FNB News - Parag chief seeks dairy technology mission, buffer stocking mechanism

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BUDGET

Parag chief seeks dairy technology mission, buffer stocking mechanism

Monday, 23 February, 2015, 08 : 00 AM [IST]

With the presentation of Union Budget 2015-16 just a week away, Devendra Shah, chairman, Parag Milk Foods Pvt. Ltd, highlights point-wise what are his and his company’s expectations for the dairy industry:

As you are aware, milk is the largest agriculture produce in the country, with its output much higher than rice, wheat or sugarcane. Further, with milk production projected to reach 140 million MT during the current year, its revenues are expected to reach Rs 3.60 lakh crore in value terms. Milk today touches the lives of millions of rural milk producers, especially women engaged primarily in this vocation. It provides much-needed basic nutrition to millions of consumers, especially children and aids in mental & physical development of the citizens of nation.

1. To institute dairy technology mission on milk productivity improvement
As you are aware, India has 21% of world’s milch animal population at 371 million heads (57% of total buffalo population; 111 million heads & 16% of cattle population; 260 million heads). However, milk productivity of Indian milch animals is quite lower at around 1,000 litre/animal. Therefore, India is able to produce only 17% of world’s total milk production. Traditionally, India was known for its indigenous breeds of cattle & buffaloes; however the genetic material was lost over last 2 centuries.

Major issues involved in increasing productivity are:

Increasing breeding infrastructure: current requirement of artificial insemination doses for entire milch animal population is more than 740 million, against that merely 10% semen doses are available. Further, there is limited coverage of artificial insemination network and availability of skilled professionals.
Even in areas where AI is performed, there is requirement of wide-spread progeny testing programme to identify best genetic material.
Availability of quality feed & minerals is a vital issue. Export of oilseed extractions leads to protein shortage in the country and increases its cost. Duty on exports of oil cakes and extractions would assist in increasing milk production further.
Awareness amongst milk producers regarding animal husbandry practices. There is a need to start short-term courses on farm management practices, modern animal management practices, etc. for milk producers, with adequate grants from government to institutes providing such courses.

In view of the above, we firmly believe that setting up of Technology Mission on Milk Productivity Improvement on the lines of other technology missions established earlier will go a long way. The mission would be solely responsible for improving productivity of milch animals and all concerned government departments would extend their entire support to the mission to make it a great success in a strategic manner. The mission may take over all the existing government schemes for productivity improvement like National Project on Cattle & Buffalo Breeding (NPCBB) and roll out its own set of activities.

2. Free & duty-free import of semen & other requirements of dairy farms
As you are aware, due to lower productivity of animals and shrinking of farm holdings, dairy farmers are moving from small herds to large farms. In order to demonstrate the economies of scale in large-scale dairy farming as well as to conduct research on increasing productivity of milch animals; we have established India’s largest integrated dairy farm with around 3,000 cows under management and we are planning to increase the herd-size to around 5,000 apart from establishing a separate farm for development of indigenous breeds of cattle. However, large farms like ours are facing procedural hurdles in obtaining licences for importing live animals, semen (including sexed semen), embryos, vaccines, fodder, etc. specifically meant for these cattle. We would therefore request you for suggesting the following policy amendments;

Permit import of semen (including sexed semen), embryos & live animals for captive use under OGL. This would help augmenting genetic material of cross-bred as well as indigenous breeds of cattle.
Allocation of a licence to import vaccines and veterinary drugs specific to herd needs for effective controlling and curing diseases on the farm.
Importation of dry cow therapy for cows at the drying off stage. This will reduce the incidence of new mastitis cases in the following lactation and reduce somatic cell counts.
Free & duty-free import of fodder like alfalfa in view of acute shortage feed in the country and spiralling prices.
Provide subsidy on usage of sexed semen and also arrange to make this technology cost-effective.

3.   Buffer stocking mechanism for dairy commodities
All across the world, governments keep buffer stocks of milk powders, butter, etc. in order to support the milk producers, on one hand, and check undue price fluctuations, on the other hand. We understand that these systems of buffer stocking mechanism for milk products are well established in the US and European countries. In case of India too, similar systems exist for other agricultural commodities like wheat, rice, etc.

Similar mechanism of buffer stocking of milk products is required in India in order to provide cushion to milk producers as well as consumers. We therefore suggest that Government of India should consider buffer stocking mechanism for skimmed milk powder and white butter, by procuring it in limited quantity & maintaining the stock.

As described above, the current milk production of the country is 140 million MTs, which is equivalent to 20 million MTs of milk solids and as per the projections of the Planning Commission of India; total milk production would reach 180 million MTs by the year 2020. Further, milk production increases by around 30% during peak months. If during this peak season, certain minimum volume of milk in terms of milk solids is procured by the Government of India, it would provide the support mechanism to the farmers as well as consumers.

Even if the Government of India procures merely 0.25% of the total production, it would amount to just 45,000 MT of milk solids based on current production. Within this 45,000 MT of milk solids, skimmed milk powder (SMP) and white butter may be procured in the ratio of 2:1. This quantity of buffer stock may be purchased by the Government of India at market price and the inventory carrying cost and rest of the expenses can be compensated through budgetary support.

We also suggest creation of a separate corporation like the erstwhile Indian Dairy Corporation with sufficient funds to buy and ware-house the stocks of milk solids as against delegating the work to any existing agency already engaged in the sector and may have business interests.

We are sure that with such an initiative of the Government of India, millions of milk producers as well as deserving consumers would benefit to a great extent from the market fluctuations and would provide much-needed food security to the nation.

4.   15-Year tax holiday on direct & indirect taxes for integrated dairy projects
Establishment of an integrated dairy project right from dairy farm to manufacture of finished products is highly capital-intensive and the gestation period of such projects is quite higher. We would therefore request for the following:

While the government has provided a five-year tax exemption under Income Tax for integrated dairy projects from last year, looking at the quantum of investments and high gestation period, full tax exemption from direct taxes may be provided minimum for a period of 15 years.

Further, around 30% of the project cost for integrated dairy units comes from indirect taxes like excise, customs & sales tax on capital equipment purchased in this regard. Therefore, 100% exemption must be provided from indirect taxes for capital equipment purchased for the project.

Further, exemption in indirect taxes, especially VAT may be provided for products manufactured by integrated dairy projects.

5.   Providing subsidy to dairy companies on capital investment in milk preservation & cold chain infrastructure
As you are aware, milk is a highly perishable commodity and requires immediate processing and cold storage to enhance its shelf-life.

However, setting up of processing & cold chain infrastructure for milk entails very high levels of investment; right from milk procurement till it reaches the end-consumer and increases interest burden. Dairy companies are facing difficulties in expanding the processing & cold chain infrastructure as, on one hand, they need to provide nutritious milk & milk products to consumers at value-for-money proposition and, on the other hand, maximise returns to milk producers.

Therefore, there is an urgent need to provide fillip to milk processing & cold chain infrastructure in the country.

While government assists other sectors by providing them tax incentives, subsidies and other facilities when they set-up infrastructure in Special Economic Zones (SEZ) or designated food parks; in case of milk processing, due to the perishable nature of commodity, it is not possible for dairy companies to establish their infrastructure in such designated places and they are forced to set up units near to milk producing region. Therefore ultimately it is the dairy farmers, who are deprived of the various benefits provided by government.

We therefore suggest providing subsidy on capital cost incurred by dairy companies for following activities:

Installation of modern equipment for milk procurement like bulk milk chilling units, automatic milk collection systems, etc.

Milk & milk product distribution infrastructure like warehouses, cold-rooms, deep-freezers, refrigerators, etc.

We recommend that the government should provide minimum 30% of the capital cost in form of subsidies for above activities, in order to motivate dairy companies to expand their processing & cold chain infrastructure.

6.   Classifying advances to dairy companies under priority sector lending
We wish to draw your kind attention to one of the policy anomalies of lending by the Reserve Bank of India and seek your help in solving one of our major problems related to financing to dairy companies.

Dairy companies have to store the dry milk powder for a longer period to take care of seasonal fluctuations, however, for making payments to the farmers, they require working capital facilities. Further, in order to modernise their plants and also to manufacture new value-added products at low cost, the dairy companies also expand / construct new capacities for which they need term loan facilities. They stock the excess production for marketing across India and export outside India and thus, have working capital requirements.

The Reserve Bank of India focusses 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 companies, our activities are not treated as “priority sector” category for direct finance to agriculture.

The Reserve Bank of India vide circular No. RBI/2006-2007/358 dated 30-4-2007, as per clause I (1) and section I (1.2.2), has classified finance up to an aggregate amount of Rs one crore per borrower and one third in excess of Rs one crore per borrower given for dairying activities under direct finance to agriculture category. However, considering large operations of dairy companies, limit of Rs one crore is negligible. The limit should be removed to meet short-term and long-term funds requirements of dairy companies.

The entire finances to dairy companies should be treated as direct finances to farmers, covered under priority sector lending norms as these organisations have been created for the betterment of rural farmers and providing outlet and forward integration to farmers for their produce, having better price-realisation.

In view of the above, we suggest you to recommend the government and RBI to classify advances to dairy sector as priority sector at the earliest for the benefit of millions of farmers of India.

7.   Assistance in R&D
We suggest that the government should give assistance to dairy companies who are undertaking research & development projects including development of new products & processes, which will aid the whole industry in generic manner.

This will help more money being spent on R&D, which is the need of the sector.

8.   Assistance in export of consumer products
We suggest that the government should provide minimum 10% assistance for development of consumer dairy products with ”Made in India" brand abroad with stipulated conditions of quality, distribution infrastructure and track record.

This assistance should be for all promotions like exhibitions, advertisements abroad and super market promotions, road shows and other marketing activities carried out abroad.