During the recent past, milk being an essential food has become the most-talked-about products after petrol in urban India! Milk is a relatively new entrant amongst the food inflation-contributing items and is likely to be around for some time to come - the minimum retail price of milk and milk products on an average has grown around 27 percent in a short span!

What is of concern is that the magnitude of paucity caused by the seasonal nature of milk production, coupled with poor supply management in India, seems to be at contradiction with the scale of milk production since the country is supposed to be the largest milk producer in the world! The annual milk production is around 115 million tonnes whereas hardly 15 million tonnes is being processed and value added in the country.

Inadequate infrastructure and poor logistics and their impact on the supply have largely contributed to the failure to build on the gains in production volumes to match up with the growing consumers' demand!

The strength of the Operation Flood programme was to recognize these challenges and address them by investing in collecting marketable milk surpluses in the milk production areas and connecting the deficit areas besides building buffer stock of seasonal surpluses. This was done through the establishment of a 'National Milk Grid' (NMG). The NMG acted as a market intervention tool assuring higher realizations for the dairy farmer and a consistent supply to the consumer.

In keeping with the liberalization policy, the Indian dairy industry migrated from a centralized buffer stocking-cum-distribution organization to a system where the market forces determined the equilibrium. However, whenever seasonality or any adversity led to reduction in the availability of fluid milk to consumers and resulted in increased prices, the response has been to ban exports and push for import. This relief to consumer comes at the cost of the dairy farmer and the industry, whose exposure to the upside is thus capped while their downside risk in the times of excess is not sufficiently covered!

Food inflation is increasingly a key and consistent area of global concern. Its impact in the dairy industry has been more pronounced in the wake of spiraling demand from emerging markets while supply has been impacted by reduction in production subsidy equivalent in the EU and the US and the adverse weather influencing production in traditional supply areas. Since the expert view seems to support the continued increase in food commodity prices, it is important to develop a long-term policy measure that addresses the needs of the consumer and the producer as well!

India needs to consider reintroduction of a backup commodity storage and distribution system albeit in a fashion that is relevant in the wake of institutional multiplicity. We should devise an incentive-based model that necessitates maintaining a certain minimum levels of buffer stocks that address any supply-demand imbalances or meet with any adversity. Instead of a central repository, this can be maintained with the milk processors themselves. The resultant increase in cost of carrying the inventory and working capital can be met through the provision of soft funding of working capital against the storage of surplus dairy commodities. The governance and compliance can be delegated to an apex monitoring committee formed by the administrative ministry of the government of India, dairy institutions like NDDB, NDRI and IDA as well as selective members of the cooperative and private dairy enterprises.

In order to play a pro-active role, the committee will need to be supported with adequate levels of market intelligence that provides insights into market vagaries. Based on its insights, the committee can then consult the government to build a duty structure that regulates inflow and outflow of dairy products and commodities into the country. The committee can be a nodal body that makes these decisions keeping in mind the long-term benefits of producers and consumers.

Milk has increasingly become a key contributor to national nutrition and there are major efforts under way to ensure 'milk security' of the country. This multi-faceted approach is targeting a production of 180 million tonnes, by the year 2022, through an exhaustive approach that addresses the needs at the production, processing and supply chain levels. However, the absence of a structured intervention programme through an impartial nodal agency can stymie the efforts by hijacking the economic incentives for a dairy farmer to produce more.

Adam Smith had argued that the lure of higher realization attracts increased levels of resources, thereby bringing the realizations back to their natural level. Surely, the long- term solution to the present milk malady is in ensuring the increases in supply counters the impact of demand on the spiralling prices of dairy commodities and products.