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VIII. Conclusions and Policy Implications

From being a recipient of massive material support from the World Food Program (WFP) and the European Community (EC) in the 1950s and 1960s, India has positioned itself as the largest producer of milk in the world with estimated production of about 82 million tonnes in 2001-02, overwhelmingly from the output of millions of smallholder producers. The cooperative movement (Operation Flood) has been important in dairy development in different parts of the country, especially in the western (Gujarat), and undoubtedly, has played an important role in keeping smallholders involved with this fast growing sector. The Indian dairy sector, which was highly regulated and protected through various restrictions on imports and exports of dairy products and licensing provisions until early 1990s, has become progressively more liberalized since 1991, culminating in the repeal of licensing requirements in 2002 of the Milk and Milk Products Order (MMPO), which restricted the private dairies to procure milk in areas being served by the cooperative sector. One fear is that private dairies will begin to procure primarily from larger scale suppliers, even as they provide tough competition to cooperative milk processors, and eventually lead to the eclipse of smallholder dairy production that has been so important to millions of rural poor and women in India. While it is too early to assess changes in procurement patterns for milk as a result of the recent policy changes, it is important under liberalization to know whether larger scale producers have a cost advantage that will lead to the displacement of smallholders under a liberalized market. This study is an attempt in this direction. It might be recalled that there were four main issues, outlined earlier in this study:

The present study uses primary data from a survey of 520 milk producers divided between traditional cooperative milksheds of Gujarat and dynamic newer milksheds of the northern region of the country (Punjab and Haryana). The sample in both regions ranges from traditional smallholder producers to large-scale commercial producers. Stochastic profit frontiers with inefficiency effects are fitted to the data to assess scale differences in production efficiency, and the determinants of inefficiency at different scales of operation. Results are then analyzed to assess the likelihood that smallholders will continue to compete successfully in a liberalized market, and to explore policy options for enhancing their competitiveness in such a market.

The study begins with a review of changes in policy environment of the Indian dairy sector and the impetus for those changes (Chapter 2). Chapter 3 discusses the conceptual framework and econometric estimation of efficiency measures and determinants of inefficiency. Sampling procedures, sample design and composition, and data description are given in chapter 4. Chapter 5 provides discussion on socio-economic and demographic characteristics of households, asset composition and ownership pattern, milk production and marketing practices, provision of animal health and breeding services and constraints faced by dairy farmers. Mass balance estimation procedures and results are presented in Chapter 6. The issues of relative efficiency and profitability of dairy farming and farm sizes through profit frontier and inefficiency model are examined in chapter 7. Conclusions and policy implications of the study are discussed in Chapter 8.

8.1 Main Findings

Dairy is an important sub-sector of the Indian agriculture accounting for nearly 17 percent of the value of output from agriculture and allied activities. India is the largest producer of milk in the world with estimated production of about 82 million tonnes followed by the USA, although in terms of milk yield, the performance of Indian dairy sector is dismal. One of the major factors contributing to increase in milk production is adoption of crossbreeding programs by the farmers. The performance of Indian dairy sector over the last three decades (post-OF period) has been extremely impressive and milk production in the country has more than trebled to about 82 million tonnes between 1970-71 and 2001-02 with an average increase of about 4.5 percent per annum.

The government efforts in dairy development were intensified with the launching of the Operation Flood (OF) program in 1970, which had three phases from 1970 to 1996. The OF program was instrumental in establishing links between millions of small dairy farmers and urban consumers through cooperatives. Dairying was considered as important source of additional employment and income to small and marginal farmers as well as the landless in rural areas (NCA, 1976). Once the decision to adopt the cooperative structure as a means for dairy development was taken, government policies were formulated to support dairy cooperatives. Large public investments were made in the milk processing and marketing infrastructure through cooperatives.

In order to promote domestic milk production, the restrictive policy framework of restricting the entry of organized private dairies into the processing sector and protection against competition from imports by restricting imports of dairy products through various import restrictions was adopted. The sector remained highly regulated and restricted until early 90s under the industrial licensing framework. However, in 1991 as a part of domestic macro-economic reforms, dairy sector was delicensed and within a year, more than 100 new plants in the private sector were set up (Dairy India, 1997). Restrictions were again imposed in 1992 in the form of Milk and Milk Products Order (MMPO). The MMPO made it mandatory for units with milk processing capacity above 10,000 liters per day or milk solids capacity of 500 tonnes per year to get permission of the State/Central government. However, in March 2002 the government took an important decision to amend the Milk and Milk Products Order and restrictions on new milk processing capacity were removed, while regulation on health and safety issues continued.

The results of financial profitability show that small-scale producers have higher profits (without family labour) per liter of milk than large-scale producers, other things equal. However, there were regional differences. Small farmers in the western region have higher profits compared to their counterparts in the northern region, while large farmers in northern region have high profitability compared to western region. This differential pattern might be due to presence of cooperatives in the western region, which provide assured market for milk irrespective of level of production along with other production inputs and services. The relationship between farm size and profitability remained unchanged even after taking into account family labor but the level of profits declined substantially on small farms as small farms use mostly family labor for milk production activities.

The findings from the application of stochastic profit frontier function present a number of noteworthy features of the performance of the milk producers in relation to their specific characteristics. The hypothesis that there were no technical inefficiencies among milk producers was rejected. The explanatory variables, price of milk, price of fodder and feed and yield, have significant impact on farm profits. The analysis revealed that milk producers could benefit considerable by improving technical efficiency through use of best-practice production methods. The estimates of mean technical efficiencies of sample dairy farmers varied from 0.79 on farms with average daily milk production of 40-80 liters and more than 150 liters to 0.85 on small farms (<10 liters/day production level). The results clearly indicate that small farmers are technically more efficient compared to large-scale producers. The average technical efficiency of the sample farmers in northern region was lower (0.79) than that of in western region (0.84).

The analysis was successful in identifying the determinants of technical inefficiency at the farm level. In case of small farms, access to information and technology, access to credit and expenses on pollution abatement are important variables that significantly explain (reduce) inefficiencies. Together with the fact that most small farms do not have easy access to information and technology, and credit, these results suggest that the provision of extension services and credit to small-scale milk producers might be a promising way of increasing milk production and productivity in India. In case of large producers, access to information and technology and credit do not play a bigger role in explaining the technical inefficiency. The results clearly demonstrate that the profits per unit of output of small-scale producers are more sensitive to differences in transaction costs across farms, other things equal, than in the case for large-scale production. The results suggest that dealing with transaction costs (through institutions) is critical for improving the ability of smallholders to compete in the market place with large-scale producers.

With increased animal densities, manure quantity and its disposal become important issues with socioeconomic implications for livestock owners and communities. Livestock sector is coming under increasing social pressures to control negative externalities from their operations. Waste from livestock has been a potential source of environmental degradation in many countries. It is critical to examine empirically the magnitude of negative environmental impacts from livestock production. One of the hypotheses of this study was to examine whether smallholder dairy producers generate a lower negative environmental externality per unit of output than large-scale producers. The real amount spent per unit of output for environmental preservation by each farm, which will offset negative externalities, whatever they might be, was computed. The results reveal that smallholder milk producers spend relatively more on pollution abatement methods compared to large farmers. One reason that small farmers spend more on pollution abatement is that smallholder producers have crop-livestock mix activities and consider manure as a source of additional income and use it on their fields in place of chemical fertilizers or make dung cakes to use as fuel. In contrast, large farms, which are located close to peri-urban areas, do not find market for sale of manure and try to dispose-off in unsustainable manner. Therefore, failure to compensate for negative environmental externalities is another policy distortion that is encouraging the scaling-up of livestock production. The policy of livestock production waste pollution has so far remained on the low priority of the public policies related to environmental protection.

The above findings clearly show that smallholder milk producers have higher profits per liter of milk and are more efficient than those of large-scale producers, however, smallholders could still be driven out of the market due to:

(i) large farmers produce large volumes

(ii) smallholders have difficulty complying with SPS/quality standards

(iii) small-scale producers are more sensitive to transaction costs due to policy distortions and poor institutional support

(iv) smallholders have less access to world dairy markets

8.2 Issues for Further Research

No project can attempt to answer all the questions that arise out of the list of priorities. These are some of the issues/questions, which have not been addressed in this study and need an empirical investigation. Some of the issues, which need to be addressed, are listed below:

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