A special correspondent in the Sunday Observer of July 28, 1996, has contended that "opposition parties are at present hell bent in denouncing the Government for the recent increase in the price of milk powder". He has posed the question whether, "a mere reduction in the import duty could cause a reduction in the market price of powdered milk and the opposition propaganda is a cheap tool to achieve political advantage".
He strongly advocates the consumption of liquid milk instead of powdered milk as in India and other milk producing countries to reduce the price burden. According to him the capital required to set up a powder plant is enormous which results in high prices. It is because of this according to him that milk powder price is relatively high. He does not however talk of efficiencies in the production of milk powder.
The special correspondent seems to be close to the seats of power and speaks of the "Government acting with responsibility to deliver long-term benefits, both to consumer and to improve local milk production. He also says that the revenue collected on milk powder is to be channelled for dairy production.
What is the Government's plan short-term or long-term? The policy statement of the Government was that a special scheme will be worked out to provide animal feed and quality farm animals at subsidized prices. These are promises and remain so. Is there any serious attempt to implement this grandiose scheme of development? These remain excellent concepts. What is the use of paper plans?
In point of fact, a request for Rs. 5 million to re-initiate the Artificial Insemination Program by an enthusiastic Secretary to Minister Thondaman was turned down by the then Treasury Secretary. "No supplementary appropriation" was the stupid reply to this request. How come without Parliamentary approval Rs. 6.9 million was paid out secretly - the infamous Hilton scandal?
The Special Correspondent says the packers should reduce prices by scaling down their packing and advertising costs. Has the Fair Trading Commission found these expenditures excessive? There is customs duty of 35 per cent on packing materials and 10 per cent on triple laminate, with BTT at 20 per cent, stamp duty of 2 per cent and defense levy of 4.5 per cent. Thus there is a heavy tax on packing materials and how can these be reduced. Why can't the duty and taxes be scaled down? Packers carry excess BTT paid upfront running into several millions of rupees to be refunded by the Inland Revenue Department. What is the cost of these to producers with monies thus blocked and with bank overdraft interest running may be upto 30 per cent. Therefore his contention that price of milk powder can be reduced by curtailing packing material cost is bordering on stupidity. Milk powder consumed by children has to be well protected to prevent bacterial infection and damage. If not the consequences can be disastrous. No response is needed to the foolish argument that prices are high and therefore duty should not be reduced! Since duty levied is on advalorem, higher the cif. price, heavier the duty. Please do not distort facts and mislead the public.
Today the cost of a liters of raw milk is Rs. 12.60. Why is it sold for Rs. 27/- by Milco at a gross mark up of 115 per cent. There is gross inefficiency and wastage in this state venture. The country's annual liquid milk production is of the order of 260 million litres and out of this only about 70-75 million litres are collected. The rest is consumed in liquid form. Milk powder is largely consumed in urban and semi-urban areas by people who have no fridges to store liquid milk. So the comparison should be between the local price of a liters of milk at Rs. 12.60 with imported powder in terms of milk at Rs. 27/-. If the duty of 10 per cent is excluded the comparative price of a liters of imported milk in powder form will be Rs. 25/-. So the local milk has an inbuilt protection of 100 per cent at the current international price of milk powder. There is thus no justification at all to levy duty for protective reasons. If the Government needs a revenue of Rs. 350 million by taxing children's essential consumer items, so be it. Then why not tax Mashoor dhal, dried fish and wet fish? Arguments for duty exemption of these items are naked political expediency.
Mr. Correspondent, what are the facts?
Let us objectively analyze the cost and production structures etc., of the dairy industry in Sri Lanka and see where the fault lies.
How is New Zealand, a non-subsidizing country producing milk powder well below our cost. This may be due to the low cost of raw milk there. The average world cost of processing into milk powder is US $.350/- per mt. If this be the basis the bulk cost of locally producing a kilo of milk powder should be Rs. 115/- per kilo and with carriage in words it should not exceed at most Rs. 130/- per kilo but the ex-factory cost of Nestles' is Rs. 150/- a kilo. A dudy of 20 percent is canvassed to cover gross inefficiencies. Are consumers to pay for this?
The President of the Veterinary Surgeons Association in a recent article has highlighted the dismal state of our dairy industry. According to him there are around 400,000 families engaged in dairy farming. A good part of them consider dairy farming as a supplementary activity and a source of income. They do not adopt modern techniques in production. Hence yields are very low, say at a liters or two a day per cow, compared to 20 litres or so obtained by commercially oriented dairy farmers: Feeding animals with concentrates is only in Coconut Triangle and perhaps in the up-country. For them the critical factors are the cost of feed and the availability of high yielding milk cows. It is sad to note that this country was able to get down only 10,000 animals during a decade and a half from 1980. Artificial insemination program has in recent years recorded dismal performance far below what was achieved in the fifties under late Dudley Senanayake, the devoted architect of agricultural development in this country.
The President of the Veterinary Surgeons Association has unequivocally blamed the bureaucrats for the present state of the dairy industry. These musketters who are close to the executive presidency are with solid blinkers. They can never understand producers' problems. They see only the new clothes of an empress but people see the nudity of their follies. The President of the Association has correctly stated that there are now eight ministries at the center handling the subject of dairy development on top of several ministers and staff of the provincial councils. There is not a single authority that can be held responsible for the success or failure of this industry. Large sums of public funds are being spent on these ministries and sadly enough not even one half of this outlay is spent on dairy development! Why not scrap these ministries and allow farmers themselves and the private sector to develop the industry?
Also according to the President of the Association, the landed cost at a mt. of FCM is US $2,500/-. The official exchange rate now is Rs. 56.10 and with L. C. Charges and commission etc., of Re. 1/- added on, it will cost Rs. 57.10 for a dollar to an importer. The taxes are a 10 per cent customs duty, 2 per cent stamp duty , 4.5 per cent defense levy - i.e., total of 16.5 per cent on the cif. price. It works out to US $412.50 per mt. (Rs. 23,141/-), the 10 per cent customs duty alone works out to US $250/- (Rs. 14,025/-) per mt. The customs duty on a kilo of milk powder is Rs. 14/-. Is this too small an amount for a poor family? Three children in a family will have to face a tax of Rs. 21/- per month on one and a half kilos of powder.
The Special Correspondent who claims to be a member of the Consultative Committee, feels that a reduction of the price by Rs. 4.80 per 400 grams pack or Rs. 14/- per kilo is not that significant. A price reduction at least on a kilo and a half will be worth Rs. 21/- saving for a month to a family of three children. This should at least mitigate the burden on a low income family earning around Rs. 1,500/- to Rs. 2,000/- a month. It is admittedly a mere speck for the Special Correspondent and his ilk but not for the poor! If this sum is so small, why can't the Government give a wage increase of Rs. 20/- a month and alleviate the burden on children of poor families or even increase Samurdhi allocations.
The Correspondent is further concerned that the Government will lose Rs. 350 million if the duty is removed. If the war effort needs more money why only tax children's foods? Why is full duty waiver given on Masoor dhal, dried fish, rice and wheat? What is the revenue that is being lost? It will be close to Rs. 5,000 million per annum. Why not impose even a small tax at least on those who consume imported Masoor dhal? Thousands of farmers who cultivated cow-pea have given up because of the duty free import of Masoor dhal. Clearly the Government has no economic or social priorities.
The landed cost of milk powder, when the duty rate of 20 per cent was approved in 1990 was US $1902 per mt. or Rs. 76,520/- at an exchange rate of Rs. 40.24 to one US dollar. In other words a kilo cost only Rs. 76.50 in 1990. A 20 per cent duty would have raised the price to Rs. 90.80 per kilo or Rs. 36.60 for a 400 gram pack. By 1994 due to the depreciation of the Rupee from Rs. 40.24 to Rs. 50.22 to a dollar cif. price moved to Rs. 91,000/- per mt. and a duty of 20 per cent would have raised the cost to Rs. 109,200/- per mt. or Rs. 43.70 per 400 gram pack. It was in this situation that a partial waiver of duty of 10 per cent was granted by President Wijetunga. He also directed, according to milk processors that they be given a subsidy on liquid milk purchased to ensure that price paid to farmers was not reduced.
This policy was adopted to lessen the burden on the poor consumers, largely the children, while safeguarding the income of dairy farmers. This was a collective policy initiative of the then Cabinet and not of a single Minister so to say. Local processors Milco and Nestles' collect only around 75 million litres of milk out of an estimated production of 260 million litres and produce around 7,000 mt. of milk powder, while the country's import requirement is 40,000-42,000 mt. Given an optimum dairy development performance, the country could meet at best only around 15 per cent of our requirement even by the end of a seven year program of development. This is the view of the professionals in this field. So it is foolish to think that we could achieve even 50 per cent self-sufficiency within a decade with all the assistance of Dr. Kurien and the National Dairy Development Board of India!
According to the special correspondent, all milk producers unanimously demanded that the duty be raised to 20 per cent. Who were the farmer organizations that were present? Is this demand a rational one? At a time when there was huge export subsidy, there was a case even to levy even 35 per cent duty. This was what the PTC recommended in 1985, when the cif price of a mt. of milk powder was US $1130/-, a price way below the local cost of production. But is that level of duty justified today when the price is US $2,500/- per mt. The duty incidence as we all know rises with the price escalation. In 1985, a 20 per cent duty would have amounted to US $226/- per mt. but at US $2,500/- price it will be US $500/-. If the tax incidence on milk powder is to be at an acceptable level at all, it has to move in inverse trend with regard to international forces.
The morality of taxing or otherwise, children's food, when prices are high is a different matter altogether. The Government's company Milco pays Rs. 12.60 for a liters of milk to the farmer and sells a liters of sterilized milk at Rs. 27/- at an astounding margin of 115 per cent over the cost of raw milk. Are the consumers given a fair deal? Is processing and distribution cost that heavy or is Milco an inefficient company. Imported milk powder in milk form costs Rs. 27/- for Anchor and Rs. 24/- for Lakspray and mind you it includes freight, handling and distribution expenses and the taxes amounting to 16.5 per cent. Should consumers let alone children suffer due to the inefficiency of a Government company?
The dairy industry can in no way develop unless and until the farmers get a decent price and adequate financial return, particularly the commercial farmers. Farmers need not only a remunerative price, but also genetically superior animals. The Governments over the years have failed to deliver these, nor can they deliver even over the next ten years. In the interim, whether one likes it or not, the country has to depend on imported milk powder. Import costs will increase consequent to the commitment of the developed countries to phase out export and domestic subsidies. In fact during the last two years the price has moved up form US $1,800/- to the current high price of US $2,500/- per mt. If this is the future trend, one can raise the question whether we need a protective tariff to assist our farmers. The depreciating rupee coupled with increasing import prices will render a protective tariff redundant. But if the Government wants more revenue, then tariff rate should not be the handle, may be a Value Added Tax or a special excise levy so that inefficient processors are not shielded at cost to revenue and more so at the expense of consumers. Importers and local processors should contribute equally to revenue. This is fundamental for a rational tax system.
It is claimed that India levies a duty of 40 per cent on milk powder and an excise duty of 20 per cent in addition on other milk products like chocolates etc. The reality of the situation is that India is self-sufficient in milk and does not import. She is the single largest producer of milk in the world now that the Soviet Union which was the largest producer has disintegrated. Besides the Indian middle class of 200 million consumers can afford higher prices but not the poorest 300 million. So self-sufficiency does not throw up the issue of deprivation of millions who cannot afford milk in India. Self-sufficiency is a myth when the poor have no access to milk.
Price of milk and milk powder in India is higher than in Sri Lanka. It is the price of milk paid to farmers that has made Indian dairy develop. Efficiency in collection of milk, processing and distribution are the underlying factors of the Indian success story. All these grew out of private sector initiative, although Co-operatives were the engine of the phenomenal growth. Fortunately Dr. Kurien ensured that the Government's interference in dairy development was kept to a minimum. This is an important feature we should take note of.
Above all there are dedicated technocrats and responsive extension workers who are well paid and cared for. Can we achieve these in Sri Lanka? We are yet to see the whole cow to be cared for by one Authority. As it is, the head is in one Ministry - the udder in another and the stomach is in a third Ministry! There is utter confusion among officials and also unfortunately among the producer farmers. Minister Kingsley Wickremaratne dreams that Milco can tame the market with its potty production of 2,500 mt. in a market of around 49,000 mt. His attitude is not only naive but also bordering on intellectual dishonesty. It is said that Milco's final cost of production of a kilo of powder market is Rs. 175/- but sold at Rs. 162/-, incurring a loss of Rs. 13/-. It should be incurring a loss of around Rs. 39 million per annum. While Milco can be indifferent to losses, can private sector companies operate by incurring losses. It is known that the leading importer Lanka Milk Foods has posted losses in 1995, as import costs soared and the retail prices were not adjusted. The company was hoping for relief by the removal of the customs duty of 10 per cent. This never came through and as a result retail prices had to be raised. One cannot expect private sector concerns to be charitable institutions. They have to earn a return on the funds of the shareholders or fold up, unlike Milco which can survive whatever happens. It is the tax payer who has to cough up.
The President of Veterinary Surgeons Association, a professional body has clearly indicated that we are weak, both in production and procurement. There is an urgent need to upgrade the animals. He is also very critical of the proposed new joint venture with the National Dairy Development Board of India to enhance processing capacity. Already there is excess capacity in processing and plans to increase to 740,000 litres a day or 270 million litres per annum will be futile when we collect at best only around 240,000 litres a day or 87 million litres per annum. It is reported that we have at present processing capacity of 742,000 litres per day. There is no economic justification to add a further 300,000 litres per day in Colombo and another 100,000 litres per day at Ambawela. We need Dr. Kurien's expertise in production and not to convert "Amul" powder into milk and market the Indian milk. So additional investment will be a disaster. What will eventually happen is a "Nestle Syndrome" - import powder and convert into processed milk and sell in various forms, blessed with duty and tax holidays and of course at sky high prices!
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