A big fat problem in milk: What’s driving up prices?

Source: The post is based on the article “A big fat problem in milk: What’s driving up prices?” published in Indian Express on 17th April 2023

What is the News?

Milk is one of the most essential commodities in India, and it has been a part of the Indian diet for centuries. However, recently the prices of milk have seen a rise.  

What are the factors that are leading to higher milk prices in India?

Shortage of Fat: The current price inflation in milk has mainly to do with a shortage of fat. It has led dairies to increase full-cream milk prices more or to cut down fat content through the rebranding of existing products. There have even been reports of branded ghee and butter disappearing from store shelves.

Rise in exports: While India consumes the bulk of its milk products, exports have also been rising.

– Increased exports came at a time when milk production was taking a hit from farmers underfeeding their animals and shrinking herd sizes — due to low prices received during the Covid lockdowns, escalation in fodder and livestock feed costs, and lumpy skin disease outbreak among cattle.

Rise in Animal Feed Prices: Another factor is the increase in the prices of cereals and rice bran, ingredients used in animal feed, which is discouraging farmers from feeding their cattle sufficiently and is reflected in milk prices that have risen 12%-15% during winter months.

Adverse weather: Unseasonal rain and heat waves have also contributed to this jump in feed prices. 

Disease: Lumpy skin disease, a deadly viral infection, assumed epidemic proportions last year and is estimated to have killed nearly 185,000 cows and buffaloes in eight states. 

Increase in labour cost: Another reason for the increase in milk prices is the increase in the cost of labor. Dairy farming is a labor-intensive activity, and the wages of labourers have been increasing due to inflation and the implementation of minimum wage laws. 

– The cost of transportation and storage of milk has also been increasing which has added to the overall cost of production. 

What is the step the government should take to avert higher milk prices?

Fix GST Anomaly: Milk doesn’t attract any goods and services tax. But skim milk powder (SMP) is taxed at 5% and milk fat at 12%. 

So while dairies pay no tax on milk procured from farmers, they have to shell out GST on solids. Thus, input tax credit cannot be claimed, as there’s no GST on milk itself. Moreover, the tax incidence goes up as the fat in the reconstituted milk increases.

One way to avoid this is by doing away with GST on milk solids used for reconstitution purposes.

Alternatively, the GST on milk fats can be reduced to 5%. Differential rates on SMP and fat probably make no sense, when both are derived directly from milk. A 12% GST on milk fat is also an anomaly when vegetable fat (edible oils) is taxed at 5%.