Maharashtra’s procurement policy increases price distortions

if you live in mumbai, you pay as much as 18 per cent to 25 per cent more on every litre of milk you purchase, compared to any other metropolis. considering that maharashtra is one of the top five milk producing states with a per day production of 1.58 million litres and the fact that there is a surplus of nine lakh litres a day, this comes out as a clear market distortion. for those familiar with the dairy industry, it is a well-known fact that the state government's procurement policy since the early 1990s has often been mentioned as the culprit. for the uninitiated, the state of maharashtra is the only one where the price of milk is regulated — the government fixes a procurement price at which it is committed to buy all the milk that it is offered by the producers — a policy similar to the centre's policies on wheat and other crops. an unfortunate outcome of this market distortion is that unlike wheat, which is at least supplied to the poor consumer at a subsidised price through the public distribution channel, the high procurement price in milk is reflected in high market prices. this is because any hike in milk procurement prices is simply passed on to the consumer. a second fallout of the government procurement has been on the its exchequer itself. the government of maharashtra was forced to get into processing of milk, thanks to the huge surpluses, but the conversion into butter or milk powder is not done efficiently. industry sources put the loss of the state government in this process at rs 5 for each litre, translating into a huge loss of around rs 225 crore per annum. the third consequence has been the squeezing out of private players in the processing sector. the government procurement price acts as the benchmark rate even for the milk which finds itself into the free market. for milk-based products, the cost of milk constitutes around 80 per cent of the overall cost of production. players in maharashtra, thus, automatically lose out since their final products are pitted against those from other states where the cost of raw material (that is, milk) is much lower. the government's recent decision to restrict its procurement and leave it to the cooperatives to sell 20 per cent of their daily collection locally from january 1, 2002, is a step in the right direction, and if taken further, it may reduce the pricing distortion which is borne by the consumer and encourage more private players. this, however, calls for a re-look at the entire distribution channel of cooperatives and clearly demarcating the role of the state under the new policy.

Maharashtra’s procurement policy increases price distortions

IF YOU live in Mumbai, you pay as much as 18 per cent to 25 per cent more on every litre of milk you purchase, compared to any other metropolis.

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