Previous Page Table of Contents Next Page

India: Increasing demand challenges the dairy sector

Meeta Punjabi
Dairy consultant
New Delhi

Over the span of three decades, India has transformed from a country of acute milk shortage to the world’s leading milk producer, with production exceeding 100 million tonnes in 2006. This phenomenal success is attributed to a Government initiative known as Operation Flood (1970–1996) and its intense focus on dairy development activities. In that initiative, rural milk shed areas were linked to urban markets through the development of a network of village cooperatives for procuring and marketing milk. And milk production and productivity were enhanced by ensuring the availability of veterinary services, artificial insemination (AI), feed and farmer education. The investment paid off, promoting production gains of 4–5 percent per annum.

However, that growth has slumped to less than 3 percent in recent years, raising cause for concern. The slowdown is attributed to the decline in investment in the dairy sector since the end of the Operation Flood initiative. Central and state government allocation for dairy development has diminished in the past two five-year plans.

Emerging situation

Dairy is currently the top-ranking commodity in India, with the value of output in 2004 at 1.179 billion rupees (US$39 million), which is almost equal to the combined output value of rice and wheat. Despite the importance of the dairy sector in overall GDP, it receives less government budgeting than the agriculture sector. Further, there has been no concentrated investment in the development of value-added or innovative products, nor any serious effort to support and modernize the informal sector.

In light of the increasing demand driven by the growing population, higher incomes and more health consciousness, the slowdown in dairy industry growth is severely worrisome. Based on estimates by the National Dairy Development Board (NDDB), the demand for milk is likely to reach 180 million tonnes by 2022. To supply the market, an average incremental increase of 5 million tonnes per annum over the next 15 years is required – a doubling of the average incremental rate achieved over the past 15 years. In the absence of sufficient increased production, India will need to rely on the world market for imports. And because of the huge volume required, it will affect global milk prices. Thus, focusing on areas for local dairy development is critical.

Traditionally, the policy environment has favoured the expansion of cooperatives, which ultimately crowded out the private sector. However, liberalization of the sector in recent years has encouraged private investment in dairying. In 2002, the Milk and Milk Products Order (MMPO) ushered in major policy changes friendly to the private sector and a momentum of activity that is likely to increase dramatically in the coming years. Large Indian and multinational corporations, such as Reliance, Pepsi and Coca-Cola, are planning significant investments.

Nowadays, both the private sector and the cooperatives drive the value chains. Because of the many unsuccessful cooperatives in the country, other models of dairy farmer organizations are being explored, such as mutually aided cooperative societies (MACS) and producer companies.

Millions of small and marginal farmers in dairying who own two to three animals and produce an average of 5 litres comprise a critical portion of India’s dairy industry. Livestock development in general and dairy development activities in particular are key components of pro-poor development strategies because livestock distribution is much more equitable than land distribution. Thus, changes in the dairying environment have important implications for the smallholder farmers and for poverty reduction.

The following characterizes India’s dairy farming and its relevance to inclusive growth:

Factors affecting the competitiveness of the dairy sector

To assess the dairy sector’s competiveness, a performance analysis looked at five factors: demand conditions, market structure, factor conditions, related supporting industries, and government and the enabling environment.21

Demand conditions

Demand for dairy products in India is likely to grow significantly in the coming years, driven by more consumers, higher incomes and greater interest in nutrition. Consumption of processed and packaged dairy products is increasing in urban areas. Because of the increasing competition from the private sector, several national and international brands have entered the market and expanded consumers’ expectation of quality – although only among a small proportion of the population. In many parts of the country, people still prefer unpacked and unprocessed milk delivered by a local milkman because of its taste and the perception of freshness. The price elasticity for milk is high, thus demand for milk is very sensitive to price changes.

Table 1:  Demand conditions

Market size and growth

Market growth is due to high per capita consumption,  increasing population and health consciousness

Consumption patterns

Consumption of processed and packaged dairy products is increasing in urban areas

Consumption patterns

Unpackaged milk is still preferred because of taste and price

Sophistication of consumers

Consumer awareness on product quality is increasing but in a very small portion of the population

Receptivity to new products

Mostly urban consumers have a very low but increasing interest in new products

Price elasticity

Price elasticity is high

Impact of market opening on demand

Consumers now have a variety of quality products

Market structure

Until 2002, cooperatives traditionally were the dominant players in the formal sector. With liberalization of the dairy industry, private investment has increased quite significantly. However, the organized sector’s share in milk procurement is very low because a large proportion of the milk and milk products are sold through the informal channel (Table 3). The informal demand absorbs approximately 41 percent of the milk and milk products produced in the country, accounting for about 75 percent of the marketable surplus of milk. The formal channel, with its packaged milk and dairy products, accounts for only about 25 percent of the marketable surplus, which is about 15 percent of production.

Table 2:  Market Structure


Still large share of produce; 85% of marketable surplus goes through informal channel

Quality of milk through informal channel is an issue and to some extent in formal channel as well

Competitive structure

Little  competition to cooperatives because private sector was not allowed in the sector until recently

Entry of supermarkets in retailing of milk is increasing the competitive structure

Governance (value chain type)

Governance of cooperative structures is constaining efficiency and expansion

Role of "lead" or organizing firms

Role of lead agency has been hampered by government interference in cooperatives

Farmer organization

Immense scope for improving management and governance through farmer organizations

Marketing chain capacity and efficiency

Scope for enhancing efficiency of distribution

Distribution channels

Cooperatives have a well-developed distribution channel in urban areas

How market signals are conveyed or distorted

Government and political interference in price setting, limits prices being determined by market forces.

The informal sector consists of the village milk vendors who procure loose milk from farmers and sell it in urban and peri-urban areas directly to consumers, small private processors or hotels. The milk vendors also may sell processed products, such as paneer or separated cream. The quality of the vendors’ milk and milk products is not guaranteed. Largely sold in loose form, it is often adulterated with several additives to control spoilage.

Table 3: Flow of milk through different channels

Share of marketable surplus

% of production

Total production
(million tonnes)






Home consumption



Marketable surplus sold in urban and rural markets (informal and formal)




Sold in urban markets as loose unpackaged milk




Sold as processed products through informal markets




Sold as packaged milk through formal markets

12.7 %

7 %


Sold as packaged milk products through formal markets

Cooperatives are the central players in the formal dairy sector. The cooperatives have a three-tier structure – i) primary societies at the village level, ii) unions at the district level and iii) federations at the state level. Currently, there are 14 federations in India.

The success of the Gujarat Cooperative Milk Marketing Federation (GCMMF), known for its Amul brand and its Amul model of cooperative, is acclaimed. However, there is a perception that cooperative organizations generally have failed in other parts of the country. A less recognized fact is that the cooperatives in other states are organized differently than the GCMMF cooperatives. The GCMMF cooperatives operate as a true representative of farmers and are run by professionally qualified managers. In most other states, the cooperatives are managed by civil servants, function more as government bodies and are weak representatives of farmers.

Of the 14 major state cooperatives in the country, 10 have state government equity, of which 6 have government equity in excess of 51 percent. Twelve of the 14 cooperatives have government officers as managing directors who are appointed by the state government. It is not uncommon for these officials to change up to three times a year. Because of such governance, cooperatives are mere parastatals and do not work in the true spirit of cooperatives – with elected farmer representatives and professionals who run the organization. This governance structure influences the functioning of the entire chain, from the state federation to the village societies and thus significantly impacts farmers’ involvement in the chain.

The primary differences between the GCMMF cooperatives and other state cooperatives are price and services. In Gujarat, the price paid to farmers is based on fat content; there is regular testing of milk each farmer supplies. In most of the other states, there is hardly any testing of milk. In other state cooperatives, the village society president wields a lot of power and typically decides the prices paid to farmers. Reportedly, farmers with some degree of influence receive higher prices while those without receive lower remuneration. Being the lead organizations, the cooperatives also set a benchmark for prices paid by other buyers, such as local vendors and private dairies, who tend to pay 50 paise or 1 rupee ($ .02) more than that paid by the cooperatives. Thus, if the farmgate price paid by the cooperative is low, other players also pay a low price.

For most of the private dairies, agents procure the milk from farmers. Some private dairies have established village societies for milk collection that follow the cooperative model. However, this model requires much larger investment and is not economically feasible, considering that cooperatives receive considerable development support from the government (such as feed subsidies). It is not uncommon for private dairies to make loans to farmers, which is a key reason for the somewhat large share of milk directed to this channel.

Factor conditions

Factor conditions for dairying entail the quality of animals, human resources and technical skills, land availability, capital, credit, infrastructure and other inputs relevant to the value chain, as the following explains.

The quality of animals is critical in determining its milk productivity and hence overall production. Currently, low productivity per animal hinders development of the dairy sector. Despite being the world’s largest milk producer, India’s productivity per animal is very low, at 987 kg per lactation, compared with the global average of 2 038 kg per lactation.

The low productivity is a result of ineffective cattle and buffalo breeding programmes, limited extension and management on dairy enterprise development, traditional feeding practices that are not based on scientific feeding methods, and limited availability and affordability of quality feed and fodder. In addition, the limited supply of quality animals is exacerbated by policies limiting interstate movement of animals. Indigenous cattle and buffalo make up 45 percent of the country’s total milch population, in contrast to the cross-bred cows at 10 percent.

Animal health and breeding services provision, veterinary infrastructure development and vaccinations are the responsibility of the state government. These services have traditionally been provided for free or at a very subsidized rate. In the past few years, there has been increasing awareness that the state pays heavily to offer these services, which are easily available to farmers (Ahuja et al.). Consequently, many states have instituted partial or full-cost recovery fees for providing the services.

Table 4: Factor conditions


Herd inventory

Very large number of indigenous animals with low productivity and a small portion of cross-breeds


Lack of policy focus on strengthening indigenous breeds

Very poor awareness of quality feed, which hinders productivity


Farmers not interested in quality feed because of the low price of milk

Increasing feed costs

Veterinary medicine

Availability is not an issue

Veterinary medicine costs

Duplicate or cheap medicines

Human capacity

Farmer technical capacity

Knowledge and new techniques are not accessible

Support services technical capacity

Accessibility to good quality veterinary services is an issue in many parts of the country

Organization and managerial capacity

Organizational and managerial capacity of farmer cooperatives is very poor

Entrepreneurial capacity

Entrepreneurial capacity is hindered by a low capacity to take risks

Credit or finance market

Formal credit mechanisms

Access to formal credit mechanisms is very poor

Informal credit mechanisms

Accessible but at very high interest

External economies

Transmission of learning

Very poor extension support services, leading to very poor knowledge transfer

Social capital and trust

Strong social capital and trust in the villages, which can sustain dairy farmer organizations if properly managed

In addition to the State Department of Animal Husbandry, Dairying and Fisheries, the milk cooperatives and NGOs (BAIF, JK Trust) provide services in many states. So do trained private sector AI technicians, although for a fee. As well, state livestock development agencies are being set up as autonomous bodies to offer services in animal breeding in the form of procurement, production and distribution of breeding inputs (such as semen and liquid nitrogen), training and promotional activities.

Despite these initiatives, the availability of services remains limited. Currently, AI services cover only 15 percent of the breedable animals. Cattle and buffalo breeding programmes have been initiated but have not had the desired impact because of a lack of coordination between the different state departments. And extension activities in dairy management are woefully lacking. Farmers have not been able to take advantage of the potential of their animals because they lack information on feeding and management practices. Extension, especially for women involved in livestock rearing, would enhance dairy production considerably.

Crop residues are the single largest bulk feed material available to farmers for feeding livestock, specifically ruminants. They include coarse straws, fine straws, leguminous straws, pulses straws and sugarcane tops. Fodder from common property resources is another major source of feed for animals. But lack of efficient management of common property resources is a major constraint in availability of these resources for fodder. The area under cultivated fodder production is limited only to 5 percent of the total cultivable land. In the states of Haryana, Punjab, Gujarat and some parts of Rajasthan, land use for green fodder production is estimated at 10 percent or more. There is a need for restructuring the land use strategy to elevate the overall proportion of cultivable lands for fodder production.

Concentrates used for fodder include coarse grains, such as maize, sorghum, bajra and other millets, and other cereal by-products, such as rice bran/polish and various oil meals, including groundnut cake, mustard cake, coconut cake, soybean meal, cotton seed meal and sesame cake. The escalating price of feed ingredients is a major cause for concern. In many states, cooperatives are involved in producing feed concentrate and selling to farmers at subsidized rates.

Scarcity of fodder resources is likely to be a major constraint in the development of the dairy sector unless adequate measures are undertaken to augment them. Another important issue regarding feed is the lack of regulations to ensure quality. In the absence of a coherent policy, all kinds of substandard feeds are available in the market.

Formal/informal credit: Lack of access to credit to expand the herd is a critical problem for farmers. There is little access to formal credit through the cooperatives. Informal credit is available from private traders and agents of private companies, but the interest rate is very high. And these loans may or may not be linked to dairy activity. When taking a loan from a trader, the farmer is then tied to selling the milk to that trader, often at a low rate. The Working Group Report on Animal Husbandry emphasizes the low or non-availability of credit as a primary constraint in livestock sector activity, indicating that: “Public sector lending is abysmally very low. The commercial banks are not favourably disposed to providing credit to livestock farmers and the cooperative credit system is very weak, resulting in excessive dependence of livestock farmers on informal sources [and] usually at exorbitant interest rates. Efforts should be put on correcting these distortions and ensure timely availability of inputs and services, including credit to livestock.”

Vaccines/medicines: The Government and the private sector are involved in producing medicines and vaccines. However, quality control is a critical issue. An important policy question is whether the government should be involved in the manufacturing and production of vaccines or should it instead take on a regulatory role to ensure quality and availability at a reasonable price.

Related supporting industries

Strong supporting industries are critical for the development of any industry. In the case of dairying, the National Dairy Research Institute pursues research and education in all aspects of dairying: microbiology, chemistry, technology, engineering, animal genetics and breeding, livestock production and management, animal nutrition, animal physiology, dairy economics and dairy extension education.

Table 5:  Related and supporting industries

Processing capacity

Lack of processing capacity in the country, including primary processing by bulk chilling

Processing capacity

There are government subsidies on bulk chilling and processing infrastructure

Transportation and distribution

Because of low productivity, transportation costs for procurement are high

Dairy farmer services

Availability of health and breeding services could be enhanced; extension is almost non-existent

Specialized finance and credit

Exists on paper but is very difficult to access

Relevant research capacity and use

Good research capacity

Processing capacity: At present, there are 678 registered dairy processing units processing 12–15 percent, or 26.63 tonnes, of the milk produced in the country each year. Of the total units registered under the MMPO, 403 are private dairies processing around 11.83 tonnes per year, whereas 212 cooperative dairies process 10.36 tonnes per year. The remaining 63 government plants process 4.44 tonnes per year. These dairy plants are registered in the different states of India. There is immense scope to increase the processing capacity and direct a greater share of milk and milk products through the formal channel.

Primary processing is another factor in need of critical attention to ensure the quality of milk through the supply chain. In addition to the Clean Milk Programme and other rural development schemes, the Government has provided subsidies for bulk chilling and processing infrastructure to support the dairy industry. But credit remains a problem; specialized credit exists on paper but is difficult to access for dairying. There is significant private sector investment in feed manufacturing and the manufacturing of medicines and vaccines.

Government and the enabling environment

The dairy sector in India has traditionally been highly regulated. The government projects and programmes in place for enhancing dairy development include subsidies for developing infrastructure for milk processing and testing. The Clean Milk Production Programme is a centrally sponsored scheme that is being implemented by the State Department of Animal Husbandry, Dairying and Fisheries with several objectives: i) the creation and strengthening of necessary infrastructure for the production of quality milk and milk products at the farm level up to the points of consumption; ii) improvement of milking techniques; and iii) training to enhance awareness on the importance of hygienic milk production. Several other rural development initiatives support dairying, such as through the District Rural Development Agency and women’s self-help groups.

An area of government support that has not been capitalized on so far is the investment in promoting the nutritional aspects of milk, particularly pasteurized milk versus loose milk. Detailed information about policy regulations regarding the dairy sector in India is available online at

The policy history

Until 1991, the dairying sector was licensed under the Industries Development and Regulation Act (IRDA, 1951). This resulted in preferential treatment given to milk cooperatives that were outside the purview of the legislation. In 1991, the dairy sector was swept up in the move to liberalize the economy. Consequently, the IRDA was replaced by the Milk and Milk Product Order in 1992, which contained the following provisions:

  1. The main objective of the MMPO is to maintain and increase the supply of liquid milk of desired quality in the interests of the general public and to regulate the production, processing and distribution of milk and milk products.
  2. Any person or dairy plant handling more than 10 000 litres of milk per day or 500 tonnes of milk solid per annum needs to be registered, with the registering authority appointed by the central Government.
  3. Every holder of a registration certificate can collect or procure milk only from the milk shed assigned under the registration certificate. The milk shed, is defined as "an area geographically demarcated by the registering authority for the collection of milk or milk product by the holder of a registration certificate''.

Amendments were made to MMPO in 2002 to further liberalize the sector and encourage dairy entrepreneurs from the private sector. The milk shed concept was abandoned, allowing for milk supplies to be procured from any area.

Traditionally, the cooperatives have not had much competition from the private sector. In the liberalized environment characterized by open procurement of milk, there is incentive for private players to invest in the sector. Consequently, many agencies, organizations and agents have started buying milk. But a major difference is that they are not backward investing in dairy development activities through the offering of producer services. In the coming years, the lack of involvement in dairy development by the various players is likely to constrain further growth of the industry.

In this environment, dairy farmer organizations and cooperatives will have a strong role to play in supporting dairy development activities. If they were to establish higher prices to farmers, for instance, the private sector and other players would be forced to pay at least that much as well.

Policy and regulatory issues

Agriculture is a state responsibility in India, and the State Department of Animal Husbandry, Dairying and Fisheries, within the Ministry of Agriculture, is responsible for the dairy activities. Consequently, the focus of the activities and budgetary allocation is biased towards agriculture rather than livestock.

Table6: Enabling environment

National sector regulation

Key regulatory actors (ministries)

Department of Animal Husbandry is under the Ministry of Agriculture, hence focus on livestock is underemphasized, particularly in light of the high value of the sector.

Price regulation

Rice setting by cooperatives

Food safety

Regulated through the Milk and Milk Products Order

Informal regulations

Very difficult to control quality in traditional channels

Huge premium on fat content of milk compared with formal regulations; thus buffalo milk fetches much higher price

Formal sector support

Domestic sector (national)

Approaches being taken to modernize the sector

Subsidy support

Various subsidies available for milk processing and testing infrastructure

Inward investment promotion

Very little investment on the promotion of health or quality of milk


Key regulatory actors (ministries)

State Department of Animal Husbandry, Dairying and Fisheries is the implementing agency at the state level

Informal regulation & transparency

Lack of milk testing equipment and thus transparency, leading to low payments

Formal sector support

Availability of veterinary services; paravets are working with the Department of Animal Husbandry. Dairying and Fisheries

Formal sector support

Availability of services in remote areas through the government

Donor/NGO roles

Donor agencies are very actively involved in livestock sector development

There are several issues related to milk pricing policies that require serious review and reconsideration. Because cooperatives are mostly managed by civil servants, there is some government influence in determining milk prices. But the state cooperatives are supposed to base the price paid to farmers on the fat and solid-not-fat (SNF) content of milk. In the case of the better-managed cooperatives in Gujuart, the system works that way.22 However, it is less the practice elsewhere. As noted previously, the village society president often wields a lot of power and determines the price randomly, without testing the fat or SNF content.

Also as previously mentioned, the cooperative price becomes the benchmark price for other buyers (vendors and private dairy agents) and when it is low, so are the other prices paid. Thus there is no incentive for farmers to sell to the other buyers; only about 15 percent of the milk is sold this way for the marketing of packaged milk and milk products. Policy efforts should focus on enforcing testing as the basis for milk pricing. This can be achieved by ensuring availability of testing machines at all milk collection centres, educating farmers to sell milk only based on testing and setting up policy norms for all players in the sector to collect milk only when it has been tested.

Another important aspect of milk pricing is the huge premium on the fat content compared to the non-fat solid content. Thus buffalo milk fetches a much higher price than cow milk, which has lower fat content.

Industry SWOT analysis

Within the framework of the competitiveness drivers and issues, the smallholder dairy sector’s strengths, weaknesses, opportunities and threats have been assessed. The strengths and weaknesses are factors that are directly controllable, while opportunities and threats derive from the external environment. As evident in Table 7, there are a large number of weaknesses in the sector, implying considerable scope for interventions. This SWOT analysis entailed matching each of these elements with an appropriate action.

Table 7: SWOT analysis of performance drivers


How to build on them

  • Large number of small and marginal farmers involved in dairying
  • An effective marketing channel helps to meet the demands of the urban consumer
  • Very large number of animals and huge scope to enhance productivity
  • Self-sufficiency in medicine production and do not have to rely on exports
  • Strengthen economic viability of dairy farms by interventions on the input side as well as ensuring more fair farmer prices
  • Increase the link between rural production areas and urban markets
  • Focus on strengthening the indigenous breed to help significantly enhance productivity
  • Ensure availability of quality medicines by strengthening regulatory framework for quality


How to correct them

  • Large share of milk (70–85%) of marketable surplus goes through informal channel where quality is a big concern
  • Sometimes quality is an issue in the formal channel as well
  • Very little competition to cooperatives because private sector was not allowed to participate in until recently
  • Farmers do not share in the benefits of high demand because of poor governance of cooperatives
  • Milk production is scattered over a large number of farmers producing miniscule quantities
  • Milk distribution is limited to urban and peri-urban areas
  • Low milk prices because of lower prices declared by cooperatives, which results in low prices of milk paid by all players
  • Ad hoc export policies and a ban on exports
  • Quality of milk and milk products are a barrier to entry to the export market, especially the EU and the USA
  • Lack of policy focus on strengthening indigenous breeds
  • Non-existent extension facilities
  • Farmers’ prices are not based on fat measurement, which affects their profitability
  • Because of low access to credit and risk-taking ability, farmers cannot increase their herd size
  • Focus on quality issues even in the informal channel by training traders and by enforcing food quality regulations
  • Develop infrastructure and training for clean milk production
  • Support a fair playing field for the private sector
  • Bring about changes in cooperatives to make them true representatives of farmers instead of functioning as parastatals.
  • Support to dairying as an enterprise to encourage commercial dairy farming and encourage production and productivity by extension and breed development
  • Enhance packaged milk distribution in more areas
  • Strengthen dairy farmer cooperatives to enable farmers to get a higher price for milk
  • Create rational export policy to enable farmers to take advantage of higher prices
  • Strictly implement quality regulations and improve infrastructure and training for quality
  • Strengthen the breed development programmes
  • Strengthen extension facilities
  • Create policy regulations to make mandatory testing as a basis for setting milk price
  • Increase access to credit through dairy farmer organizations and other agencies


How to pursue them

  • Increased farmer income by exploiting the high demand
  • Increased consumer sophistication and awareness of quality reception of quality packaged products (though slowly)
  • Entry of large corporations in retailing, which can lead to more investment
  • Immense scope to enhance governance of dairy farmer organizations and thus enable dairy farmers to demand higher prices
  • Potential for exports due to low cost of production
  • Overall positive growth environment, which is triggering the Government to enhance infrastructure
  • Create policies and activities geared towards enhancing dairy farming activity by increasing, production, productivity and ensuring fair farmer price of milk
  • Establish enabling policy environment to enhance investment
  • Create policy support to enhance governance of producer companies
  • Focus on quality issues that are a barrier to exports
  • Encourage private sector to increase investment in dairying


How to avert them

  • Large portion of the population does not care about quality issues in milk
  • Because of high price sensitivity for dairy products, people are not willing to pay for quality
  • Significant increase in maize prices can increase feed prices
  • Large informal markets that extend credit are constraining farmers
  • Low productivity and scattered production leading to high cost of transportation
  • Emphasis on milk fat and not on SNF content maintaining relatively lower prices of milk
  • Initiate consumer education about the negative health impacts of unpackaged products
  • Develop packaging in small quantities to meet the needs of the poor
  • Increase milk prices in accordance with feed prices
  • Support expansion of dairy farmer organizations
  • Enhance productivity by breed improvement and extension
  • Enforce price setting of milk based on fat and SNF content to encourage production of cow milk

Four dairy enterprise models

The following section presents analysis and comparisons of four dairy enterprise models in India. Chosen for the analysis: i) a private dairy operating in Andhra Pradesh, ii) the Orissa State Cooperative as an example of a weak functioning cooperative, iii) the Gujarat Cooperative Milk Marketing Federation as an example of a strong functioning cooperative and iv) a mutually aided cooperative society as an alternative model. Models such as producer companies (emerging as a new generation cooperative) are still in a developing stage.

Table 8: Model features

Private dairy

State cooperative



Number of farmers involved

150 000

224 000

2 700 000


Average litresof milk procured per day

700 000

322 000


60 000

Litres of milk  processed at dairy plant per day



10 200 000


Number of primary cooperatives

3 500

3 800

13 141


As previously noted, cooperatives have been successful only in some parts of the country. This is largely because the cooperative law falls under the state policy and is formulated differently in different states. In states such as Gujarat, where the model succeeds, the cooperative is headed by elected managers and managed by professionals. In many other states, civil servants manage the cooperative, which results in a lot of government interference in the day-to-day functioning and leads to a lack of democracy and hence no sense of ownership or responsibility at the village level.

Three key differences distinguish the Gujarat (GCMMF) cooperatives from the other states: i) an oversight board elected by farmer members; ii) professionals employed by the cooperatives to manage the cooperatives and iii) the cooperatives have autonomy and freedom in their operating policies from interference by government and politicians (Tushar Shah et al.).

To address the governance issues related to cooperative management, the MACS Act was passed in 1995. It de-linked the district level cooperative from the state level, giving autonomy to district and village mutually aided societies. However, only the state of Andhra Pradesh has implemented the legislation.

Changing from the cooperative model to the society model has many associated bureaucratic problems. To overcome the hassles, the concept of producer companies was introduced as a way of transforming cooperatives to work more efficiently as representatives of farmers. However, while promising, it is a relatively new idea that needs more time to develop. Meanwhile, with the liberalization of dairy sector, private sector dairies have emerged as prominent players in the dairy industry.

i) A private dairy

The private dairy selected for the comparative analysis is an ISO 9001-certified dairy headquartered in Andhra Pradesh. The company set up there in 1992 after the MMPO opened the door to private dairies, and it now trades on the Indian stock exchange. Milk collection is about 7 lakh litres per day from 150 000 households in 3 500 villages in 3 states, although the major operations are in Andhra Pradesh. The company serves three main metropolitan areas with fresh milk (Hyderabad, Chennai and Bangalore) and is about to enter Mumbai. It also markets a wide range of products, including milk, curd, butter milk, pedha and paneer as well as new items such as flavoured yoghurt and flavoured milk to cater to the changing tastes of the young generation. The company has several chilling and bulk cooling units across its collection region in Andhra Pradesh to ensure quality of milk through the chain.

The company obtains its milk supply through village agents who have personal relationships with the farmers; it does not get directly involved with farmers. Depending on the social structure of the village, there may be more than one agent per village. The agents collect the milk and deliver to the company. The two parties have negotiated a price, but the company is not involved with what price the agent pays the farmers (although it is slightly above what the cooperatives pay in the state). Agents often provide loans to farmers to maintain their loyalty; typically, the agent competes with agents of other private companies for a farmers’ milk supply. Company employees are previous dairy cooperative employees who have enormous experience in this area. Collection areas depend on milk density and areas in which the district cooperative is less active and access to markets is efficient.

ii) The Orissa State Cooperative

The state cooperative is a dairy cooperative society registered under the Cooperative Society Act (1962). Currently, milk collected from 3 800 village societies and 224 000 farmers within 12 district unions totals about 322 000 litres per day. There has not been much competition with the private sector in this region because of low productivity and little dairy development, although private sector investment in the dairy sector is on the rise.

iii) Gujarat Cooperative Milk Marketing Federation

The Anand Milk Union Limited (Amul) cooperative formed in 1946; but it has become a brand name managed by the Gujarat Cooperative Milk Marketing Federation (GCMMF). The GCMMF consists of 13 district unions, involving 13 141 village dairy cooperative societies and nearly 2.7 million farmer members. With an aggregate milk processing capacity of 10.2 million litres per day, it is Asia ’s biggest dairy business venture. The marketing network encompasses 3 000 wholesale distributors and over 500 000 retail outlets, giving GCMMF a national reach that very few fast-moving consumer goods companies can boast. GCMMF has been exporting UHT -processed milk, ghee, skimmed and whole milk powder, butter, cheese and indigenous milk products to the China , Hong Kong , Singapore and the USA , among others.


GCMMF’s Amul model of dairy development is a three-tiered structure, with the dairy cooperative societies at the village level federated under a milk union at the district level and a federation of member unions at the state level. Farmer members milk their cows twice daily (morning and evening). GCMMF collects the milk twice a day, makes regular payments to the farmer members and provides them with cattle feed, fodder, animal breeding and veterinarian services.

Anyone who owns a cow or a buffalo and makes a one time payment of 11 rupees (10 rupees for the share certificate and 1 rupee for registration) can become a member of the village cooperative society. The applicant must agree to provide a set minimum quantity of milk, generally between 600 and 700 litres, to the society each year. The farmer members elect a managing committee that then chooses a chairman. The managing committee appoints a secretary to discharge the society’s administrative functions.

At the second tier, there is a district level union that processes the milk procured from individual societies. Each of the 13 unions has a board of directors chosen by an electoral college drawn from the chairpersons of its affiliated societies. The union board in turn elects its chairman.

The final tier is constituted by the GCMMF, which is responsible for marketing the milk procured and processed into various value-added products at the union dairies. All the products are sold under the Sagar or Amul umbrella brands. The federation’s board consists of the chairpersons of all 13 district unions. They elect the federation chairperson and appoint the managing director, who is accountable to the nearly 2.7 million strong Amul dairy society members.

Elected representatives of the farmer members make policy decisions at all three levels, which are then implemented by professional managers and skilled personnel employed by the farmer members. This structure eliminates all middlemen. By placing the farmer members in command, in essence, of the dairy cooperative involves them in the development process.

This cooperative structure is democratic, and the farmers are in control, from the milking of their animals to the final marketing by the federation. For every rupee that GCMMF earns, roughly 75 paise goes to the farmers. The mandate is clear – production by the masses, for the masses, at its efficient best.

The farmer members democratically govern the entire cooperative structure to ensure that the higher tier organizations are geared to serve the purpose of the lower levels and that the gains at all levels flow ultimately back to the farmers in a significant measure. The core feature of this structure is farmer involvement in decision-making at all three stages – procurement, processing and marketing of milk and milk products. The value addition at procurement and processing stages can be realized only with effective marketing of products, thus making it an essential feature for success.

Services provided to farmer members

The dairy unions affiliated to GCMMF provide various inputs that contribute to enhancing the productivity and quality standards, such as:

It is this integrated approach to dairying and addressing farmers’ needs at all levels that gives the Amul model its uniqueness. And it is why every third litre of milk from a cow or buffalo in Gujarat is processed in a GCMMF union dairy.

iv) MACS in Andhra Pradesh (AP)

Dairy activities started at the district level in 1971. The originally chosen district union was registered under the Andhra Pradesh Cooperative Societies Act (1964). After the introduction of the MACS Act (1995), the district union opted for registration as a MACS to acquire better functional autonomy for servicing its farmer members. The union is currently collecting 60 000 litres of milk per day from 650 villages, though it likely to increase up to 100 000 litres in the next two to three years.

The MACS have a two-tier operation: at the village and district levels. A village society with elected officers manages operations at the lower level; an elected board of directors managers the district society. The village and district societies each registered separately, and each has the freedom to use its own profits.

The union provides its members with a range of services required for dairy development activity:

Comparative analysis of the four value chains

The following compares performance criteria for the four dairy value chains to determine how they are likely to endure against future competition.

Demand conditions

The GCMMF has a wide range of traditional products as well as several new products catering to the demands of the new generation, such as sugar-free ice cream. It is one of the largest selling brands of dairy products, with a presence in all parts of the country. The private dairy also has a range of modern products catering to the young generation, such as flavoured yoghurt. The Andhra Pradesh MACS largely sells traditional products, such as milk, to urban consumers as well as rural markets through village societies (small packets, 250 ml). The Orissa State Cooperative also largely sells milk and a few traditional products.

Market structure and governance

The competitive structure for the four models varies. Dairy is a regional industry with regional dairies serving the local market, especially in the case of packaged milk. There is more scope for inter-regional trade.

The GCMMF competes with other multinational companies, such as Nestlé and Britannia, with certain products but leads among dairy products in India. The private dairy is a leading brand in the city of Hyderabad. However, the state of Andhra Pradesh has a well-developed dairy industry with several private dairies present in the state and rigorous competition among them. The Andhra Pradesh MACS largely sells packaged milk to the nearby areas and thus encounters less competition in marketing its products. And as mentioned earlier, Orissa finds very little competition to its packaged dairy products because there are hardly any private players in the state.

The supply chain is closely linked to the governance structure of the chain. For instance, the GCMMF network is very strong, with farmer involvement at all levels in the chain. Thus it is difficult for private players to procure milk directly from farmers. It is a similar situation within the Andhra Pradesh MACS. In Orissa, however, the cooperative network is not very strong and the president of the village society wields a lot of power; farmer involvement in decision-making at all levels is virtually non-existent. This has created keen competition from milk vendors in milk procurement in that area. The private dairy in Andhra Pradesh experiences intense competition from several private dairies in milk collection. But most of these companies do not deal directly with farmers. Milk is collected through village agents. There is no involvement of any company in any dairy development activity, and thus the companies compete with each other for milk collection.

The GCMMF collects its milk through village societies, with the cooperative setting the price. But it pays one of the highest prices in the country; milk collection is done in a transparent manner (based on testing fat and SNF content). The MACS society also has similar norms (for testing fat and SNF content) for milk collection. The MACS has the freedom to decide the price paid to farmers for their milk because they have autonomy in setting prices. Societies making profits through the sale of milk products can give higher returns to farmers because they do not have to follow the cooperative price. The prices paid that the Andhra Pradesh MACS declares at the district union are higher than the cooperative prices.

The Orissa State Cooperative collects its milk supply through a village society run by the president who wields a lot of power; its farmers’ price is relatively low compared with the GCMMF. In most cases, there is no testing for fat and SNF content on which prices should be based. Average prices are fixed for cow and buffalo milk; however, influential people in community get better prices. In the case of the private dairy, milk purchases are done through the agent, with prices based on competition with agents of other companies and the declared cooperative price. A large number of societies have electronic milk testing machines and more are acquiring them.

Factor conditions

Livestock assets are likely to be better where organizations serving the area are involved in dairy development activities. The GCMMF has been providing good AI services, which has enhanced the quality of buffalo in the area. The Andhra Pradesh MACS have created a good network of services by involving the State Department of Animal Husbandry, Dairying and Fisheries and NGOs working in its area. With efficient services and involvement in breed development, the quality of herd is likely to improve in the near future.

The GCMMF as well as the Andhra Pradesh MACS provide their farmers with feed, animal medicines and vaccines and breeding services. In the Orissa State Cooperative, feed is made available at a subsidized rate through the village society. The society is also involved in providing health and breeding services; however, the farmers still need to largely rely on the state government to provide health and breeding services, which are somewhat inadequate. There is no facility for loans; however, medicines are available at cost, although supply tends to be a problem. Because the private dairy collects milk through agents, it is not directly involved with the farmers for service provision. The agents sometimes extend loans to farmers, which ensures marketing commitment by producers. These are general loans not specifically used for dairy activities, and the interest rate typically is quite high.

Milk productivity depends on the level of extension support provided to farmers. The GCMMF provides ongoing extension activities, including training sessions and exposure visits for women. The Andhra Pradesh MACS are also involved in extension to some extent. The Orissa State Cooperative offers hardly any extension activity; the private dairy does not involve itself in extension services at all.

Related and supporting industries

The GCMMF has created good processing and primary processing infrastructure. Its plants are ISO certified and meet all the quality requirements. The private dairy processing plant also is ISO certified; however, the primary processing at the village level is not very strong. The Andhra Pradesh MACS have developed adequate processing facilities and plan to expand significantly in the coming years. Milk quality was an issue previously for the Orissa State Cooperative, but the situation has improved in recent years.


The GCMMF is the most organized in meeting future growth because of its investing in dairy development activities, such as ensuring the availability of feed and fodder and veterinary services. It is in a position to increase its procurement in the coming years. Also, in terms of development, the GCMMF leads the country in modern products, such as sugar-free ice cream.

The private dairy is not involved in dairy development activity and is only focusing on milk procurement. Faced with increasing competition, it will have to move to newer areas for expansion. Because of low involvement of farmers in the Orissa Cooperative, the private sector will find it easy to move into milk procurement in its area. The lack of variety and quality of its products will make it difficult for Orissa to compete with the private sector.

If the MACS model becomes popular, procurement will be affected. MACS involvement in dairy development activity will help the model grow and expand the milk procurement. It is geared to face competition from the private sector because of close links with farmers at the village level.


Dairy has a lot of potential to improve rural incomes, nutrition and women empowerment, and hence is a very critical area for investment. A well-developed industry will enable millions of farmers to capitalize on the emerging opportunities and make a significant impact on rural incomes. On the flip side, weak efforts towards dairy development also can have a significant but negative impact on the dairy industry. The growth rate has been sluggish over the past few years. With an increase in demand on one hand and sluggish supply on the other, there is a likely shortfall in demand in the coming years.

Major areas of intervention in the dairy sector have been highlighted in this review. Carrying out interventions requires resources and commitment from key actors – government, NGOs, development agencies and the National Dairy Development Board – to partner and work together.

A comprehensive policy addressing the critical issues is required for the robust growth of the sector. The following highlights those issues:

  1. The first issue is defining and implementing a policy for dairy development. Though a livestock policy has been established at the national level, its implementation is at the state level because agriculture is a state responsibility in India. But state policies addressing critical needs in dairy development have yet to be clearly defined across the country. Some progressive states have a well-defined policy, but it is lacking in most of the others. But even where a policy is clearly developed, oftentimes implementation is a problem.
  2. Lack of clarity between the roles of the State Livestock Development Agency and the State Department of Animal Husbandry, Dairying and Fisheries is an issue for effective policy implementation. For example, the National Cattle and Buffalo Breeding programme has not been well implemented in several states. Further, availability of funds is a major issue in implementing livestock activities. The Livestock Department is within the Department of Agriculture and thus the resources are biased towards agriculture. There is need to emphasize the importance of dairying to smallholder incomes to direct more resources towards dairy development.

Two very significant factors for the growth of the dairy sector are dairy development activities and milk prices paid to farmers. In the liberated policy environment, any player can procure milk in any region. This is a very different situation from the earlier concept of milk sheds, which limited the agency or organization procuring milk to a particular area. Hence, earlier it made sense for agencies and organizations to invest in dairy development activities.

But the freedom for procurement has thwarted the incentive for private companies to invest in dairy development activities. However, private sector investment in procurement is increasing. What is clear is that while the number of buyers is increasing, little is being done to develop the sector. In this situation, farmer-owned organizations (such as cooperatives, producer companies, common interest groups and women’s self-help groups) have to be strengthened at the grassroots level and linked to service and input providers.

Dairy farmer organizations can be used as a platform to address issues regarding availability of all inputs, including feed, fodder, breeding, veterinarian services, medicines, vaccines, credit and insurance. As is evident from the examples presented previously, the GCMMF has been the most successful in meeting the input requirements of farmers. However, this model has not been successful in other states because of issues with the basic organization of cooperatives.

Dairy cooperatives in several states function as parastatals and lack the spirit of cooperative organization with farmer involvement in ownership and decision-making. Alternative models of dairy farmer organizations – such as the MACS, producer companies, women’s self-help groups – also need to be explored. International agencies and donor groups need to be directed towards creating political will to strengthen dairy cooperatives and to set them up.

A very important aspect of dairy development is the price paid to farmers. Currently in many states, the milk price is set by the cooperatives; this price is used by all other players to set their prices, typically by paying 50 paise or 1 rupee more than the cooperative price in that area. The farmer’s price for milk ranges from 9 to 11 rupees for cow milk and 13 to 14 rupees for buffalo milk (a key comparison is a litre of bottled water, which costs 10–12 rupees then why are milk prices so low? The GCMMF pays the highest prices in the country. In the areas where the Andhra Pradesh MACS have set up, their prices are higher than the cooperative prices (MACS have the freedom to declare their own prices). It is evident that where dairy farmer organizations are strong, farmer prices are higher.

Low productivity per animal is another factor hindering development of the dairy sector. Many issues related to low productivity have been discussed – an inadequate cattle and buffalo breeding programme, extension and management on dairy enterprise and feeding practices, and availability of quality feed and fodder. Another important aspect related to low productivity is the lack of quality animals for farmers to purchase. A major hindrance to the availability of quality animals in dairy developing areas is the policy regarding interstate movement of animals.

Finally, it is important to discuss the hygienic issues. Milk quality concerns go beyond the farm level and require assurance of safe milk at all stages, including within the informal sector. Through the formal channel, cooperatives, private dairies or any other form of dairy farmer organization, quality can be addressed through training and education on clean milk practices, including the use of bulk coolers. It is also important to develop diagnostic facilities for milk testing, including infrastructure and human resources, that enable constant monitoring for quality. At the processing level, plant certification will help to enhance consumer confidence.

Milk quality in the informal markets is an important issue. As noted, 70–85 percent (based on different estimates) of milk is obtained and sold through the informal channel. In recent years, initiatives have focused on working with and providing training to traders. In Kenya, for instance, licensing has been used to formalize the traditional sector. In India as well, the Capitalisation of Livestock Programme Experiences programme, along with the International Livestock Research Institute, have undertaken some initiatives in this direction.

In the current situation, traders collecting milk at the farm then deliver it and milk products to urban and peri-urban areas. Each trader buys only small amounts of milk. There is scope to organize the traders into groups and create joint facilities where they can test, process and store their milk supplies. These trader facilities could serve as wholesale or bulk suppliers for hotels, chaiwalas (tea sellers) and small sweetshops. These initiatives can help to address the quality issues in the informal sector and also create employment opportunities in the non-farm sector.

An argument against working with traders is that formal sector involvement in dairying is increasing and eventually there will be no room for informal players. However, looking at the current reality, it will be several years before this materializes. In the meantime, the informal sector should not be ignored and organizing informal traders should be pursued.

Annex I: Overview of dairy marketing channels in India

Annex II: Income from dairy enterprise

Income from dairy enterprise per month (two-animal farm)

Economic analysis
(accounting for household labour and cost of green/dry fodder obtained for free from common resources or neighbour fields)

Financial analysis
(Does not account for household labour and free fodder)

Feed cost

2 000

1 400

Labour cost



Medicine cost



Total cost

2 810

1 460

Total revenue
(4 litre/animal/day @ 9 rupees cow milk or 14 rupees buffalo milk)

2 160–3 360

2 160–3 360

Net income


7001 900

Source: Punjabi

Annex III: Milk price chart


Orissa State Coop


Private dairy (heritage)









Farmer price




225+ some amount
(cooperative pricing)

Agent price



92–105 + incentive

240+ incentive

Consumer price

Source: Punjabi

Annex Table 1: Identifying critical issues in the dairy chain





Policy environment

Developing livestock policy
Breed development

Dept. of Animal Husbandry, Dairying and Fisheries

Lack of a coherent livestock development policy
Ineffective implementation of policy and projects due to lack of clarity in roles of different agencies
Lack of resources
Lack of clarity between roles of different departments
Lack of regulation for quality of feed and medicines


Disease control/ health/breeding/extension services
Support to dairy farmer organizations/women’s self-help groups

Dept. of Animal Husbandry, Dairying and Fisheries
Private dairies

Inadequate coverage of veterinarian and breeding services
Non-existent extension services
Scope to enhance activities of NGOs in these areas
Lack of private sector involvement in dairy development services and activities


Feed supply
Medicines/vaccine supply

Feed companies
Medicine companies
Medicine store

Quality/cost of feed
Ineffective approach for management of common property resources
Quality of medicines

Formal credit for animal purchase

Banks/financial institution
Self-help group

Very poor access to formal credit at the farm level

Informal loans for animal purchase or other dairy needs

Private company agent

Very high rate of interest; farmer has to sell milk at low price to the trader if he/she has borrowed money from the trader


Dairy farming
Selling milk cooperatives/traders/private dairy agents


Poor management and feeding practices because of lack of information in the absence of extension activities.
Low productivity because of poor genetic potential, poor feeding and management practices, poor access to health and breeding services, lack of good-quality animals
Availability of milk per household very low
Low profitability from dairy enterprise


Collection of milk from farmers through village society, processing and marketing of milk in cities and urban areas

Cooperative society

Lack of coverage of villages
Lack of transparency in milk testing and pricing
Lack of democracy in village societies
Marketing only in peri-urban/urban areas
Maintaining quality of milk/infrastructure
Milk prices declared by cooperatives kept low and used as a benchmark price by other players

Purchase milk from farmers and selling milk and processed products to consumers


No transparency in milk pricing
Adulteration and quality of milk and milk products
Unhygienic conditions for milk processing

Purchase of milk from farmers through village agents, processing and selling milk

Private dairy

No transparency in pricing of milk
Quality of milk


Selling of milk and milk products processed by cooperatives and private dairies


21 The first four factors were drawn from the diamond model; see Dr Michael E. Porter, 1985. Competitive advantage creating and sustaining superior performance. The fifth factor is from an adaptation of a model for agro industry value chains by Carlos Da Silva; see Carlos Da Silva and Hildo M. de Souza Filho. 2007. Guidelines for rapid appraisals of agrifood chain performance in developing countries. FAO publication. Rome.
22 Gujarat farmers receive the highest share of consumer prices compared to any other state in the country.

Previous Page Top of Page Next Page