Policy Paper on dairy Industry

Food Processing Five Sectors Project

India Development Foundation 1

POLICY ENVIRONMENT FOR DEVELOPMENT OF DAIRY IN INDIA

Harsh Vivek

Introduction

In spite of the unprecedented rise in milk production in the last two decades in India, the modern dairy

industry has not really taken-off the way it was thought it would. Despite successes like the

Operation Flood and the Cooperatives Movement and establishment of institutions like the National

Dairy Development Board (NDDB), much of the dairy sector still remains in the hands of small,

informal, unorganized players. This puts considerable constraints on promotion of high-value added

dairy products, technological innovation and upgradation, and most importantly quality management.

This paper is an attempt to take a look at some of the government policies over the last few decades,

and assess the impacts of such policies on the growth and development of the dairy sector in the

country. Starting from the Operation Flood in the 1970s, to the delicensing of the dairy sector in

1991, an effort has been made to map the major changes in the dairy sector to the policy changes that

either fuelled or hindered such a change.

It emerges from the study that the government had a bias in favour of small and cottage scale units in

dairy processing due to the presumed contributions of such units in providing livelihoods to small and

marginal farmers in the rural country-side.

However, what has been the experience in the West and other developed dairy nations of the world is

that scale is important in the development of the modern dairy industry. Only by operating at a large

scale can a firm generate surpluses to invest in building a sustainable procurement base for

procurement and processing of milk. In the absence of any concerted effort on part of the government

to promote the development of large-scale dairy plants in India, the Indian dairy industry became

cluttered with numerous sub-optimal plants, and a large informal sector.

Faced with competition from the low-cost (and mostly untaxed) unorganized sector, and the inability

to derive consumer premium in the price-sensitive consumer market, most organised dairy firms in

India struggled with low-margins. While some large cooperatives have been able to ensure significant

product diversification and market penetration, the overall scenario still remains considerably below

the potential and expected performance.



Milk Production

Over the last few years, India has emerged as one of the largest producer of milk in the world. The

other major milk producing countries are the United States, the European Union, Australia and New

Zealand.

The total milk production in the world was 593 million tonnes in the year 2002. As shown in figure 1,

India, United States and the European Union are the major players contributing to total global milk

production. The growth rate of milk production in these nations has been fluctuating widely in the last

few years. However, the global average growth rate for milk has hovered close to unity.

The rise in milk production in India comes coupled with two important facts. First, India has the

worlds largest concentration of bovine population in the world. It has more than 40% of worlds total

buffaloes, and more than one sixth of worlds total cows1. This implies that though our aggregate milk

production may be high, the productivity of milch cattle in the country remains abysmally low.

Second, despite being the largest producer of milk in the world, India is also the largest consumer of

milk. The per capita availability of milk in India, though increasing over the last 30 years, still falls

below the worlds average of 485 grams of milk per person per day. Figure 4 shows the trends of per

capita milk availability in India for the last two decades. Per capita milk availability for the year 2004-

05 was 232 grams of milk per person per day.

Policy Support for Development of Dairy Industry in India

Operation Flood and the National Dairy Development Board (NDDB), 1970 to 1996

Post independence, India was a milk-stressed country with domestic demand far outstripping the

domestic production of milk. Given the nutrition and hunger problems in the country, the government

took upon itself the task of development of the domestic dairy industry. The two-pronged objectives

for the government were first to augment the supply of milk for domestic consumption and second to

increase the returns to dairy farmers by providing the infrastructure for producing value-added dairy

products.

As one of the biggest programmes for development of dairy came the Operation Flood in the year

1970-71. This was a rural development programme, which received liberal grants from the

Government of India (NDDB), the World Bank and the European Economic Commission (EEC).

1 Source: National Dairy Development Board, India



Operation Flood worked to create an integrated national milk-market, and established institutions to

cost-effectively procure, process and market the milk and milk products. It worked through setting-up

of small milk producers cooperatives, which procured milk from farmers in the village, and provided

them with inputs and services. Thus, there was a forward movement of milk from the village

cooperative societies to the processing and pasteurizing plants (dairy unions), and a backward

movement of inputs, technology and modern dairying practices from the unions to the local village

cooperatives. The above has come to be recognized globally as the celebrated Anand pattern of dairy

development as depicted in figure 5. A National Milk Grid was established linking more than 700

towns and cities. This helped to connect the producers and consumers of milk, and created an

integrated milk market in the country.

Operation Flood was implemented in three phases. Phase One (1970-80) linked the four metropolitan

cities in India Delhi, Mumbai, Kolkata and Chennai with 18 major milk sheds in the country.

National Dairy Development Board negotiated the details of the programme, and financed the

operation through the sale of skimmed milk powder and butter oil gifted under the World Food

Programme by the European Economic Commission.

Phase Two (1981-85) expanded the outlets for sale of pasteurized milk in major cities of the

country. Capacity for production of milk powder increased from 22,000 tonnes to 140,000 tonnes.

Processing units were established for production of butter, ghee, whole milk powder, skimmed milk

powder and baby foods. By the end of 1985, 43000 village cooperatives were established having more

than 4.25 million dairy farmer members2.

Phase Three (1985-1996) consolidated the cooperative movement in the country. It emphasized use of

modern technology, better breed of cattle, hygienic and sanitary methods of production and HACCP

and other certifications. It also enabled the cooperatives to be market-driven having sophisticated

processing capacities for products like UHT milk, yogurt, processed cheese and ice creams. Phase

three emphasized research and development in animal health and nutrition.

Impacts of Operation Flood

Operation Flood has had far reaching impacts on the development of modern dairying facilities in the

country. It has not only impacted growth in production and distribution of milk and milk products, but

also dominated the rural development scenario by providing sustainable livelihood options to millions

of rural farmers. A World Bank audit showed that of the Rs. 200 crores invested in Operation Flood

(II), the net return into the rural economy has Rs. 24000 crores per year over a period of ten years, or a

2 Source: National Dairy Development Board Website: www.nddb.org



total of Rs. 240,000 crores in all. No other major development programme in the world has matched

this input-output ratio3.

The impact of Operation Flood on Indias modern dairy sector has been paramount. From an

insignificant 200,000 litres per day (lpd) of processed milk in 1950-51, the organised sector is

presently handling more than 25 million lpd in more than 400 modern dairy plants setup in different

milk sheds in the country. One of the largest liquid milk processing and pasteurizing plants has been

established in Delhi handling over 800,000 lpd (Mother Dairy). Indias first automated dairy plant

with handling capacity of 1,000,000 lpd has been established at Gandhinagar near Ahmedabad in

Western India. Several domestic cooperatives have mushroomed, and many of them are now

emerging as major players in the global market. The Gujarat Cooperative Milk Marketing Federation

Limited, with its popular brand Amul, has become the one of the largest food companies in Asia,

with annual turnover in excess of Rs. 30 billion.

Operation Flood offers some very crucial lessons for policy-makers. The first lesson is inclusive

growth. By establishing dairy cooperatives at the grassroots level, it brought the milk farmers into its

ambit, and placed control in their hands to decide what and how much to produce and sell. This

market-oriented, participatory approach to development led to many grassroot-level innovations in

designing of the supply chain in dairy.

Secondly, efficiency is the key to success in food processing industries such as dairy, and thus,

streamlining and strengthening of the supply chain holds paramount importance. With setting up of a

strong supply-chain network, leakage from the system to middlemen can be checked and more returns

can be realized for the milk producers (who are the ultimate stakeholders of the system).

Thirdly, for higher price realization, one needs to graduate from simple, low-value commodities to

high-value added processed products. Marketing holds the key to ensuring that products are available

at the right place, at the right time, at the right price. Brand building is an essential exercise for all

dairy companies to exploit the full potential of the dairy value-chain.

Finally, the most crucial lesson of Operation Flood to all policy makers is that growth and

development should be market-oriented and market-led. By developing the market forces, and

ensuring healthy competition among different players in the market, a robust and transparent system

can be developed, which benefits both the producers and consumers by ensuring quality products at

value-for-money prices.

There are, however, many pitfalls in the Operation Flood.

3 Source: The Indian Dairy Industry Website: www.indiadairy.com



Operation Flood Successful in Limited States Only: The success of dairy cooperatives has been

largely confined to a few states in India such as Gujarat, Punjab, Andhra Pradesh and Rajasthan,

where brands like Amul, Verka, Vijaya and Saras have become household names. However, a large

number of dairy cooperatives, unions and federations are defunct and are not able to create value for

their members. Cooperatives in Uttar Pradesh (Parag Dairy), Kerala (Milma), and Madhya Pradesh

(Uttam Dairy) are largely loss-making. A lot needs to be done to strengthen such non-performing

cooperatives.

Excessive Government Interference in Decision-Making: Excessive government interventions in the

cooperatives due to vested political interests have led to massive politicization of dairy cooperatives.

These cooperatives have a very large rural base, with millions of farmers as members, and they could

play a major role during political elections. With electoral forces, and not market forces guiding the

decision-making of the cooperatives, most cooperatives have become agencies for implementing the

populist policies of the government, and thus unprofitable and unviable business units.

Limited Sources of Finance: Limited sources of finance available to these cooperatives also hinder the

smooth functioning of many dairy cooperatives. The cooperatives cannot raise equity from the

market, and have to depend either on their own retained earnings or on equity from member farmers.

Both these sources are woefully inadequate for meeting the financial needs for technological

upgradation and innovation, and thus the cooperatives have to resort to government loans and grants.

This in turn makes them an easy prey for government interference in decision-making.

Politicization of Cooperatives: Politicization of cooperatives has caused a plethora of problems. Over-

staffing, low capacity utilization, weak market orientation and poor financial controls have become

the norm rather than exception in case if most Indian dairy cooperatives. Appointment of bureaucrats

as managers of the cooperatives has been the case in Madhya Pradesh, Orissa and Uttar Pradesh.

These bureaucrats do not have the professional skills required to manage such producer cooperatives.

Consequently, under such bureaucratic heads, the cooperatives fail to respond to neither the needs of

the producer farmers, nor the needs of the industry.

Government dictated input-output pricing: In case of most cooperatives the state government fixes the

minimum producer price. For instance in Maharashtra and Punjab, the State Government fixes the

selling price of milk to government dairies. The selling price is determined by the government

through on the spot interventions in case of Andhra Pradesh and Karnataka. This has caused

inevitable distortions in the pricing of processed dairy products, and has adversely affected the

financial health of the cooperatives.



Inability to Meet the Stringent Sanitary and Phyto-Sanitary Standards for Exports: Indian dairy

industry, on an average, falls short of meeting the Sanitary and Phyto-Sanitary (SPS) requirements of

the WTO Agreements, and thus is not able to compete in the global markets. As a direct consequence

of this, most of the Indian dairy exports are directed to the Middle East and the developing nations of

Asia and Africa where the SPS and other export regulations are not all that stringent. However, in

order to be able to compete in the more remunerative markets of the West such as Europe and the US,

there has to be a more concerted effort to make our dairy plants truly of global standards.

As shown in figure 6, Bangladesh and UAE account for around 45% of dairy exports from India.

Indian exports to remunerative markets of USA, EU, Canada and Australia have been quite low. One

reason for low exports of dairy products from India to these markets is that these developed nations

are also the major milk producing nations of the world. Thus there does not exist much scope of

meeting the unsatisfied demand in their economies. Also, these nations have very high and stringent

SPS and FDA norms, which most Indian dairy manufacturers find difficult to comply with.

The recent Clean Milk Production (CMP) campaign of the NDDB is a step in total quality

management in dairy products. In other words, total quality management at every step from the cow

to the consumer. This has been initiated keeping in mind the growing quality consciousness among

consumers in domestic as well as in international markets.

Steps to Revive Dairy Cooperatives

Assistance to Cooperatives: Under the scheme of revitalizing sick dairy cooperative unions and

federations, 12 milk unions in Madhya Pradesh, Uttar Pradesh, Karnataka, Kerala, Maharashtra and

West Bengal have been proposed for rehabilitation with an estimated outlay of Rs. 87 crores

approximately. The scheme is implemented on a 50:50 partnership between the state and the union

government.

Though such rehabilitation plans do provide these cooperatives with much-needed financial support in

the form of grants, they on the flip-side bring with them more government interference in the

management of these cooperatives. Thus, on the one hand such rehabilitation and revival packages for

the cooperatives do provide short-term solutions to make the cooperatives function; they on the other

hand do not address the long-term issues of bureaucratic interference in management of these

cooperatives.

What required are not more grants or loans from the government. Allowing the cooperatives to raise

funds from the markets and other financial institutions at competitive rates, and more professional

management of the cooperative are the structural solutions needed to make these cooperatives vibrant

business entities. The Producers Companies Act (2002) is a pioneering step in the direction of



making the cooperatives less dependent on government sources of funding, and enabling them to

restructure their debt-equity ratio on prudent financial lines.

Dairy Development in Non Operation Flood, Hilly and Backward Areas: In continuation of the

centrally sponsored scheme to promote dairy development, an outlay of Rs. 250 crores was made in

the 9th Plan. Under this scheme dairy cooperatives are to be promoted and strengthened in hilly and

backward districts of the country. The focus of the programme is two-pronged of not only giving a

thrust to dairy in these regions, but also sustainable livelihoods to the poor.

The Anand experience of dairy development has been of understanding the importance of value-

addition, marketing and branding for higher price realization. In the light of the above, the National

Dairy Development Board has launched a Mnemonic Campaign to develop a common, umbrella

brand, with standardization of logo, artwork and retail outlet design for faster brand recall for these

cooperatives.

The regional dairy cooperatives, upon paying a consideration to Mother Dairy, can use the Mother

Dairy brand for selling their milk; however Mother Dairy shall ensure quality control and inspection

of these regional cooperatives. This has been allowed to reap the mileage of the Mother Dairy brand

by smaller, upcoming cooperatives which did not have the wherewithal to establish their own brands.

De-licensing (1991) and Milk and Milk Products Order (MMPO), 1992

Post 1991, milk processing in large-scale plants was de-licensed and opened for domestic and private

players to participate. The Indian Dairy sector, at the time of liberalisation, was replete with many

inefficient, obsolete and sub-scale units, which faced direct threat from domestic and foreign

competition. Keeping in mind the employment and livelihoods contribution of these small and cottage

dairy processing units, the Government of India announced the Milk and Milk Products Order

(MMPO) in 1992, under the provisions of the Essential Commodities Act, 1955.

The operation of MMPO was largely limited to registration of dairy firms in the organised sector,

though as a policy, it had three major objectives:

Augment the supply of milk in milk deficient regions of the country, and ensure a certain

minimum quality standard.

Inspection and certification of dairy units for quality control, health and hygiene.

Maintain a database on the status of the organised dairy sector in the country.



MMPO required that the large-scale processing units having capacity of more than 10,000 lpd or 500

tonnes milk solids a year could operate only after a license from the government. It is ironical that the

government which liberalized the economy did not allow the dairy companies to operate without

government licenses and permits!

Licenses for milk processing capacities above 75000 lpd were only granted by the Central

Government, while permission for capacities below 75000 lpd but more than 10000 lpd was granted

by the state governments. For capacities below 10000 lpd no license was needed.

The granting of government licenses was a political exercise, not in sync with the market demands but

directed by the vested interests of the political power-groups and farmer unions. Government granted

licenses based on its calculations of the difference between the marketable surpluses in different areas,

while keeping in mind the processing capacity already installed. This did not permit healthy

competition to develop the dairy sector, and many small, sub-optimal, sub-standard and inefficient

dairy plants got indirect protection and respite from the growing competition. Rampant corruption

also made the license system difficult to deal with for new start-up enterprises.

Clearly, the MMPO was a disincentive to larger capacities, which could show greater economies of

scale. Large-scale plants necessarily require backward integration and substantial extension work for

ensuring stable procurement base of milk. As a result these large-scale units are most likely to help

increase milk yields and, in turn the output of processed dairy products. MMPO encouraged

companies to by-pass regulation, resort to sub-optimal units and poaching of milk from the

cooperatives.

However, keeping in mind the growing pressure of competition from global players in the dairy

sector, the tightening of the WTO Agreements, and the anomalies in the license structure, the

government made an amendment in the MMPO (1992). The amendment allowed the dairy players to

setup dairy processing units wherever and whenever they felt like. In other words, licenses need not

be taken now for setting up dairy units. However, these dairy plants have to still seek government

registration for purposes of ensuring sanitary and hygienic conditions and quality of products. In order

to check red-tapism and bureaucratic delays, the registration procedure has to be completed within 45

days by statute.

In a nutshell, the salient amendments in the MMPO in 1999 are as follows:

The provision of assigning milk sheds has been done away with, giving full flexibility and

freedom of choice to private enterprises and dairy cooperatives to procure and market milk in

any region of the country.



The registration under MMPO-92 will now not be for capacity installation, but only for

sanitary and hygiene conditions, quality and food safety.

The provision of inspection of dairy plants has been made more flexible.

The provision to grant registration in 90 days has now been reduced to 45 days.

Abolition of Quantitative Restrictions (QR) in Dairy Imports, 2001

Dairy imports became liberal after the Quantitative Restrictions on such imports were done away with

in 2001. The Government of India, in an agreement with the Government of United States, removed

QR from a plethora of dairy products. Table 5 highlights the trend in milk and milk products imports

over the last few years, and a percentage of dairy imports in the total agriculture imports in the

country.

The dairy imports were particularly high in the year 2003-04. This was on account of dip in domestic

milk production, and a subsequent dip in the production of milk powder. Milk powder production

declined by 10.9% on a year-to-year basis in 2003-04.4 Total milk powder production during April to

September 2003 dropped by 12.7%.

The below-normal rainfall over the past three years had resulted in insufficient calving. Given this

crisis, many cooperatives for instance, in Maharashtra sought help from the NDDB seeking around

1400 MT of skimmed milk powder. It was also reported that in Gujarat, procurement from 12 milk

sheds declined by 9.6% to 4505.3 thousand kgs per day as against 4986 thousand kgs per day in the

same period in the previous year5.

In wake of the above crisis of fall in milk production and procurement from major milk sheds in the

country, the Union Government allowed the NDDB to import 6000 tonnes of milk powder to ease the

supply shortage. Many states had openly objected to this decision of the Central Government. For

instance, Punjab one of the largest milk producing states had raised objections citing that such

imports would reduce milk prices, adversely affect farmers interests and result in large-scale killing

of unproductive animals! However, states like Maharashtra cleared a proposal by the State Cabinet to

increase the procurement price of milk from dairy cooperatives by Re. 1 per litre in order to increase

procurement from the village cooperatives. What comes as a surprise is that the cooperatives had to

wait for a government clearance to increase procurement prices! Rather than politics, it should have

been the market that should have decided when and by how much to increase the procurement price.

4 Source: Centre for Monitoring Indian Economy (CMIE), Monthly Review (December 2003) 5 Source: Centre for Monitoring Indian Economy (CMIE), Monthly Review (December 2003)



Industry Structure Liquid Milk and Milk Products

A total of 45.7 million tonnes of milk was processed into milk products in the year 2000-01, out of

which the share of the organised sector (including all cooperatives) was an abysmal 10%. On the other

hand, 38.9 million tonnes of liquid milk was produced in India in 2000-01, out of which only 15.4%

was processed, and the rest was sold unprocessed6.

In both the above categories we clearly see that the industry is dominated by small, informal and

unorganized dairy units. In the absence of adequate integration and economies of scale, most of the

milk and milk products are either sold unprocessed, or processed locally into low value-added

products. Such products in absence of hygiene, quality and safety are unable to command premium

prices from the consumers.

Few reasons why the informal sector is able to survive and compete in the market with organised

dairy players are as follows.

First, the informal milk vendors (colloquially referred to as dudhias) are able to work with very low

levels of investments. Thus despite low volumes, they are able to compete with the organised players.

They procure milk daily from the farmers, and supply within hours to the nearby consumption centres

(urban areas), and thus do not have to invest heavily in chilling and pasteurizing units, unlike the case

with organised players.

Second, most of the small, informal milk vendors have very small operating cycles, and are able to

turn their stocks daily and recover their money from the business. In such a scenario, they are in a

position to pay higher prices to farmers than most cooperatives and are able to procure milk from the

members of the cooperatives without making any significant investments in developing a procurement

base.

Third, the concept of pasteurized milk has not yet taken off well with most middle-class Indian

households, which still feel that fresh milk from the local milk vendors (dudhias) is the best and the

most nutritious. The misconception that pasteurization kills not only the germs, but also the nutritive

value of milk has made the acceptance of pasteurized milk rather difficult in many small towns in the

country. It is in these small towns that most informal milk vendors have a flourishing business as they

are able to encash on the misconceptions of the consumers.

Finally, in products like paneer (cottage cheese), the entire market is almost dominated by informal

players as they are able to service the market far better than any organised player. Cost effectiveness

and freshness are the two most important drivers in sale of cottage cheese. The informal milk vendors

6 Source: CII-McKinsey FAIDA Report Realising the Potential 2001.



with their small markets and fast operating cycles are clearly able to outsmart the organised players in

the industry. The branded frozen cottage cheese hygienically tinned and canned is still not very

popular primarily due to the notion of freshness that dawns heavy on the psyche of the buyers. It is

only in product categories like table butter, milk powder and ghee that the organised players are able

to gain a substantial market share because such products do not fall under the fresh food category.

Dairy Industry in New Zealand: A Snapshot

New Zealand has a vibrant dairy industry, and accounts for approximately 35% of the worlds trade in

dairy products, despite just 2% of the worlds dairy production. The success of dairy in New Zealand

has been attributed to efficient vertical integration by large-scale cooperatives upto the grassroot level

dairy farmers; economies of scale in processing; research and development; quality control and

aggressive yet creative marketing.

Value addition has been at the very core of dairy industry in New Zealand. Most dairy cooperatives in

New Zealand have invested heavily in expanding their product lines to launch newer and more

innovative dairy products. There has been a growing trend among dairy firms in New Zealand

towards production of high-value added functional foods like low fat, high calcium and protein milk,

and biomedical foods like colostrums-based health supplements and products made from organic

milk.

The market in dairy in New Zealand is very well organised, as compared to the unorganized, informal

dairy markets in India. About 96% of the milk production in New Zealand is handled by the

cooperatives and the rest 4% by small private entrepreneurs that look at production of very specific

niche varieties of dairy products especially cheese and yogurt.

Mergers and acquisitions have been common in dairy industry in New Zealand, primarily to obtain

economies of scale. In the past 20 years, there has been a large reduction in the number of

independent dairy cooperatives from 36 in 1983 to only 3 large cooperatives in 2001. The largest

dairy cooperative Fonterra was formed in 2001 following industry reform and legislative change to

unite the once-fragmented dairy industry in New Zealand. This was done to provide the critical mass

and efficiencies needed for competing in the global economy. The entire population of dairy farmers

in New Zealand (around 14000) is vertically integrated with either the cooperative or the private dairy

firms.

The picture in India is much different than what exists in New Zealand.

Given the sheer number of dairy farmers in India, it is not possible for any dairy cooperative or

private firm to vertically integrate with all of them. Also, the in absence of the necessary financial



wherewithal and other support services, most dairy firms in India have struggled to attain large

volumes and scale economies. The Indian dairy market as a result has remained cluttered with large

number of unorganized players with sub-optimal capacities, thereby putting considerable constraint

on value addition.

The MMPO (1992) had also put barriers to installing capacity or mergers and acquisitions in dairy

industry, thus affecting the scale-economies of dairy units in the country. However, with the

amendment in the MMPO in 1999, such restrictions on capacity or mergers and acquisitions have

been removed, which is a positive step in the consolidation of dairy units in the country.

New Zealand exports over $NZ5.7 billion worth of dairy products each year. Fonterra, the largest

dairy company in New Zealand, represents more than 20% of total New Zealands exports and 7% of

the country's GDP7.

The major export markets for New Zealand are USA, UK, Japan, Singapore, Taiwan, Hong Kong and

Belgium. It is important to note that not only New Zealand exports value-added dairy products, but

also to nations which have high quality and SPS standards. Around 36% of New Zealands dairy

exports are high value added, and there is an increasing trend on the same.

India, on the other hand, finds it difficult to export its dairy products to the affluent nations of the

West primarily on account of lack of adequate exportable surplus, and also its inability to meet the

stringent quality norms of the importing nations. Thus, much of Indian dairy exports are confined to

the Gulf and the SAARC nations, where quality norms are not very stringent.

Cluster development has been the approach for dairy development in New Zealand. North Island

accounts for 85% of dairy production in New Zealand. Within North Island, clusters for dairy have

been developed in South Auckland region. Clusters have also been developed in Otago and Southland

focusing on specialized areas like producing sheep milk for cheese plants, milk products for biotech

applications and a dairy education and innovation centre at Manawatu.

Invention and innovation are the major drivers of growth in New Zealands dairy industry, both in

domestic and export markets. For instance, a break-through project by Fonterra with researchers at

Massey Universitys Riddet Centre aims to pioneer a novel food delivery system called POSIFoods or

point-of-sale individualized foods. Such fast, nutritious snacks, tailored to individuals dietary needs

and taste preferences, all at the touch of a button, are going to be the convenience foods of the future.

The only way in which any dairy unit could hope to compete is to invest in R&D and innovation, and

come out with more customer-centric offerings.

7 Source: www.marketnewzealand.com. This is New Zealands official online trade development system.



Despite there being a world of difference between the nature of dairy industry in India and New

Zealand, there are a few lessons that Indian dairy firms, as well as the government, can learn from

their counterparts in New Zealand.

First of all, vertical integration is important for maintaining efficiency in the procurement supply

chain, and this is best demonstrated by the cooperatives. Vertical integration also helps in reducing

wastage, ensuring quality standards and attaining scale economies in dairy processing. Development

of cooperatives has to be promoted, and reckless government intervention in management of

cooperatives should be checked.

Secondly, consolidation of dairy units is important to help these dairy plants attain economies of scale,

reduce costs and become competitive. In this respect, cluster development can be looked at as an

alternative for development of dairy processing in India. By cluster development, all dairy units shall

be able to consolidate their procurement base and production structure, share the infrastructure costs

among themselves (for instance power, cold storage, refrigerated rail transport etc.), and add value to

the produce at lower costs. This shall put them in a position to compete with the informal players in

the price sensitive market by offering higher quality at affordable prices.

Thirdly, innovation and invention is the crux for surviving and competing in the market place. A tie-

up of dairy units with research institutions can give a fillip to market-oriented R&D, which is essential

in todays competitive marketplace.

Concluding Analysis

To conclude the study on the impact of policies on the growth trajectory of dairy processing in India,

a regression analysis was performed on the effect of the major policies in dairy on the growth of milk

and milk products. The three major policies that had a land-mark effect on dairy, and have been

included in this analysis are:

Operation Flood (and establishment of dairy cooperatives) in 1970

Delicensing of dairy sector in 1991

MMPO (1992) and its Amendment (1999).

In addition to the above three major policies, a fourth variable, namely the effect of milk production in

(t-1) year on the growth of milk production in t-year has also been used in the analysis. The

underlying reason being that milk production has a slight element of cyclical production, and this

variable helps to capture the variance in growth rates due to such cyclicality of milk production. In

absence of adequate data for all dairy products in all the years from 1952 to 2004, milk production

data has been used, and the assumption made that more milk production leads to more milk

processing.



From the analysis shown in figure 9, we find that variables Flood (Operation Flood), DELIC (de-

licensing), AR (1) (Previous years growth rate of milk production) and the constant C are significant

i.e. explain the maximum variance in growth of milk production over the years. Clearly, the Operation

Flood and Delicensing have been the two most important policies in favour of dairy development in

the country. Operation Flood, through setting-up of village dairy cooperative societies and

development of milk sheds, and delicensing through encouraging large players to enter the dairy

sector and operate at optimal scales, have contributed positively to the growth of dairy processing in

this country. MMPO, to the contrary, had been a bottleneck, but given the short duration for which it

was implemented (and later amended) it did not significantly impact (hinder) dairy development on

the whole.

SWOT Analysis

STRENGTHS

Large production base Large procurement base due to

establishment of numerous village dairy cooperative societies (Operation Flood)

Large domestic demand Large stock of milch cattle Cheap supply of labour Easy availability of fodder, and animal

feed at affordable rates

WEAKNESSES

Lowest productivity of milch animals in the world

Dairy sector dominated largely by informal, unorganized players

Vertical integration (coordination) still not very robust in case of many dairy firms/cooperatives

Most dairy brands are nascent and not very popular among consumers weak marketing for processed dairy products

Risk management and insurance facilities are still not easily available

OPPORTUNITIES

Liberalisation of the economy dairy

sector open for investment by private and foreign players.

Abolition of the Quantitative Restrictions on import of dairy products.

Per capita consumption of milk products below international average scope of increasing consumption

Amendment of the Milk and Milk Products Order (MMPO) no restrictions on capacity installation and expansion.

Amendment in Cold Storage Act (No licenses needed for establishing refrigerated and cold chain units for dairy products)



Figure 1: Milk Production in Million Tonnes

Milk Production in Million Tonnes

0102030405060708090

India

United States

Russia

Pakistan

Brazil

New Zealand

Ukraine

Poland

Australia

Argentina

Countries

Milk Production

-15-10-505101520

Growth Rate

1999 2000 2001 2002

CAGR '00 CAGR '01 CAGR '02

Source: Food and Agriculture Organization (FAO), Analysis: IDF

Table 1, Figure 2: No. of Cows (2002)

Source: Food and Agriculture Organisation (FAO)

Country No. of Cows

India 35000

Brazil 15000

Russia 12000

United States

11000

Mexico 9000

Ukraine 7000

Germany 6000

France 5000

New Zealand

3000

Poland 3000

Argentina 2500

United Kingdom

2000

China 1500

0

5000

10000

15000

20000

25000

30000

35000

No.of Cows (in

'000)

India United

States

Germany Poland China

Countries

Total No. of Cows



Table 2, Figure 3: Milk Production per Cattle Head (2002)

0

2

4

6

8

10

M ilk Per Cat t le

(M T )

Canada Australia New

Zealand

World

Average

Mexico

Count ry

Productivity of Milch Cattle (2002)

Source: Food and Agriculture Organisation (FAO), 2002

Figure 4: Per Capita Milk Availability in India

Per Capita Milk Availability

0

50

100

150

200

250

1955-56

1968-69

1979-80

1981-82

1983-84

1985-86

1987-88

1989-90

1991-92

1993-94

1995-96

1997-98

1999-00

2001-02

Years

Milk Availability Per Capita

(in grams)

Source: National Dairy Development Board (NDDB)

Country Productivity

United States 8.4

Canada 7.5

European Union

5.7

Australia 4.8

Poland 3.9

New Zealand 3.7

Argentina 3.6

World

Average

3.1

Russia 2.7

Mexico 1.4

India 1.0



Figure 5: Anand Pattern of Dairy Development: Three-tier Structure

Analysis: IDF

Table 3, Figure 6: Dairy Export Destinations from India (2002)

Source: www.apeda.com

Table 4: Progress on Dairy Cooperatives

Particulars 1998-1999 1999-2000

2000-2001 2001- 2002 @

Societies Organized (000) (Anand Pattern) *

81.0 83.7 98.0 99.2

Farmer members (lakh) * 101.4 105.2 108.3 108.9

Average rural milk procurement (lakh kg/day)

135.8 157.4 165.5 163.56

Liquid milk marketing (lakh litres/day)

121.3 129.0 134.0 135.82

* Cumulative @ till November, 2001 (provisional) Source: Department of Animal Husbandry, Ministry of Rural Development, 2001

Country % Exports

Bangladesh 23

UAE 22

Germany 6

Oman 5

Egypt 4

Saudi Arabia

4

Madagascar 3

USA 3

South Korea

3

Yemen 3

Netherlands 2

Others 22

Village Level Dairy

Cooperative Society State Level Milk

Marketing Federation

Procure Milk, Provide Inputs, Payments for

milk

Chilling and Processing Facilities for milk and milk

products

Marketing facilities for dairy unions, quality

control, R&D

% Exports

Bangladesh UAE Germany Oman

Egypt Saudi Arabia Madagascar USA

South Korea Yemen Netherlands Others



Table 5: Dairy Imports as a % of Total Agri-Imports

2002-03 2003-04 2003-04 (Apr. to Sep)

2004-05 (Apr. to Sep)

Product $ Mn

% agri imports

$ Mn % agri imports

$ Mn % agri imports

$ Mn % agri imports

Milk Products 2 0.1 19.5 0.5 1.36 0.1 1.48 0.1

Source: Economic Survey, www.indiabudget.nic.in

Figure 7: Share of Organised Sector in Milk and Milk Products (2001)

Source: CII-McKinsey FAIDA Report Realizing the Potential

Figure 8: Share of Organised Sector in Milk and Milk Products (2001)

Milk Products

63.70%

26.30%

10.10%

Self-Consumption (home made)

Unorgansied Trade (locally processed)

Organised (Processed)

Source: CII-McKinsey FAIDA Report Realizing the Potential

Milk Processing

25.40%

59.10%

15.40%

Self-Consumption (not processed) Unorgansied Trade (not processed)

Organised (Processed)



Table 6, Figure 9: Regression Curve for Policies on Growth of Milk Production

1. Dependent Variable: DIFPROD

2. Method: ML ARCH

3. Sample(adjusted): 1952 2004

4. Included observations: 53 after adjusting endpoints

5. Convergence achieved after 37 iterations

6. Bollerslev-Wooldrige robust standard errors & covariance

Coefficient Std. Error z-Statistic Prob.

C 1.148197 0.197210 5.822209 0.0000

MMPO 0.614523 1.140534 0.538802 0.5900

FLOOD 2.887937 0.580598 4.974072 0.0000

DELIC 1.317485 0.602216 2.187728 0.0287

AR(1) 0.405977 0.146401 2.773048 0.0056

-6

-4

-2

0

2

4

6

-5

0

5

10

55 60 65 70 75 80 85 90 95 00

Residual Actual Fitted

Analysis: IDF.



POLICY ENVIRONMENT FOR DEVELOPMENT OF HORTICULTURE IN INDIA

Harsh Vivek

Introduction

India is one of the largest producers of fruits and vegetables in the world. Out of the 370 metric tonnes

of fruits produced in the world in 2001, India accounted for around 8% of the total production. In

vegetables, India produced 71 million metric tonnes in 20018 and accounted for around 15% of the

worlds total vegetable production.

However, though it is an honour to be world leaders in production of fruits and vegetables, it is not

much of a reason to rejoice in case of India. The volumes in India come due to the sheer size of the

country and the amount of arable land put under fruits and vegetables cultivation. Despite large

aggregate production of fruits and vegetables, the productivity per hectare of land remains quite low

in India.

The diverse agro-climatic zones available in India make it possible to grow a vast variety of fruits and

vegetables. However, the competitiveness of horticulture sector in the global market shall largely

depend on the productivity of the crop. Table 1 shows that though productivity in India for production

of grapes, oranges and bananas is far greater than the world average, in most other fruits, India still

lags behind other nations. Smaller nations like Cape Verde, Bahamas and Benin record higher per

hectare productivity in mango, lemons and pineapples respectively than India.

Table 2 shows productivity in India in vegetables in comparison to the world average. Here again, we

find that Indias average falls short of the worlds average in most vegetables. To the contrary, many

small nations have productivity several times higher than that of India such as Netherlands in brinjals

and tomatoes; New Zealand in potatoes; and Kuwait in green beans.

The per capita availability of fruits and vegetables in India is as low as 100 grams per day and 200

grams per day respectively. If we take into account the fact that around 20% of the produce is wasted

due to handling and storage losses, the per capita availability of fruit further reduces to just 80 grams

per person per day. Per capita availability for vegetables, after taking into account all the wastage and

handling losses, comes to a mere 160 grams per day. This is well below the recommended minimum

dietary requirements of 140 grams of fruits per day and 270 grams of vegetables per day9.

However, despite the low per capita availability of fruits and vegetables in the country, rising per

capita income shall ensure that the fruit-and-vegetable consumption shall grow over the next few

8 Source: Task Force on Agro-Food Processing (2001), Government of India. 9 Source: Food and Agriculture Organisation (FAO)



years. While the fruit-and-vegetable sector may remain dominated by the fresh market in the years

to come, there may still be opportunities for development of successful processing and retailing

businesses. This would require prudent vertical coordination among the different players in the value

chain; reduction in wastage and improvements in quality of processed fruits and vegetables.

Major Fruits and Vegetables in India: Production and Trade10

a) Mango

Total area under mango cultivation in India is around 1.5 million hectares, with the annual production

of 10.99 million tonnes.

India accounts for more than 50% of the worlds production. The other major mango growing nations

are Mexico, Pakistan, Brazil and Thailand. Despite large domestic production of mangoes, Indias

share in the global trade in mangoes is not very significant. Out of the 0.65 million tonnes of mangoes

traded internationally every year, valued at US $384 million, Indias share in this trade is only around

3800 tonnes, valued at US $18 million.

It must be noted that Indias major mango exports are in the fresh form; however, less than 1% of

worlds trade in mangoes is in fresh form. Bulk of the international trade is in the form of processed

mangoes, especially mango pulp. The major importers of mango and mango pulp are North America,

Middle East and Europe. The major destinations for Indian mango exports are Middle East and

Europe. Our exports to the biggest importer of mangoes, i.e. North America, are almost negligible.

Mango market in North America is heavily dominated by exports from Mexico and Brazil.

The ratio of cost of production to farm-gate prices in mangoes is quite unfavourable for mango

growers in India. This has adversely affected the price competitiveness of Indian mangoes in the

global market. Subsidy, either domestic or export, is not a major factor in deciding mango trade in the

world as none of the major producers and exporters of mangoes subsidize mango production on any

significant scale.

Two pronged strategy is needed to increase Indias share in worlds mango trade. Firstly, while

strengthening our stronghold in the trade of fresh mangoes, impetus should be given to trade of

processed mangoes as well. Secondly, mango growers, processors and exporters should be made

aware of the SPS norms under the WTO and Codex, which are mandatory and stringent for exports.

b) Grapes

10 Source: National Workshop on Enhancing Competitiveness of Indian Agriculture organised jointly by Confederation of Indian Industry (CII), Ministry of Agriculture (Government of India) and National Institute of Agricultural Marketing (NIAM) on April 7, 2005 at Scope Complex, Lodhi Estate, New Delhi.



With around 40,000 hectares of land under grapes cultivation, India produces about 1.2 million tonnes

of grapes per year. Grapes are the second most important fruit exported from India, after mangoes.

Maharashtra, Gujarat and Karnataka are the major grape producing states in India. Plans are underway

for starting grapes cultivation for producing wines in Uttaranchal and Pondicherry.

The global trade in grapes is 2.7 million tonnes, valued at US$ 2.6 billion. The major producers of

grapes are Italy, France, Spain, USA, Argentina and Chile. The North American and European nations

are major importers of grapes, while Latin American nations are major exporters of grapes.

Indias grape exports are small compared to the worlds trade. However, Indian export

competitiveness in grapes continues to be high based on relatively lower prices of grapes cultivation

in India compared to our Western counterparts. The issues of concern in grape exports are mainly

conforming to SPS measures and the establishment of export-oriented infrastructure facilities.

There are a few success stories in grapes in India. One such success story is MahaGrapes in

Maharashtra which represent vertically coordinated grape production and marketing system.

MahaGrapes has a sizeable share in grape exports from India.

MahaGrapes has been briefly discussed later in the paper as a case let.

c) Banana

India is one of the largest banana producers in the world having approximately 0.45 million hectares

of land under banana cultivation. The total banana cultivation in India is close to 16 million tonnes.

Uttar Pradesh, Bihar, Maharashtra and West Bengal are few of the major banana producing states in

India.

The availability of banana all year round makes it one of the most widely consumed fruits in the

country. Also, there is a preference among Indian consumers for fresh banana, and in presence of

all-year round availability, processed banana finds difficulty in getting acceptance from the Indian

consumers.

Banana is among the worlds most widely traded fresh fruits, with annual world trade amounting to

14.58 million tonnes, valued at US$ 4.3 billion. The international trade in banana is distorted on

account of the quotas and preferences used by the importing nations in favour of certain exporting

nations. In Europe, the in-quota tariff on import of bananas from Caribbean countries is 0% and the

in-quota tariff for certain Latin American nations is 75 euro per tonne. Further still, Out-of quota Most

Favoured Nation (MFN) tariff is 750 euro per tonne.



In 2003, the average price of banana in Europe was US $810 per tonne, and US $385 per tonne in the

US. At these production prices, India is one of the most efficient and competitive banana growers in

the world. However, Indian firms are not able to compete in the global market place due to the

distorted tariff regimes of the major banana importing nations of the world.

d) Apple

India is not a major player in apple production and trade in the world. The total production of apple in

the country is approximately 1.2 million tonnes and the area under cultivation is about 0.24 million

hectares. Major apple producers in the world are USA, China, France, Germany and Italy and they

contribute a lions share to the worlds annual total apple production of 45 million tonnes.

India is a net importer of apples. In 2002-03, India exported around 15000 tonnes of apples, while it

imported around 18000 tonnes. Indias share in the global apple trade is also miniscule. France, Italy,

USA and China are the major exporters of apples. The volume of global trade in apples is around 5.6

million tonnes, valued at US$ 2.8 billion.

The cost of production of apple in India is relatively higher than in other major producing nations.

This is on account of apples being grown in hilly regions in India where accessibility is poor and

infrastructure support is weak.

The main handicap in apple exports is that of stagnation in upgradation of varieties of apples grown in

India for last four decades. The tastes in the world have shifted away from traditional varieties to

exotic varieties of apples. Also most Indian apple varieties are not very amenable to processing.

e) Potato

Potato is one of the major vegetables grown in India. The per hectare productivity of potatoes in India

is higher than the international average. The total potato production in the country is approximately 24

million tonnes, and the area under cultivation is 1.2 million hectares. Indias share in the world potato

production is around 6 to 7%.

The total trade in potato amounts to 7.9 million tonnes, valued at US$ 1.6 billion. Indias share in

potato exports is around 2.5%, with exports amounting to about 2 lac tonnes in 2002-03.

Russia, Poland, China, USA and Germany are the major producers of potato in the world. The

importers of potato are Russia, Netherlands, Belgium, France and Saudi Arabia. The export

destinations of Indian potatoes are Sri Lanka, Nepal, UAE, Mauritius and Qatar. Once again, Indian

exports are mostly to the Saarc and the Gulf nations primarily on account of Indian potatoes not being

able to meet the stringent quality standards of the lucrative markets of the west.



The international potato trade has some important insights to offer. We find that major European

nations are both the major exporters and importers of potatoes. This is essentially on account of the

seasonality of production of potatoes. Most European nations are net importers of potatoes in winters

and net exporters of potatoes in summers. It is here where a good opportunity lies for Indian potato

growers. The bulk of Indian potato production happens during the winter months, when Europe is a

net potato importer. Thus, there are good opportunities for India for exports to Europe. What is

unfortunate is that despite this opportunity, India is not a player in the European potato trade. A

concerted, coordinated effort on improving the quality of Indian potatoes; making them compliant to

the SPS standards of the European nations; and development of export-oriented infrastructure can

help India play a more dominant role in the worlds potato trade.

f) Onions

Onion production presents a very interesting picture. While on the one hand, onion is regarded as a

thrust vegetable (after the onion crisis in the 90s); on the other hand, per hectare productivity of

onion is still far below the average per hectare productivity in most developing countries. Also,

despite seasonality and cyclicality of production of onions and a growing domestic demand, the

exports of onions from India are increasing at a fast pace and are expected to reach one million tonnes

in 2005.

The total production of onions in the country is approx. 5.7 million tonnes and the area under

cultivation is 0.45 million hectares. India is the second largest producer of onions, second only to

China. The other major onion producers are USA, Russia, Turkey, Japan, Nigeria and Spain. The

global trade in onions in 2002 was 3.9 million tonnes, valued at US$ 1.06 billion. The share of Indian

exports in world trade in onions has increased from around 9% in 1990 to 14% in 2002.

However, despite the increase in Indias share in the export market, India has been unable to enter the

European markets. This is because the red flesh onions grown in India are more pungent and

unsuitable for the European palate. Government in collaboration with agriculture research institutions

should develop other varieties of onions which are not only amenable to processing, but also have an

export market.

The major importers of onions are Germany, UK, USA, UAE, France and Malaysia. The major

exporters are Netherlands, India, Spain, Poland and Mexico. However, the major export destinations

for Indian exports are Malaysia, Sri Lanka, UAE, Bangladesh and Bahrain, where the red flesh onions

find easy acceptance in local cuisines and dietary habits.



Production and Productivity Statistics: Fruits and Vegetables

From figure 1 and 2 we see that there has been a steady increase in the area under fruits production,

from around 3 million hectares to over 4 million hectares in the last decade. Also despite minor

fluctuations, the overall fruits production has increased from less than 30 million tonnes to well over

40 million tonnes in the last decade.

Figure 3 shows that per hectare productivity in fruits was around 10 metric tonnes per hectare in

1991-92, and it remained more or less close to the same level even in 2001-02. Thus, there has been

an overall stagnation in fruit productivity in the last decade. Clearly, the increase in fruits production

in India has been an outcome of increase in area and not increase in productivity.

In figures 4 and 5, we see that the area under vegetable cultivation has remained more or less static at

close to 6 million hectares in the last decade. However, the production of vegetables, on the whole,

has shown a substantial increase. Notwithstanding the year-wise fluctuations in production growth

rates, vegetables production has shown a secular growth from around 60 million tonnes in 1991-92 to

more than 80 million tonnes in 2001-02.

There has been a sizeable increase in vegetable production in the year 1998-99 due to reasons like

favourable monsoons; good market conditions in terms of farm-gate prices and consumer prices; and

positive conditions in the exports market. It is important to note is that the agriculture sector in India

has been able to not only sustain the increase in vegetable production that happened in 1998-99 and

but also maintain production (and consumption) at higher levels even in the subsequent years.

The productivity in vegetable production on the whole has increased in the last decade as shown in

figure 6. From close to 10 metric tonnes of vegetables per hectare in 1991-92, the productivity has

almost doubled in 2001-02 to around 20 metric tonnes per hectare. Thus, despite stagnation in

increase in area under vegetable production, the increase in vegetable production happened due to

increase in productivity.

Fruit and Vegetable Processing: Present Status

Fruit-and-vegetable processing, in its simplest forms like making pickles, chutneys, sun-drying of

fruits and so on, has traditionally been practiced in India. However, in the present-day scenario,

despite huge volumes of production of fruits and vegetables, the processed fruit-and-vegetable sector

accounts for only 2% of the total produce. Compared to Indias 2%, the other major nations have a



much higher percentage of fruits and vegetables getting processed such as Brazil 70%, USA 65%,

Malaysia 83% and Israel 50%11.

There have recently been some questions raised on the validity of the figure of 2%. As claimed by the

government, this figure comes from the organised fruit-and-vegetable processing units in the country.

But, then there is a large informal sector in the economy which is ignored while estimating the

amount of fruits and vegetables processed in the country. There have been claims that should the

informal processing units be taken into consideration the percentage of fruits and vegetables

processed would go up. However, this is a contentious issue and a more in-depth, detailed assessment

is required to establish the veracity of this argument.

Another argument presented in most policy circles is that due to the presence of diverse agro-climatic

conditions and long growing seasons, there is year round availability of fresh fruits and vegetables.

Thus, processed fruits and vegetables are not preferred much by the average Indian consumer. The

cost of processing, packaging and marketing further pushes up the cost of processed fruits and

vegetables, and thus makes them out of the reach of the common man.

While it is true that in the presence of affordable fresh varieties, the domestic fruit-and-vegetable

sector would be dominated by fresh trade, the growing urbanization; rising disposable incomes and

increasing demand for convenience foods should also provide enough scope for fruit-and-vegetable

processors to do successful business.12

As per the Ministry of Food Processing Industry, at present there are a little over 5198 food

processing units registered under the Food Products Order (1955). These units cover a whole

spectrum of food processing activities like wheat and rice milling, dairying, poultry and marine foods.

A recent survey by the Ministry showed that there are around 4000 registered units involved only in

the processing of fruits and vegetables.13 Most of these units are in the small and cottage sector. The

total installed capacity for fruit-and-vegetable processing was 11.08 lac tonnes in 1993, which

increased to around 21 lac tonnes in 1999.14 A few modern units have established processing plants,

and a few more are in the pipeline.

11 Source: National Workshop on Enhancing Competitiveness of Indian Agriculture organised jointly by Confederation of Indian Industry (CII), Ministry of Agriculture (Government of India) and National Institute of Agricultural Marketing (NIAM) on April 7, 2005 at Scope Complex, Lodhi Estate, New Delhi. 12 Source: Food and Agriculture Integrated Development Action (FAIDA) Report, Confederation of Indian Industries (CII) and McKinsey and Company. 13 Source: Ministry of Food Processing Industries, Government of India, www.mofpi.nic.in 14 Source: Ministry of Food Processing Industries, Government of India, www.mofpi.nic.in



In the year 1997-98 the exports of processed fruits and vegetables were in the order of 299 thousand

tonnes, valued at Rs.761 crores or US$ 200 million. To further give a boost to exports of processed

fruits and vegetables from India, the Government of India has approved 1120 proposals of 100%

export oriented units in 1999-2000 in different Agri-Export Zones (AEZ) of the country.

The important countries with which Joint Ventures have been signed are U.S.A., U.K., Netherlands,

Switzerland, and Germany. The proposals include the fields like technology transfer, financial

assistance and marketing tie-ups. These tie-ups include production of items like canned mushrooms;

banana and mango puree; fruit concentrates; and dehydration of vegetables particularly onion.

The past track record of projects planned in food processing (including fruits and vegetables) and their

implementation has been presented in figures 8 and 9. If the statistics presented in those figures are

anything to go by, the rate of implementation of projects planned in food processing (including fruits

and vegetables) is rather abysmal. Therefore, one cannot really say how many of the proposals

planned and approved shall materialize on the ground.

The major reason for poor project implementation is that the fruit-and-vegetable value chain has very

high levels of inefficiencies due to wastage and handling losses; poor infrastructure and post-harvest

management techniques; inadequate transport systems and support services like integrated cold

chains; and poor retailing conditions.

Given the infrastructural bottlenecks, it is very difficult for any processor to profitably market his

produce. To overcome these bottlenecks in the value chain, vertical integration could be a possible

alternative, but it requires huge financial wherewithal, managerial expertise and legal support, all of

which most Small and Medium Enterprises (SMEs) lack in our country. Backward integration through

contract farming and forward integration through setting-up of proper retailing joints could help the

fruit-and-vegetable processors develop sustainable businesses. This will also enable them to compete

with the informal players by offering quality produce at affordable prices.

Policy Support for Horticulture in India

Cold Storage Act (1980)

Among the infrastructure facilities needed to support fruit-and-vegetable processing, cold storages are

of paramount importance. Most fruits and vegetables have seasonal production cycles while demand

for such fruits and vegetables is all the year round. Even processing takes place throughout the year,

and thus it is important for the raw materials to be available all the year round. Cold storages help

break the seasonality in availability of fruits and vegetables both for consumption and processing

purposes by performing a balancing act between the glut and deficit seasons.



The number of cold storages (of more than 10 tonnes capacity) in the country has gone up from 2,930

at the end of 1990-91 to 3,253 at the end of 1995-96 and their aggregate capacities have gone up from

7.68 million tonnes to 8.73 million tonnes.

The cold storages are being mostly used for the storage of agricultural commodities with potato being

the largest stored commodity. About 88% of the total cold chain capacity is exclusively used for

storage of potatoes only. Potatoes also account for about 50% of the multi-purpose storage capacity.15

At present setting up of cold storages in India is not a lucrative activity because of high investment

and low rental charges prevailing in the country. In some of the states there are curbs on rental

charges as they are fixed by the governments. The Cold Storage Act (1980) made it compulsory for

any entrepreneur setting up a cold storage unit to take a license from the Central and the State

Governments, depending upon the installed capacity of the cold storage. The Act also gave powers to

the government to decide the cold storage rentals. The governments, on account of populist moves,

never raised the rental charges for cold storages. This has had an adverse impact on growth of cold

storages as low rents have made the business unviable and unprofitable.

The Cold Storage Act was implemented by Directorate of Marketing and Inspection in the Ministry of

Rural Development.

Most cold storages in India were built in the 1980s for storing potato and potato seeds. Most of them

are not very suitable for storing frozen peas, broccoli, mushrooms and other sensitive horticulture

products as they are not able to meet the stringent temperature requirements. These do not have

scientific humidity and temperature controls and are thus unsuitable for many horticulture produce.

The spatial distribution (or concentration) of cold storages is also highly skewed as a result of the

license regime of the government. Around 46% of the total cold storage capacity in India is

concentrated in a single state only Uttar Pradesh16. Unreliable electricity forces cold storages to use

diesel generating sets, which increases the chilling costs manifolds.

As far as refrigerated transport of perishable horticulture produce from the farm to the processing unit

or the cold storage is concerned, the demand far outstrips the supply. However, the rate of fleet

expansion has been slow in the country despite rising demands for such refrigerated transports.

Refrigerated trucks are expensive as they are refrigerated using generators, which add to the costs.

Also, breaking down of such gensets during the transit spoils the stock. The Ministry of Railways has

long been tossing with the idea of attaching refrigerated vans to super fast express trains; however

there has been more rhetoric than action on this front.

15 Source: CII Report on Cold Storages and Foodgrains Handling (2002) 16 Source: CII Report on Cold Storages and Foodgrains Handling (2002)



In 1997, the union government repealed the Cold Storage Order, 1980. Since then, no license is

required from the Union government for setting up a cold storage. However, the states are still to

repeal or amend their respective cold storage acts for freeing the cold storage units from the license

regime.

Easy and concessional finance should be made available for setting up cold storages in rural and other

agricultural areas. Finance is available for establishing cold storages from State Financial

Corporations, Nationalised and Scheduled Banks, National Cooperative Development Corporation

(NCDC) for cold storages under the cooperative sector, National Horticulture Boards, Ministry of

Food Processing Industries, and Agriculture and Processed Food Products Export Development

Authority (APEDA) for cold storage for export houses.

The G.B. Pant University of Agricultural Sciences at Pantnagar in Udham Singh Nagar district of

Uttaranchal vehemently believes that integrated cold storage management is the need of the hour for

the development of horticulture industry in India, especially in the hilly regions. Given the poor socio-

economic conditions of the farmers in hilly areas and the weak public infrastructure, the fruit-and-

vegetable processors will have to ensure a bundle of services like procurement from the farm-gate;

assistance in cultivation; storage and transport facilities; and prompt payments in order to maintain a

stable supply of raw materials of considerable quality for processing and sale in the domestic as well

as export markets.

Case let (1): The Himachal Pradesh Fruit Processing and Marketing Corporation (HPMC): Bundling

of Pre-and-Post Harvest Infrastructure Services for Fruit Farmers

Established in 1974 as a State Public Undertaking, HPMC looks at development of fruit processing in

the state of Himachal Pradesh. It provides all the services to the fruit growers that are needed for

successful marketing of the produce in the domestic and export markets. HPMC provides pre-and-

post harvest infrastructure facilities comprising of a network of mechanized pack houses; cold

storages; trans-shipment centres and fruit processing plants even to the remotest corners of the state,

besides a network of marketing services at major terminal markets. Several pre-and-post harvest

management services are provided right at the doorsteps of the farmers. By doing so, the farmers are

able to remove the farm-heat from the produce and increase the shelf-life of the produce.

On the marketing front, HPMC has incorporated the latest technology for processing and packing of

juices in tetra packs; introduction of juice dispensing machines at major commercial centres;

preparation of apple and pear juice concentrates for export purposes and development of an umbrella

brand (hpmc) for marketing of processed fruits from Himachal Pradesh.



One of the major initiatives of HPMC is the introduction of mobile cold storage vans, which procure

the produce from the farm-gate and transport them under refrigerated conditions to processing units

located in distant places. This checks wastage of the perishable produce during transit; reduces

handling and storage losses by the producer at his farm; and maintains the quality of the raw material

right upto the time it is processed. Cold storages have also been setup in metropolitan towns in the

country, where apples and apple concentrates from Himachal Pradesh are stored for sale in the off-

season months.

HPMC was once a fairly successful enterprise. However, there have been claims recently that it has

not been able to sustain its success. There has been stagnation in HPMC in terms of procurement, and

marketing outlets. It has been unable to attract enough farmer suppliers due to the fact that it has been

unable to pay remunerative prices for the fruits procured. This inability to pay remunerative prices to

farmers stems from its failure to successfully market its produce in consumer markets and earn higher

profits. There has been stiff competition to HPMC from many private players which are able to

establish better brands for their products.

HPMC had the advantage of government ownership, which ensured public funds for infrastructure

investments, but on the flipside, it brought bureaucratic interference in the management of the

enterprise. With bureaucrats at the helm of the affairs in HPMC, the accountability shifted from

farmers to superiors in the government and the ministries. This hampered the long-term growth of the

organisation.

Corporatisation of HPMC is required so that it functions like an autonomous business organisation.

Just like cooperatives, even HPMC needs to look for market sources for funds, and not rely on the soft

budgets of the government. Only then shall it be able to free itself from the bureaucratic interferences

and be able to respond to the market opportunities and challenges.

Agriculture Export Zones (AEZ)

There has been a lot of talk on Indias comparative advantage in several horticulture products in the

world market. However, despite the comparative advantage in terms of cheap labour, long growing

seasons, diverse agro-climatic zones and vast bio-diversity, Indias presence in the global trade in

most horticulture products (both fresh and processed) is much below the potential.

It is in realization of the fact that to give an impetus to horticulture exports in the country, there has to

be a package of infrastructure facilities, fiscal incentives and other support services. Agri Export

Zones or AEZ is one of important policies of the Government of India that provides a bundle of

services to producers and processors, especially for export purposes. The Ministry of Agriculture,



Ministry of Food Processing Industries, and Agriculture Produce Export Development Authority

(APEDA) look into the growth and development of AEZs in the country.

Agri Export Zones or AEZ were introduced in the national EXIM policy in the year 2001-2002. With

the opening of the world trade under the WTO, the Government of India has put horticulture in its

thrust list. There is a general understanding emerging in the government authorities that

comprehensive assistance should be meted out to units involved in food processing (including fruits

and vegetables) to be able to successfully compete in the world market. The AEZs are so designed

that the entire value chain starting from the farm upto the final retailing unit can be strengthened.

Provision for good quality inputs like modern seeds for exportable and processable varieties of fruits

and vegetables; pre and post harvest technologies for farmers; storage and warehousing facilities;

good transportation and communication networks; sources of finance; export-friendly infrastructures

like ports, Inland Container Depots (ICD); and quality assurance laboratories all come as a package to

units in an AEZ. Convergence is the modus operandi in an AEZ, where government authorities and

private entrepreneurs converge to devise solutions and build synergies for boosting exports in

agriculture.

The major AEZs are as follows (an indicative list):

i. Litchi Export Zone in Uttaranchal (Nanital, Udham Singh Nagar, Dehradun, Pithoragarh,

Pauri and Almora), West Bengal (Malda, Murshidabad and 24 Pargana North and South), and

Bihar (Muzaffarpur, Hajipur, Vaishali, Bhagalpur and Sitamarhi).

ii. Grape and Grapevine in Maharashtra (Nasik, Sangli, Sholapur, Satara and Ahmendnagar).

iii. Mango Export Zone in Maharashtra (Ratnagiri, Sindhudurg, Thane and Raigarh), Uttar

Pradesh (Saharanpur, Muzaffarnagar, Bijnore, Meerut, Baghpat and Bulandshahar), Andhra

Pradesh (Chittor and Krishna districts), West Bengal (Malda and Murshidabad) and Tamil

Nadu (Madurai, Theni, Dindigul, Virudhunagar and Tiruneveli).

iv. Apple and Walnut Export Zone in Jammu and Kashmir (Srinagar, Baramula, Anantnag,

Kupwara, Udhampur and Pulwama), and Apple Export Zone in Himachal Pradesh (Shimla,

Kullu, Chamba and Kinnaur).

v. Potato Export Zone in Punjab (Singhpura, Patiala and satellite centres in Ludhiana and

Jalandhar) and West Bengal (Hooghly, Burdhwan, Midnapore, Uday Narayanpur, and

Howrah).



vi. Gherkins Export Zone in Karnataka (Tumkur, Bangalore, Hassan, Kolar, Chitradurg,

Dharwad and Bagalkot) and Andhra Pradesh (Mehboobnagar, Rangareddy, Karinagar,

Medak, Warangal and Nalconda).

vii. Medicinal and Aromatic Plants Export Zone in Uttaranchal (Uttarkashi, Chamoli,

Pithoragarh, Dehradun and Nanital) and Kerala (Wayanad, Mallapuram, Palakkad, Kollam,

Ernakulam, Idukki and Trivandrum).

viii. Banana Export Zone in Maharashtra (Sholapur, Sangli, Pune, Nasik, Latur and Osmanabad).

Case-let (2): Lychee Export Zone in Uttaranchal

With an objective of promoting cultivation and exports of Lychee in Uttaranchal, the Lychee Export

Zone was established on 22nd September, 2001 in the districts of Dehradun, Nanital, Udham Singh

Nagar, Pithoragarh, Pauri (Kotdwar) and Almora. The total planned investment was Rs. 8.70 crores,

while the anticipated exports from the zone over a period of 5 years was Rs.38.20 crores17. The major

objectives, activities of the Lychee Export Zone are as follows:

Expansion of area under Lychee in Uttaranchal to the tune of 1000 hectares, and rejuvenation

of old and unproductive Lychee orchards over an area of 450 hectares in a period of 3 years.

To bridge the gap between advanced technologies and conventional methods of Lychee

cultivation, and encourage plantation of processing-friendly varieties of Lychee.

To coordinate with various state departments to get their commitment for financial and

physical resources and implementation of designated activities, and to identify entrepreneurs

and facilitate setting-up of units for post-harvest handling and processing.

To facilitate exports of Lychee by ensuring compliance with Codex requirements (water,

pesticide residue and other SPS standards) and improving access to international markets by

making agreements with international buyers.

The Lychee Export Zone is slightly behind schedule in meeting its area expansion and orchard

rejuvenation targets. Till date, it has accomplished around 650 hectares of area expansion under

Lychee cultivation, and 350 hectares of rejuvenation of unproductive Lychee orchards. Efforts are on

to accelerate the growth in area under Lychee in this current fiscal year.

Forward and backward linkages are being developed in the Lychee Export Zone (LEZ) through

public-private entrepreneurship. Consistent endeavours have been made to encourage entrepreneurs to

17 Source: www.apeda.com



come forward to develop infrastructure for post harvest handling. 7 MoU have been signed by the

LEZ and private entrepreneurs for installing processing and export-oriented infrastructure in the state.

Lychee Exports from Lychee Export Zones

Indian Lychee due to its peculiar taste has become very popular, and has good potential to earn

foreign exchange. The harvesting season in India starts earlier than China and Taiwan, which gives

India an advantage for entering the Europe market.

Developing export businesses require stability in production and consistency in quality and supply of

the produce. Adverse weather conditions affect the flowering of the Lychee plant, and results in a

drop in Lychee production. The unfavourable weather conditions like dense fog during winter months

and rains during the flowering season disbalance the male-female flower ratio, and result in low fruit

setting. However, LEZ in Uttaranchal is trying to tie-up with agriculture research organisations to

develop resistant varieties to overcome this problem of disbalanced flowering. The G.B. Pant

University at Pantnagar has offered support to the government in developing the aforesaid varieties of

Lychee plants.

Despite weather problems, 480 metric tonnes of Lychee was exported in 2003-04. Performance of

Uttaranchal was good as exports from this state jumped from 9.25 metric tonnes in 2002-03 to 73

metric tonnes in 2003-04. This was primarily due to the high quality standards that the LEZ has

ensured among the Lychee growers in Uttaranchal that Lychee from this state found easy acceptance

in the world market.

Case-let (3): MahaGrapes Major grape exporter from India

Maharashtra is Indias leading producer and exporter of grapes. Favourable climate; the soil and

humidity conditions; and the frequency of rainfall makes Maharashtra an ideal place in India for

production of grapes, and also wines and other beverages.

According to the Ministry of Food Processing Industries and APEDA, production of grapes for export

markets is far more lucrative than production for domestic markets, as the export marke

Policy Paper on dairy Industry

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Transcript of Policy Paper on dairy Industry