Back to the Main ET Page

Separating Milk and Water

Arvind Panagariya

            “Imported dairy products flood Punjab's market, sounding the death-knell for marginal farmers,” says the headline of an article published in a recent issue of Outlook.  Thanks to the “glut of imported butter oil and milk powder,” continues the article, Punjab has been turned from “the proverbial land of milk and honey” into “the land of milk, more milk and tears.”

The magazine’s claim is, of course, disingenuous.  The phenomenal success of the dairy industry under the charismatic leadership of Dr. Verghese Kurien has culminated in India becoming the world’s largest producer of milk today.  One wonders how just 40,000 tonnes of imports, which is all the milk that has been imported according to Outlook’s own account, could lead to a glut in a country that produces 75 million tonnes of its own milk every year.

To be sure, dairy farmers in Punjab and elsewhere are under stress; prices of milk and milk products have experienced a sharp decline during the last year or two.  But imports, which were liberalized only on April 1, 2000 and so far amount to less than 0.1 percent of the total consumption, have little to do with this stress.  More likely, it is domestic competition that has intensified in recent years.  As such, the calls for very large duties on imports by Prakash Singh Badal, the chief minister of Punjab, are misplaced; the duties will do little to alleviate the current plight of his farmers.

That said, it must be acknowledged that the case for fully freeing up India’s imports of dairy products in a relatively short period of time is complex.  There is little doubt that eventually we must free up trade in this sector as well:  the principle of comparative advantage and the benefits from specialization it implies apply as much to dairy products as to textiles and clothing or automobiles.  What is different about the dairy sector in its current state is the adjustment cost of liberalization, both economic and political.

But consider first the case in favor of liberalization.  To its credit, the dairy revolution launched via Operation Flood in 1970 has raised the availability of milk in India from 112 grams per-person per-day in 1970-71 to 211 grams in 1998-99.   While this is an impressive performance, milk availability remains inadequate for the predominantly vegetarian India.  Most diet specialists would advice the vegetarians in India to drink at least 500 grams of milk per day.  Add to that the milk needed for making ghee, curd, makkhan, khoya, milk powder and cheese, which currently account for a little more than half of the milk consumption in India.  Even adjusting for the population that eats meat, fish and poultry and, therefore, require less milk, these facts imply the need for a much larger quantity of milk than is currently available.  Furthermore, given that millions of children still go without any milk because their parents are unable to afford it, the case for bringing milk prices down through cheaper imports seems irrefutable.

Unfortunately, the issue is more complex.  Unlike developed countries where milk is produced in big farms of 100 or more cattle on farm, the average farmer in India has just one or two cattle.  Most of such cattle owners are small or marginal farmers or landless laborers.  In all, nine million of them, spread over 100,000 villages, sell 12 million liters of milk every day to urban consumers.  A substantial decline in milk prices through imports will hurt these poor farmers.  In all likelihood, production costs of these farmers are higher than the current world prices so that large quantities of imports would displace many of them.  Even though some poor people will benefit from lower milk prices, the net impact of imports on poverty is likely to be negative.

In addition to this tension, there is a political-economy factor that pulls policy against free imports.  Milk production and exports are subsidized in developed countries.  Good economics says that we should enjoy the benefits of such subsidy: if these countries want to give us milk for free (or at throwaway prices), we should gladly take it, providing our children an adequate source of protein and calcium.  Yet, politicians are likely to find it difficult to convince domestic industry to accept free flow of subsidized imports.

Thus, to ensure that the adverse impact of liberalization on poverty does not block other, more urgent reforms, pragmatism dictates a compromise solution whereby a modest protection to the domestic dairy industry is provided against milk imports.  Contrary to some claims, the government has not tied its hands entirely under the WTO agreement.  According to World Bank’s Garry Pursell, a leading trade-policy expert on India, our current WTO obligations require us to import only 10,000 tonnes of powdered milk at a tariff rate of 15%.  Beyond this quantity, the tariff rate can rise up to 60%.  Taking the interests of consumers and long-term efficiency into account, in my judgment, the tariff rate on out-of-quota imports should be set at approximately 30 percent.

Of course, we should not lose sight of the fact the ultimate goal of the policy should be to lift the small farmers and landless laborers out of their marginal existence.  Rather than freeze these individuals in their current employment, which condemns them to living on sales of a few liters of milk every day, we must create better opportunities for them.  This means treating the protection to dairy industry as a transition measure.

The ultimate cure for poverty lies in outward-oriented rapid growth that generates high-paying jobs—a prescription that the current President of the World Bank, James Wolfensohn, has chosen to ignore. On the one hand, we must continue with our broad liberalization program and on the other, we must support the launch of a new WTO round that brings an end to agricultural subsidies in the rich countries.

Economic Times, June 21 2000