Lahore - Pakistan is the 3rd largest milk producing country in the world. Dairy farming in Pakistan is characterised by fragmented, smallholder farmers operating at subsistence level, forming around 8.5 million of the population. Over 10 million farming families produce approximately 40 billion litres of milk annually, with an 11.30% share in the GDP. As such, the industry is providing employment to millions of Pakistanis.

However, despite growth and being one of the world’s largest producers of milk Pakistan is still a net importer of dairy products.  These views were expressed by Babur Sultan, CEO, Engro Foods and Chairman Pakistan Dairy Association (PDA), in an interview with The Nation.

Mr. Babur also shared his views about the proposed unnecessary taxes on dairy industry in the upcoming budget 2016-17. He believes that with the right support, the situation can be reversed, making Pakistan an exporter of milk and dairy products, and a major player in the global dairy industry. Following are some extracts of the interview:

Q: What are some of the key challenges being faced by Pakistan’s dairy sector?

Ans: The Pakistani dairy sector faces multiple challenges. One of the biggest current hurdles to future growth is the rumoured removal of zero-rating on dairy products. Removal of the zero-rating is likely to have a massive, and wide-ranging impact on not only the dairy industry, but also the lives and health of millions of Pakistanis.

Q3: Last year the government planned to increase tax on processed dairy sector, what happened to that? Did the government go-ahead with it?

Ans: At the time, after extensive consultations with the PDA, the government deferred the withdrawal of zero-rating on most dairy products. However, they did go ahead and impose 10% sales tax on locally produced pure powder milks for children, yoghurts, cream, cheese, butter, etc. This had a definite negative effect which was witnessed in the rising of prices for these items and also investor aversion for the overall dairy sector. 

Q:  If zero-rating is withdrawn, what will be its impact on the overall market for milk, and dairy sector in general?

Ans:  It’s important to note that the removal of zero-rating will not only impact the dairy industry, it will affect all Pakistanis. Milk is a key source of nutrients for growing children. And in a culture such as ours, milk is not only consumed directly, dairy is also a key ingredient for many other dietary staples, whether yoghurt, or butter, or ghee, or for use in tea. A breakdown of the domestic kitchen budget shows that at 22%, milk and dairy products form one of the biggest portions of kitchen expenditure (compared to wheat, which is 12%). Milk products also have 7.4% weightage in the Consumer Price Index, while wheat is 4.2%.

If, as recent reports indicate, the Government removes the zero-rating on dairy products the most immediate effect will be a direct increase in the price of packaged milk (by about 6-8 Rupees), as well as other dairy products. While only 6 percent of milk currently sold is packaged, there is also bound to be a knock-on effect on the price of loose milk. As such, the removal of the zero-rating will lead to further price hikes and in turn lead to a rise in the Consumer Price Index, with an overall rise in inflation.

Withdrawal of zero rating will negatively impact the livelihoods of the 600,000 farmers engaged in the dairy value chain across the country and will notice a decrease in demand for the milk they produce. Related industries for breeding, feeding and milking equipment will also shrink. Direct investment in the dairy processing sector will decrease and lower the quality of milk for consumers as well as production capacity, discourage corporate dairy farming, and make value chains less efficient while simultaneously increasing rural poverty and decreasing GDP. Consequently, foreign and local investment in dairy farms and the dairy processing sector will suffer – which amounted to USD 800 million over the last five years.

Pakistan Dairy Association proposes to the government that:

- Continue zero rating taxation regime

- Re-transpose dairy products from 8th to 5th schedule of the Sales Tax Act 1990

- Refund the full amount of outstanding sales tax refunds (over PKR 17 billion)

Q:  How can Pakistan’s dairy sector maximize its potential?

Ans: There is definitely a huge potential for growth in this industry given the right attention. In recent years, huge investments have been made enabling the sector to increase overall milk production, as well as cut down on milk wastage. As mentioned earlier, there are 8.5 million people associated with the dairy industry in Pakistan; as such, any substantial growth will directly impact the lives of millions of Pakistanis. We believe that working together with the private sector, the government can play an important role in enabling the dairy industry to reach its maximum potential.