Explained: Why Indian dairy farmers oppose RCEP trade agreement

Providing market access to New Zealand in particular could wipe out their livelihoods

As India moves closer towards finalising its negotiating position under the Regional Comprehensive Economic Partnership (RCEP), the Indian dairy industry has upped its opposition to the pact on grounds that any lowering of tariff would severely harm its interests.

RCEP is India’s most ambitious trade pact to date. Based on India’s existing free-trade agreements (FTA) with the 10-nation Asean bloc, the RCEP will include all the nations with which Asean has trade deals — China, India, Japan, South Korea, Australia and —  most importantly from the point of view of the Indian dairy industry — New Zealand. 

The negotiations on this issue centre on granting New Zealand access to the fast-growing dairy products market in India —together with wine, apples and kiwis — in return for easier norms for cross-border migration of Indian professionals (nurses, chartered accountants and IT experts). 

But this quid pro quo is a little more complicated because of the asymmetry in the two countries' dairy sectors. New Zealand is the world’s largest global milk and dairy product exporter, accounting for nearly 20 per cent, or $5.4 billion, of all global exports in 2018, according to the International Trade Centre. India, by contrast, is a negligible exporter. Currently, most milk and dairy products imports to India attract a peak customs duty of 64 per cent (60 per cent basic customs duty and 4 per cent countervailing duties). 

The Indian dairy industry’s argument against lowering these duties hinges on the fact that, given the fragmented nature of the sector, cheap imports would impact the livelihood of almost 100 million rural households that are directly or indirectly dependent on dairying. An overwhelming 77 per cent of these households comprise small and marginal farmers.

Moreover, in India, more than 70 per cent of the price that customers pay for milk is passed on to dairy farmers mainly on account of the unique cooperative structure that was put in place under Operation Flood I and II, programmes that transformed a dairy-poor country into the world’s largest milk producer. In New Zealand, the farmers’ share in consumer price is 30 per cent, and there are just about 20,000 farmers involved in the dairy sector, most of them with landholdings that are several orders or magnitude larger than Indian farmers’ (see chart). 

New Zealand exports almost 93 per cent of its annual milk production — estimated at 20.5 million tonnes — in various forms. Indian dairy players say that if New Zealand were to ship just 5 per cent of its annual milk and milk product exports to India, the sheer volume would be enough to depress Indian product prices.

Rough estimates show that just 5 per cent of New Zealand’s annual exports of high-value milk products would be enough to capture 28 per cent of the Indian market for all milk and milk-based products — and that include skimmed milk powder (SMP), cheese and butter.

Clearly, the odds are stacked heavily against lowering tariffs. Local dairy companies may have to slash their milk procurement prices if cheap imports are allowed because global SMP prices are far lower than Indian rates  — Rs160-170 a kg against Rs280-290 respectively. Assuming that 10 litres of liquid milk goes into producing one kg of SMP, procurement prices in India have to drop Rs10-11 per litre to make purchases competitive vis-à-vis imports. This would be disastrous for small Indian dairy farmers, who were beginning to see a slight increase in procurement rates in the past few weeks after years of low prices.

Back-of-the-envelope calculations show that Indian farmers could collectively lose almost Rs3.5 trillion if procurement prices are slashed. The impact on the rural sector as a result of lower procurement prices could be huge, given that latest NSSO data showed that between 2003 and 2013 the income from livestock recorded the fastest compound annual growth rate (CAGR) at 14.3 per cent. 

Dairy accounts for 25 per cent (Rs7 trillion) of the country’s total farm produce and has been a global success story. Since 1997, world milk production grew at a CAGR of 2 per cent, half India’s CAGR of 4.5 per cent.

Commerce ministry officials who are spearheading the RCEP negotiations appear to think the dairy sector’s fears are unfounded. "India is the largest producer of milk globally. Imports of high-value foreign produce may rise in certain categories, but there's nothing to suggest the entire sector will be affected," a trade negotiator at RCEP said.

A senior dairy sector official finds this reasoning specious. “If the argument is that import of high-value milk products, which is consumed by a select class of people, might rise, what is the need for lowering tariff on them?” he points out. 

As it stands, the trade-off — Indian professionals versus small and marginal farmers — is a tricky one. Much depends on which lobby is heard the loudest in the corridors of Raisina Hill.