Increase in the Prices of Milk Fat

Increase in the Prices of Milk Fat

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April 23, 2023

India is facing milk inflation due to shortage of milk fat and the difference between toned milk and full cream has broadened from Rs. 11 to more than Rs. 16 per litre.

Increase in Milk Prices and Reasons for Milk Fat Shortage

The Problem

               • The existing milk price inflation is due to shortage of milk fat.

               • Consequently, dairies have either reduced the fat content of existing items or have increased the prices of full-cream milk.

               • Reports have also indicated that butter and branded ghee are not available in many stores

Possible reasons

               Decreasing contribution through buffaloes - Many experts are partly linking the problem to the falling share of buffaloes in overall milk production because they offer 9% SNF and 7% fat whereas cow milk has 3.5% and 8.5% of the same.

               Demand Supply Imbalance - There is improved demand for ice-cream, paneer, cheese, ghee and various high-fat milk items. Yet, supply comes from crossbreds which provide low fat milk. This imbalance pushes up the fat prices significantly.

               Taxation - There is no GST on milk. But milk fat is taxed at 12% and Skimmed Milk Powder (SMP) at 5%. Dairies do not pay tax on milk sourced through farmers but they have to pay GST on solids and thus, they cannot claim input tax credit with no GST on milk. As the fat content in reconditioned milk increases, the tax incidence also pushes higher

Way Ahead

               • Import has been ruled out but the high prices may well incentivize more farmers to invest in cattle and increase the production.

               • GST over those milk solids that are used for reconditioning can be done away with and the overall GST over milk fat can be lowered to 5%. Different prices for fat and SMP hardly make sense as both for them are derived from milk. When the tax on vegetable fat is 5%, milk fat GST of 12% seems an anomaly.

               • The supply constraints must be addressed through sound policies because it is a sector which provides direct livelihood to 80 million farmers and can also provide the same to many other marginal and small farmers because 120 million of them have too small plots for feasible farming.

Source - The HINDU & Business Today