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Pakistan is arguably the fourth largest milk producer in the world. Yet, the sector is largely informal. The integration of milk value chain into formal sector is missing. Out of over 60 million tons annual milk production, just 3 percent is processed. Nearly 80 percent of milk supply is by small farms (less than 10 animals), while the supply from medium and large farms is a mere 1 percent. The reliance on small farmers explains low milk yield – 20 to 25 percent of top yielding countries.

Around one third of milk produced is retained at the farm level. Add to this losses and consumption by calves, less than half of the production is tradable milk; out of which only 7 percent is processed. That is too low a number. There is no control on the adulteration of loose milk. That is why despite high consumption of milk, two fifth of Pakistan’s children are stunted and around one sixth suffer from wasting.

To fight adulteration, many countries around the world came up with minimum pasteurization law. There have been talks of instating a similar law in urban centers of Pakistan for past many years. There are multiple benefits. Good quality of packaged milk helps in addressing malnutrition. Foreign and local investment comes in – already two big multinationals operate in Pakistan, and a few local corporates have ventured into pasteurized milk segment.

This creates market for medium and large farms – a few big corporates are already invested in the value chain. All of which will boost economic growth and creates jobs. Moreover, this will help broaden the tax base and boost collections. Pakistan needs to focus on regulation of loose milk market and bringing in a minimum pasteurization law, at least in the urban centres.

Throughout the world, dairy industry development has taken place with the help of government. There are tax and regulatory incentives offered to investors. Turkey is a big success. There is VAT exemption on the milk value chain, government supports in the form of grants for producers, and a minimum pasteurization law. In India, government has invested in developing milk cold chains, and given incentives to increase yield, along with low tax rates.

In Pakistan, no such incentives have been offered to the formal industry for growth. The cold chain needs to be developed for reducing the milk wastage and lowering the cost of collection from small farms. One of the prime reasons for milk going bad is lack of proper infrastructure that could maintain the hygiene and temperature of loose milk. There is a case of increasing input costs for those who tries to maintain the standards.

The cost problem has exacerbated with recent inflationary trends and rising price of raw milk. It is adversely affecting the overall dairy value chain. The formal sector pays taxes and incurs cost to ensure quality. With delta in taxation (between formal and informal), the incentives to formalize are falling. This is evident from the fact that prior to 2016, processed ambient milk volumes were steadily growing – from 250 million litres in 2008 to 495 million litres in 2016 – CAGR of 8.4 percent. Then, zero rating was removed, and the value chain is now taxed at 8 percent. By 2019, the volumes fell to 464 million litres.

That reversing trend must be arrested. For that to happen, government needs to review zero rating in the upcoming budget. The minimum pasteurization law should be implemented with mandatory processing. This should be done in a staged manner. Government needs to learn from Turkish experience where such steps have revolutionized the formal dairy sector. The potential is huge in Pakistan.