 1. Financing of the livestock activities specifically for 1-2 milch animals is usually perceived as risky proposition by the banks. In most of the cases, the access to finance is only restricted to the purchase of milch animals rather than financing other tiers of the milk supply chain including procurement, processing, marketing and distribution. As per the recent memorandum submitted to the Honourable Prime Minister of India, the District Milk Unions have to store the dry milk powder for a longer period but, for making payments to the farmers, they require working capital facilities. Further, in order to modernize their plants and also to manufacture new value added products at low cost, the District Unions also expand/construct new capacities for which they also need term loan facilities. The State Federations also stock the excess production of District Unions for marketing across India and also to export outside India and thus, have working capital requirements.

Lack of sufficient landholding for cultivation of green fodder, limited resources leading to absence of collaterals to offer, inability to generate own contribution, lack of technical skills to make the enterprises more viable and lack of financial resources to purchase the inputs are some of the constraints in financing small dairy farmers.

30

Earlier, the finance given by the banks to District Unions and State Federation of Cooperative Dairies was categorized by RBI in the priority sector lending norms as it was treated direct finance to farmers. However, vide circular No. RBI/2006-2007/358 dated 30-4-2007, as per clause I (1) and section I (1.2.2), finance upto an aggregate amount of Rs. one crore per borrower and one third in excess of Rs. one crore per borrower given for dairying activities is to be categorized under direct finance to agriculture category. Considering their large operations, limit of Rs. one crore is negligible. The Reserve Bank of India focuses on the priority sector for its lending as those sectors that impact large sections of the populations, the weaker sections and sectors which are employment intensive. However, when it comes to disbursement of short term and long term loans for dairy cooperatives (district Union and State Federations), the same have not been treated as priority sector category for direct finance to agriculture. The number of animals insured are only 4 % in spite of a large population of cross bred productive cattle owing to lack of awareness, affordability, lack of delivery channels, claim settlement issues and high cost of transaction.

Way Forward

The banks and other financial institutions need to play the proactive role in providing easy and user friendly credit to the end users of each component viz production, procurement, processing and distribution across the milk value chain through development of area specific schemes and redesigning of their financial products. This will also enhance the agri advances portfolio and the customer base of the commercial banks. The following are the strategies for the effective delivery of financial solutions (including insurance) that can be implemented by the banks and other national bodies for the benefit and development of the dairy sector:

Kisan White Card (similar to Kisan Credit Card) scheme should be introduced to provide short term credit/working capital to the dairy producers. Under this scheme, the farmers should get credit against the future production and they will be free to purchase the inputs at a competitive price from selective stocks.

Re-designing of livestock insurance products so as to tackle the critical issues of ascertainment of livestock during claim settlement process and the identification of the reasons for the death of the animal. Furthermore, the insurance companies needs to strengthen the monitoring mechanism of the insurance settlements. The Government should put in place the support structure for compensating certain proportion to these insurance companies for the loss incurred by them.

The special scheme may be implemented especially for the progressive dairy farmers of the district cooperative milk producers unions. Under this scheme, the dairy farmers may be sanctioned limit based on their annual income from sale of milk proceeds to augment the dairy development activities like purchase of milch animals, construction of cattle shed, purchase of milking machines, feed and fodder cultivation etc.

Awareness campaigns must be conducted for the dairy farmers on insurance schemes. As the value of animals maintained by the farmers improves, they will be inclined to pay the required premium to insure them.

31

Special developmental and promotional activities must be conducted for the officials and field staff of banks and other financial institutions to strengthen the cooperative credit structure as well as the RRBs so that the adequate and timely credit is made available to the dairy farmers especially in non operational flood areas, hilly areas as well as backward regions of North East India. The traditional finance models in dairy sector have been limited to purchase of milch animals that is susceptible to high delinquencies as well as cumbersome loan processing procedures. Financing to dairy farmers for the purchase of milch animals through district level milk cooperative unions/ private dairy plants under MCA route can be adopted as one of the viable financial models to provide hassle free production loans with minimum probabilities of turning into bad asset. The banks may either provide loans to the milk processors for onward lending to livestock growers on guarantee of the processing units etc or directly to the dairy farmers against the deferred bills issued by processing unit.
Milk Procurement & Receivables Escrow

Bank

Dairy Unit M&C Agent

Farmer

*Financing Milch Animals under MCA Model

As against the traditional financial model, the MCA model provides various benefits like enhancement of the area under milk production by bringing small and marginal farmers, enhanced reputation/financial strength of the dairy unit and increased coverage under milk production leading to increased capacity and profitability of the dairy unit. The farmers get assured market for milk. Banks on the other hand can increase their customer base as well as crosssell other products to them.

Contract Farming in the sector has been widely adopted as a viable business model by the cooperative unions and the private sector players for providing assured and reliable inputs service to the farmers and desired quality of milk to the contracting dairies. The unions and private sector players provide the technical services for improving the productivity of animals, distribution of fodder seeds and cattle feed and veterinary services. Banking linkages could be provided to the dairy farmer through the dairies. Dairies can organize the supply of quality, timely and adequate inputs, credit support from banks, extension services and arranging for the buy back for the milk and for direct payment to the financing banks from the proceeds. Most of the cooperative unions including AMUL in Gujarat have tied up with financial institutions under contract farming arrangement. The same model can be replicated in other states also. The advantages of contract farming in dairy business are schematically represented in figure below. 32

Cooperative Union/Private Dairy

Profit maximization farmers

to

the

Easy accessibility to bank finance. Achievement of economics of scale by producers & processors.

Contract Farming Arrangement

Dairy Farmer

Efficient monitoring of production operations, extension programmes & credit delivery in cluster.

The entire finances to District Unions and State Federation of Cooperative Dairies should be treated as direct finances to farmers, covered under priority sector lending norms as these organizations have been created under three-tier Amul Pattern, for the betterment of rural farmers and are nothing but the forward integration of farmers for better price-realization

Micro Credit for Dairy Farming

27.5 % of Indias population lives below the NPL in 2004 05, which corresponds to around 29 crore people. Assuming one MF client per household & given that the average no of persons per household is five, the potential number of households requiring micro-credit in all sectors would be around 5.8 crore. Assuming 35 % of SHG members opt for dairy farming as income generating activities, there would be around 2 crore BPL people in need of micro-credit support for managing their livelihood through dairy farming. Assuming Rs 30,000 as the average loan size required for a single unit dairy farming having two milch animals of 10 litre capacity, the total credit requirement for this sector for the BPL people would be around Rs 60,000 crores. In order to meet such a huge credit demand for the BPL people in the sector, Government of India has to take some proactive steps to encourage the semi-formal Micro-Financial Institutions (MFIs) to play active role in financing dairy farming. (Source: Financing Agriculture)

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About CII

CII is a non-government, not-for-profit, industry led and industry managed organisation, playing a proactive role in India's development process. Founded over 115 years ago, it is India's premier business association, with a direct membership of over 7800 organisations from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 companies from around 396 national and regional sectorial associations. CII catalyses change by working closely with government on policy issues, enhancing efficiency, competitiveness and expanding business opportunities for industry through a range of specialised services and global linkages. It also provides a platform for sectorial consensus building and networking. Major emphasis is laid on projecting a positive image of business, assisting industry to identify and execute corporate citizenship programmes. Partnerships with over 120 NGOs across the country carry forward our initiatives in integrated and inclusive development, which include health, education, livelihood, diversity management, skill development and water, to name a few. With 64 offices in India, 9 overseas in Australia, Austria, China, France, Germany, Japan, Singapore, UK, and USA, and institutional partnerships with 221 counterpart organisations in 90 countries, CII serves as a reference point for Indian industry and the international business community.

The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the growth of industry in India, partnering industry and government alike through advisory and consultative processes.

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About Technopak

A leading Management Consulting firm offering strategic advice, start up assistance, performance enhancement impetus, consumer insights and capital advisory, to leading Indian and International companies, operating in Food & Agriculture, Retail, Consumer Products, Fashion (Textiles & Apparel), Healthcare, Hospitality, Education, Entertainment and Real Estate sectors.

With a team of established domain experts at work, Technopak builds and enhances business capabilities for leading Indian and international companies by offering end-to-end solutions that are unique due to our rich experience, strong industry relationships and a global footprint.

Our team currently comprises 200+ skilled professionals from leading International and Indian engineering and management institutes. Most of our consultants have hands-on industry experience in their fields of specialization and represent a wide variety of functional backgrounds. This enormous knowledge and talent pool enables Technopak to create special customized teams for each project depending upon the client requirements. From offices in Gurgaon (National Capital Territory of Delhi), Thane (Mumbai) and Bangalore, we consult with clients across the world.

Since our inception in 1992, as a Management Consulting firm across diverse industries, we have offered services to have far reaching impact on client businesses. Founded on the principle of concept to commissioning, we are strategic advisors to our clients during the ideation phase, implementation guides through start-up and a trusted advisor overall. Over 70 percent of our projects come from repeat clients.

Technopaks Food & Agriculture practice provides advisory services and implementation support across the entire food value chain in the sector. The services include Strategic Planning and Diversification, Feasibility Study, Turnkey Solutions, Contract Research for Product Development, Troubleshooting in Food Processing & Biotechnology areas, High tech Information Services, Advanced training, Mergers & Acquisitions, Entry Indias Strategy and International Market Strategy, among others.

Performance Enhancement

Strategy

Implementation

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For further information, please contact:

Mr. V. Sridhar
Associate Director Food and Agriculture Email: sridhar.v@technopak.com

Technopak Advisors Pvt. Ltd.

4th Floor, Tower A, Building 8 DLF Cyber City, Phase II Gurgaon 122002 (National Capital Territory of Delhi) India Phone: +91 124 4541111 Fax: +91 124 4541198

www.technopak.com

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