Raja Adeel Ashfaq

Pakistan is one of the five largest milk producers in the world and yet it remains a milk deficient country. The tradable surplus constitutes only 25.2 billion litres – or 44 per cent of annual milk output of 57.3 billion litres. The remainder is mostly wasted or used in the preparation traditional products – ghee, butter, sweets, yogurt, etc. A whopping 92 per cent, or 23.2 billion litres, of the surplus is sold untreated in the market by informal sector through a supply chain that lacks suitable storage and proper temperature conditions, jeopardizing its nutritious value and food safety at the expense of public health. The unpackaged milk is mostly contaminated and adulterated, which makes it more unsafe for human consumption and causes spread of multiple diseases like tuberculosis. The processed, packaged milk is less than eight per cent of the tradable surplus due to failure of successive governments to implement policies and laws to regulate the huge unprocessed milk trade. Countries like Turkey, Indonesia, Sri Lanka, Thailand, Malaysia, South Africa, etc have increased the processed milk consumption to 80-98 per cent of their tradable surplus by implementing policies discouraging trade of untreated, raw milk. The unavailability of low-cost healthy, nutritious packaged milk is often blamed for growing malnutrition in Pakistan, causing an annual economic loss of $7.2 billion in the form of increased health expenditure, lower life expectancy, reduced physical productivity. It also is major cause of stunting and wasting among children. According to the Planning Commission of Pakistan, the stunting in children below five years in the country has grown by seven per cent to 43.7 per cent and wasting by three per cent to 15.1 per cent since 1994. About 31.5 per cent children are underweight. The industry says the government can overcome such public health issues by implementing policies encouraging use of processed milk and working closely with the industry to jointly launch subsidized school milk programme on the pattern of countries like Indonesia. The dairy industry’s share in the market is low because of absence of laws – like minimum pasteurization and milk packaging standards – to discourage the use of unprocessed milk, and higher cost of packaged milk to raw milk. Currently, the price differential between packaged milk and loose milk has increased to 90 per cent from 77 per cent, due to abolition of its zero-rating status in the budget 2016-17 that left a impact of 6-8 per cent, sharp increase in its costs of inputs like packaging materials over hefty currency devaluation, and double digit inflation in last three years resulting in raw milk procurement costs. Resultantly, according to the industry, the dairy industry, whose capacity utilization has come down to 50 per cent from 68 per cent in 2016, has witnessed 30 per cent drop in its sales and 80 per cent decline in profits as it finds it hard to pass on the full price impact of abolition of zero-rating facility that has made sales tax a part of its production cost, increased price of milk procurement and other inputs to consumers as the demand for processed milk is highly price sensitive because of availability of low-priced loose milk. The industry sales fell by 17 per cent when the packaged milk producers raised their prices by six per cent in August 2017 to incorporate the impact of the withdrawal of zero-rating. The removal of zero-rating for dairy products is a divergence from international tax practices, and is impacting financial viability of stringently regulated dairy industry and eroding its competitiveness vis-à-vis loose milk. The industry says the revival of zero-rating will involve tax relief of Rs3.5 billion but it will boost its income tax and sales tax contribution to government revenue by Rs10.5 billion, and attract non-debt creating FDI to the tune of $1.5 billion in five years besides pushing exports and encouraging investment in value-added dairy products like cheese. The PDA also wants harmonization of federal and provincial GST on goods and services at 13 per cent and reintroduction of tax credit on investments by existing players. Another area where the industry wants government intervention relates to multiple, competing food regulatory regimes being implemented at the federal and provincial levels at the expense of investment in and growth of processed milk industry. The industry says nowhere in the world has any country succeeded in developing its dairy industry without active government support. Turkey has in a short time increased the use of processed milk by exempting the industry from VAT, giving grants to producers, enforcing minimum pasteurisation law and minim packaging requirements to discourage sale of contaminated, unhygienic loose milk. Similarly, Thailand heavily subsidise its dairy sector and India has invested millions of dollar for the development of cold chain for the industry. Pakistan also needs to regulate its loose milk market by implementing a minimum pasteurisation law and packaging standards. This will create incentive for farmers to sell their produce directly to the industry, eliminate middleman and bring down price of packaged milk. The dairy sector can play a crucial role in boosting the rural economy. According to the industry estimates, one per cent increase in the market share of packaged milk business can create 2500 new jobs and transfer additional Rs36 billion into the rural economy. Further, it will boost taxes by Rs6 billion a year. The government support is also needed to improve milk yields. The dairy sector is not competitive from the very source as milk yield at six litres per animal is one of the lowest in the world. In the US, the farmers have successfully increased the yield per animal to 35 litres. The industry has been financing programmes to train farmers and double their milk yields and reduce disease. But its impact has been limited. The government should enforce policies and launch initiatives for improving animal breed, feed and yield.

– The writer former executive member of Lahore Chamber of Commerce & Industry.