INDIA'S MILK PRODUCTION

• Milk and milk products are rich in protein.
• They are a key source of calcium, vitamins, and protein for a large vegetarian population in India.
• Dairy industry strengthens the rural economy.
• It acts as a source of income for farmers and potential for women empowerment.

4. Present status of the Dairy sector in India

• According to the Food and Agriculture Organisation Corporate Statistical Database (FAOSTAT), India is the highest milk producer in the world contributing 24% of global milk production.
• Top milk-producing states include Rajasthan (15.05%), Uttar Pradesh (14.93%), and Madhya Pradesh (8.6%).
• Indian dairy sector has an annual growth trend of 5-6%.
• In 2022, there was a 39% jump in exports of dairy products.
• Key exporting destinations are Bangladesh, UAE, Bahrain, Malaysia, Saudi Arabia, and Qatar.

Image Source: Economic Survey

5. Government Initiatives to Boost the dairy sector

• Operation Flood: It was launched in 1970 by National Dairy Development Board (NDDB). It transformed India from a milk-deficient into the world's largest milk producer. Dr. Varghese Kurien was the architect of Operation Flood.
• Rashtriya Gokul Mission: It aims to genetically improve the cattle population and promote and conserve indigenous cattle breeds.
• National Dairy Development Board (NDBB): It is monitoring the supply-demand gap in dairy products along with the central government.
• National Programme for Dairy Development (NPDD): It aims to strengthen infrastructure for the production of high-quality milk as well as for the procurement, processing, and marketing of milk and milk products.
• Dairy Entrepreneurship Development Scheme (DEDS): It aims to create self-employment opportunities in the dairy industry.
• The National Bank for Agriculture and Rural Development (NABARD) is carrying out the programme.

6. Alternative to imports

• October-March is normally the ‘flush’ season in milk when supply exceeds demand.
• Dairies convert the surplus that they procure into skim milk powder (SMP) and butter fat.
• This is done by separating the cream and removing the water in the skimmed milk through evaporation and spray drying.
• The same SMP and fat are reconstituted into whole milk during the ‘lean’ summer-monsoon months (April-September) when animals produce less amid rising demand for curd, lassi, and ice cream.
• Such processing into solids and reconstitution by adding water happens in no other farm produce: atta flour and sausages once made cannot be turned back into wheat or pigs.
• The 2022-23 ‘flush’ was a rare season where milk procurement fell, leaving dairies with hardly any surplus for converting into fat and powder.
• And with production bound to fall further in the ongoing ‘lean’, the dependence on the purchase of milk solids for reconstitution will only go up.

7. Fixing GST Anamoly

• Therein lies a problem. Milk doesn’t attract any goods and services tax.
• But SMP is taxed at 5% and milk fat at 12%. So while dairies pay no tax on milk procured from farmers, they have to shell out GST on solids.
• And Input tax credits cannot be claimed, as there’s no GST on milk itself. Moreover, the tax incidence goes up as the fat in the reconstituted milk increases.
  
• For every 100 liters (103 kg) of full-cream milk that dairies process, 6.18 kg of fat and 9.27 kg of SMP are produced.
• Butter contains 82% fat. Taking its price at Rs 425/kg (Rs 518/kg of fat) and SMP’s at Rs 325/kg, their combined cost in the reconstitution of 100 liters will be Rs 6,214.
• Adding 12% GST on fat and 5% on SMP takes it to Rs 6,749 or Rs 67.49 per liter. 
• Simply put, the total cost of fat and SMP used in the reconstitution of one liter of full cream, and milk is today around Rs 67.5.
• The GST component in that is Rs 5.35/liter-Rs 3.84 on fat and Rs 1.51 on SMP -which is ultimately passed on to the consumer.
• One way to avoid this is by doing away with GST on milk solids used for reconstitution purposes.
• Alternatively, the GST on milk fats can be reduced to 5%. Differential rates on SMP and fat probably make no sense, when both are derived directly from milk.
• A 12% GST on milk fat is also an anomaly when vegetable fat (edible oils) is taxed at 5%.