Why India’s Next Big Export Could Be Paneer, Not Powdered Milk

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Rajiv, thank you so much for joining me today. So let me start off by asking you about the dairy industry, but in the context of trade. So two recent developments or developing stories. So one is, of course, the India-UK FTA, which has been signed, but I'm sure it will take time to go into effect. But one of the things that's noteworthy about that deal is that it leaves out the mention of dairy products. Similarly, in the ongoing India-US bilateral trade agreement discussions, there is considerable resistance to allowing the import of dairy products from the US for various reasons.

And I'm sure we can come to that. But again, dairy is a sensitive issue there. So that's really the starting point. So my question is, why is this happening?

Govind, first of all, it's a pleasure to be on your show. And thanks for inviting me today. You would remember, before we get into the FTAs of UK and USA, you would remember sometime in 2018 or 2019, India withdrew from the RCEP.

Totally, the only issue was dairy. The only issue was dairy. And so now what is happening in these FTAs, the UK one is already done, the US is under consideration, and there will be a few more coming up.

And my guess is, India will be protecting dairy in all these FTAs as of now, as for now. Okay, so let's understand the context of US. US, last year, would have exported about $9 billion worth of dairy products, and they definitely seek access to the Indian market.

It's a very lucrative market for them. US dairy is heavily subsidised, and it's more into value-added products, they are not interested in sending milk to you, and neither is the Indian consumer interested in getting that milk. They are more into value-added products, which would be cheese, essentially, and a few other ingredients in which India has just started creating some base.

So first up, my view is, this protection currently is needed. It's a question of, say, food sovereignty and security, 80 million Indian households depend on dairy, their livelihoods depend on dairy, and these are mostly smallholders, one, two, or three cows. So there is a need to protect these 80 million households.

So this is the economic reason. Second, Govind, you would know, this is a cultural issue also, like the animals in the US are fed with animal protein, which is culturally not accepted in the Indian context, which has got about 30 to 35% vegetarian population, whose only source of protein is milk. So hence, on these two aspects, I would think that India has strictly protected the dairy industry, the dairy sector from the UK FTA, and the same is going to happen with the US FTA that is under discussion now.

So tell us about the domestic market then. So we produce about 230 million tonnes of milk as things stand today, but we hardly export any. So how much of it is used in the way it is produced?

How much of it gets converted into value added? What's been the transition like?

See, today, if you see, first of all, before that, we have to have a small discussion on cooperative and the private sector. Today, thankfully, the split is 50-50, which used to be, say, 30 years back, it would be 90 with the cooperative and 10 with the private sector as in terms of milk handling. So today, it would be 50-50, which is a good thing.

The private sector has come ahead, the private sector has invested, the private sector has grown in shape and size, the private sector has grown in trust with the consumer. So it's a 50-50 split. This indicates that going forward, this protectionism is not going to stay.

It will not make economic sense. Okay, culturally, there can be non-tariff barriers, which is WTO certified, like certificates and licences and things like that. So that can be handled.

But economically, going forward, this protectionism is not going to stay. So what are we doing about it will be an issue. But now, coming back to your question, what is, so out of this 240 million tonnes that we produce, say half of it is consumed by the producers.

You know, these are consumed in my home and in the neighbourhood, and this is consumed. So half of the remaining goes into the milk processors and to the market. Now, India is largely a pouch milk company.

Even if you see the biggest of the biggest players like Amul and Nandini, the big cooperatives or the big private sector players like Hatchson in the south or Paras in north or Sonai Dairy in the west, the big ones, they are mainly pouch milk sellers. So India consumes a large quantity of pouch milk. Second consumption is the ingredients.

Like, why do we make ingredients? One is to increase the shelf life, you know, for with about 10 or 11 litres of milk, you make one kg of milk powder. OK, so you you handle that, particularly in the western region in Maharashtra, a lot of milk powder, cheese and other such long shelf life products are made which are used by ingredients in other sectors like pharmaceuticals, like confectionaries.

They use milk powder and butter and then a large part of cheese that is made in India. India, whatever cheese is made in India, 95 percent would be mozzarella cheese, which in other words is called pizza cheese. So the bigger buyers are the pizza companies, the Domino's, Pizza Hut and all.

So I would say a large part goes into direct consumption by way of pouch milk, which goes into the houses, half litre or one litre. And you can think of the logistics that is involved. A huge part goes into making milk powder and cheese, which are ingredients.

And then you have the value added products like consumer cheese, like ghee, like paneer. Paneer is gaining ground, like curd. OK, curd also in Indian context would be or yoghurt will be a value added product.

Right, so when you say, let me let me come to the Indian market. So one of the things you've said is that the private sector has now become half of the industry, which is I'm assuming it's out of 240, it's about 120 million tonnes. And I'll ask you for a breakup shortly.

But the growth of this private sector to this point has happened, is it mostly in the last decade, decade and a half? I mean, the rapid growth.

I would say, you know, the investment in private sector happened, started happening during the mid-90s, after private sector was allowed to invest in this sector, in that globalisation, early 90s liberalisation period. That was a major policy change. And then there were a lot of such policies, new dairy policy and a lot of things came up one after the other.

But most of these companies, the big private sector companies that you see in the country today, like Heritage or Hudson or VRS must be older. There are many others like Dodla Dairy or all the dairy companies in the West. There is a multinational Schreiber Dynamics, Lactalis came in recently, of course.

But this private sector investment and by the way, not all private sector companies are large companies. There are very small but successful private sector interest that is there in this industry, which is catering to a regional and local clientele. And they are doing very well.

So I would say during the mid-90s, 95 to say the early 2000s, a lot of investment happened in the private sector. And so it is the last 20 years, I would say the private sector has grown in size.

Right. And most of these companies, from what I can see, including in your earlier portfolio at Lactalis, when you acquired companies like Prabhat Dairy or Tirumala Dairy or Anek, these are all local players. So it's a very localised industry and typically has stayed local. Would that be correct?

Absolutely. And not only in India, let's say if you see a company like Lactalis, it's a global company with about, say, in excess of 30 billion euros in turnover. Though while it's a global company, but all their acquisitions in all countries of the world, they have remained local.

And that possibly is the only way to be successful in this sector. You know, you have to have a local approach. It's not just marketing.

It's just connecting with the consumer. And that has to be the nerve centre of your strategy. So, yes, to say it is local is correct.

Even you see, even Indian companies who are slightly pan-Indian, slightly bigger ones, they have a local flavour. I mean, literally so, even say the buttermilk that you drink in South India and the buttermilk that you would drink in the North or the West will not be the same in taste. So literally, it has to have a local flavour, if not figuratively.

Right. And how do these companies contrast with, let's say, the big guys like Nestle or Britannia and Amul for that matter? I mean, Amul is, of course, not private sector, but it's still a large player and a big brand.

Yes, it's a, I mean, thanks for asking this. You will see, say there is a company in Pune where I live called Chitle, very, very popular, very well known, very trusted. OK, so see with companies like Nestle particularly or Britannia, you are trusting the brand.

OK, you are, if you don't know anything else, OK, you buy Nestle. But as you get entrenched as a consumer, as you get entrenched in the market, you will trust the brand, the maker, the manufacturer and also the seller. OK, say for Nestle, with all due respect, and I trust the brand very much.

It's a great brand. But Nestle products, which I may get in home in Pune, at home in Pune, is made somewhere in Baramati or in Fulton or in Indapur, where they don't make it themselves. So that's an advanced consumer who will get into that.

OK, so then I will start trusting a Shriver Foods in Baramati or a Govind Milk in Fulton or a Sonai Dairy in Indapur. I will layer it with my trust for Nestle. So they are doing very well and Britannia, all this while they have been manufacturing dairy at somebody else's factory.

Only recently they have set up their own unit. So I am not saying at all that, you know, if somebody is manufacturing with somebody else, which makes proper economic sense and that is how things are done, I'm not undermining it. But I'm saying they are doing very well by way of the trust for the brand, the umbrella brand.

But when you are when you are a consumer, evolved consumer of a glass of milk, in addition to the trust for the brand, you also try to see how responsibly the raw material is procured, how responsibly it is transported. So again, again, this is not a debate on organic or A1 or A2, that will be a very big debate and we will have very strong points of view on those. I'm saying how responsibly are you procuring the raw material?

How much are you investing in traceability and sustainability? In these cases, some of the big brands, while being big and trustworthy, they are depending on the local procurer and manufacturer. So as an evolved customer, you start understanding and tracing the entire value chain.

Right.

That is where I feel there is place for coexistence of a big multinational brand and also a local player in this sector.

And you did say that some of the smaller local brands are very successful. So, I mean, we had a financial news outlet.

So when you say successful, do you mean that you could be small and highly profitable at the same time? I mean, over a sustained period of time?

Yes. So this is, again, a mix of, I mean, profitability is understood differently by different players in the same industry, say a cooperative, for a cooperative like an Amul or a KML, profitability will be understood differently because they're the farmers and the owners. So how much are the farmers getting back their share?

That is one. Two, is there the Indian small private sector companies, what is their EBITDA? And the large corporates, they understand by way of cash flow how much they have invested and what is their, what are they getting back in how much time while creating value for everybody.

So, yes. So by saying that some of the small players are successful, I would, I am referring to their to their bottom line levels.

So if you were to look at the transition of private sector and its growth in the last two decades or so, and it seems relatively silent, I mean, compared to maybe some other industries, because as you said, it's also local. And even if there has been a lot of consolidation activity, including cross-border M&As, it's not been as picked up, at least by media, maybe as others.

So if I were to now ask you to talk about, let's say, the distinction between, you know, the product portfolio or rather within the product portfolio and what is really, let's say, making money and what is relatively not, how is that, how does that sort of pan out for particularly these smaller brands?

Yes, so this is making money in dairy is very seasonal, you know, that is the reason you will see yesterday in Maharashtra, a lot of people, they increased the MRP of milk. So it is seasonal unless you are investing in value added products. You increase the life of the life of the product and you increase your realisation out of that.

So there are very few companies who are making big money to invest in communicating success. You know, the investment is mostly done in welfare. It's even if you see the private sector companies who operate in India in the dairy industry, the ethos is that of a cooperative.

That is what I have seen. So it is not too much. There are companies who are very successful in communicating also.

There are a couple of listed companies and who have some obligation of communication. So that remains. But otherwise, my view is here, the investment more is in the welfare of the farmer on one side and the happiness and the value to the consumer on the other side.

Because if you are investing in value added products, long shelf life products that can travel across the country and the globe, then you need some communication to do some advertising to do. And, you know, you need to create a buzz. Otherwise, if you are catering to your home state or, say, one region of the country, you are known to the consumer, you are known to the trade.

So there is not there hasn't been. So your observation is very right. There hasn't been too much of noise around the growth and success of the private sector.

But going forward, I believe that there will be a little more noise. There are some more investments happening in this sector. Some of the major Indian corporates, though, you know, dragging their feet over it, but ultimately investing in this sector.

And there will be some competition. Competition will create a little bit of noise in the coming days. That is what I feel.

And I'm going to come back to product mix in a moment. But when you say companies have been dragging their feet on the investment, so what are the pitfalls they're seeing, which is holding them back or causing them to reconsider?

No, I see companies have invested people. I mean, the companies that I know, they have invested whatever they have got from the business, they have invested back in the company. But the investments have been mostly on, say, efficiencies of collection.

So setting up bulk milk coolers. So today, if I have coolers in 200 villages, tomorrow I'll have bulk milk coolers in 400 villages. That has been the idea, the objective.

So even today, you will see the collection efficiency is not as much as it would have been in Europe, where the climatic conditions are different, the holding patterns are different. So there has been investments. What I meant to say, the investment hasn't been too much on the consumer side as much as it has been on the supply side, on the raw material side.

So there has been investments in technology. There has been investments in processing capabilities and automation. There has been massive investment in collection efficiency, milk collection efficiency, which is collection logistics, which is a big bane of the industry even today.

Got it. So if I were to ask you to describe, let's say, a mid-sized regional, mid to large sized regional player in India today, what would be the size in terms of millions of tonnes of milk produced and then the product mix between selling, let's say, the milk pouches, as you said, and the value added, whether it's cheese or butter or other products?

See, I would rather, instead of getting into the production side, you know, the better way of determining the size of a company is milk handle, how much milk is being handled. So in my opinion, anything between, say, 700,000 to 1.5 million litres of milk would make a mid-sized company. Anything above that would be a would be a bigger company, a larger company.

So anything above 1.5 million is something. And what I'm talking of is a single site processing. I see, say, a company like Lactalis in India with about, say, 15, 16 factories, maybe collecting a lot of milk, but in seven different states and processed at seven different factories.

So that's a different ballgame.

So how big would Lactalis be in terms of collection?

It's, you know, Govind, it's not a public company. So though I'm not with Lactalis anymore, I really don't know if these figures are out.

So, OK, let me put a different question. So when you said the average size is 700,000 to 1.5 million litres, how many companies are there in India which would be larger than that?

There would be about larger than that, definitely five, six companies that come to my mind in the private sector.

Got it. OK, so now can I come back to product mix? If you were to now split that up, I mean, how much of it goes into, let's say, pouches or classical milk distribution?

What is the value? Where are the value add in or rather what is the value add and what are the value added products?

See, if you see today, there is a clear split that cooperative is the pouch provider to the country, is a daily milk provider to the country and the private sector has grown as ingredients and value added product suppliers. I don't mean to say that Amul doesn't provide ingredients or Amul doesn't give value added products. They do everything.

It's a 80,000 crore company. So, I mean, it can beat the global leaders, hands down. But other than that, the private sector hasn't been too successful in entering homes with milk pouches.

So that's the private sector. So I would say I would say a cooperative, say like Avin or Nandini or Amul, majority of their milk, lot of their milk would go into homes as pouch milk or let's say the Poona cooperative, the brand called Katraj, entirely they'll go into the pouch milk, they're packing and sending milk to homes or at best you get a bottle of ghee or flavoured milk. Private sector has invested more in drying, in creating value added consumer products like cheese slice or cheese cubes or things like that.

I'm not even talking of cheese, the grated mozzarella or that because that's not consumer, that goes as ingredients to the end consumer product suppliers. So the split will differ from company to company. But in private sector, I would say it's in the private investment, the significant companies, it would be a 30 percent that will be in milk and curd and things like that.

And balance 60 to 70 percent will be ingredients and value addition.

So and the reason why, let's say, companies like Amul have succeeded in pouch milk going to homes, is it like a distribution issue or is it a demand side brand comfort? So, for example, newspapers, you know, I mean, it's tough to get a newspaper into someone's home today or a new newspaper brand because so is it a similar kind of logic in the case of milk brands as well?

Distribution and the brand salience over a period of time, the brand salience over a period of 50 years. And manufacturing locally, you know, if the profitability concerns are different, if the profitability concerns are not the same, your business, that means if the objective is different, you handle the business differently in a different way. So Amul milk in Calcutta, in Kolkata is manufactured locally.

You cannot send milk from Ahmedabad to Calcutta. So you have manufacturing facilities everywhere, whereas in the private sector, you are manufacturing milk powder, skim milk powder or whole milk powder or mozzarella cheese. When you are doing that, you don't need to manufacture at all locations.

You manufacture where you are collecting milk and you have a product which lasts 12 months or 24 months and you distribute across the country or even export. India started exporting to some of the countries like the GCC and even to Russia here in the current days that has opened up. So specifically with these two players, the cooperative and the private, the split is different.

And you mean the brand salience which Amul or Nandini has created over a period of time with distribution efficiency, with collection and manufacturing facilities all across the country, they are a bigger player in pouch milk.

Right. And if I were to put the same question from a slightly different direction. So would you also say that therefore it's not really lucrative for a newer, relatively newer private player to get into pouch milk distribution because the margins are lower and there are distribution challenges versus, let's say, getting into more value added products, which we've talked about and also having the advantage of having a single base and then distributing all over?

More than distribution and the advantage of distribution, I would say the collection efficiency, the collection logistics is dissuading the private investor from getting into pouch milk and also the perishability, the losses. OK, so these are the things I have. You know, there are milk companies, dairy companies in the West and in Europe who don't even handle milk.

OK, there's a very big cheese company, a three billion dollar, three billion euro cheese company somewhere in Europe, doesn't handle milk at all. It handles milk in a different way. So the collection is different.

And here, a farmer is a small holder having one cow. So you have to collect 10 litres of milk from 300,000 farmers. That becomes the problem for a new entrant.

Right. And I'm going to come to farmers because I guess like land holdings, you know, which are small and fragmented, cattle farming or cattle, you know, dairy production is also fragmented. But, you know, coming back to the value added part.

Now, if a lot of the growth that you've seen in India by private sector has been on the value add, what's the path forward there in terms of what we've been doing so far, how profitable it's been and how you see that ahead? And I want to link that to the global point, which is, you know, the export potential and so on, which is where we started from.

So the path forward in terms of consumer value add is huge, is immense. And India has built, the private sector has built huge capacities for that to see that, I mean, to cater to the demand that is to come. And it is going to come because now the world is more open.

I mean, people know what is available in the West and what is available here in terms of milk products. So that is going to, the consumer value add is going to grow undoubtedly. And I am very encouraged to see that a lot of people, a lot of players have created or are creating capacities to cater to that need.

It could be in terms of, say, ice cream or cheese or yoghurt or, say, specialised paneer or anything. Paneer is in Europe, sometimes they consider it cheese. So consumer value add, I see tremendous possibility and potential.

And when you talk of that marketing buzz, that marketing noise, which is missing, there is a silent growth that is going to come when you are catering to the consumer value add more and more. So that is one part where India is starting off now. The exports that are happening currently is, again, commodities.

India is sending powder or butter to Africa or Russia or, say, some of the Gulf countries. Gulf countries, still some consumer products are being sent, but the exports currently is commodities.

Right. And you did point out that we only export about one percent of our total output of milk in whichever way.

Yes.

Yes. That's right. So if you were to bet on, let's say, one or a few value added products today where you feel India has the opportunity not just for the local consumer market, but also for exports, what would they be under the umbrella of dairy?

See, today I am seeing an increased interest in paneer simply because the expertise doesn't lie elsewhere. That is one. But as we evolve, I would say there is big interest in yoghurt and cheese also.

Why? It will take time because the technology, the technical know-how and the expertise is much more evolved in the countries that we may wish to send these products to. OK, so once we have invested in traceability, sustainability, technical know-how, capability build-up, then we, I'm sure, see, we are the largest producer of milk.

And this will just be a statement in the days to come if we don't dominate the world market. And we can't dominate the world market with liquid milk. We dominate the world market only with value added produce.

And today we are not in a position, if you leave aside the protectionism, we are not in a position to send produce to, let's say, Europe because we have not invested much in traceability and sustainability and also the technical know-how. But the good point is we are doing it. There are signs that we are doing it.

So I don't see this protectionism to continue. This is not a destination. This is just a bridge.

This will be there till the time we have built enough capabilities in terms of our technical know-how, in terms of our traceability and sustainability. The collection efficiency, investment in collection efficiency is a given, whether you export or you don't export. So with these, my bet would be to start with, say, paneer is a huge interest area, then it will be yoghurt, then it will be cheese, then it could be many other variations, varieties of things, you know, half-cooked, semi-cooked and a lot of ready-to-eat material can be sent.

Sweets, Indian sweets are sent to the US, if I am, I mean, what I believe that Raj Bhog and Roshakolla are being sent to the US and there is a big fanfare, big clientele of Indian sweets. Some are manufactured locally also. So as a whole, I bet big on the dairy industry of India.

And there is no reason why in the coming days we, in addition to being the largest producer, which we have been talking about for quite some time now, in addition to being the largest producer, there is no reason why we cannot dominate the milk sector globally.

Right. And I'm going to come back to the pharma point in a moment. But at current prices or at current costs rather, is our India or other Indian value added products competitive?

So let's say, for example, in our trade deals, we are forced to reduce duties further or remove some of the non-tariff barriers. Would some of these value added products in India be competitive?

No, they won't be. They won't be. The one reason is, see, our realisation per litre of milk, if you see, is lower than many other developed countries.

One. Two, is particularly US. Why we are blocking it?

Because the US industry is very organised and it is heavily subsidised. OK, so I don't know what the US administration will do with the subsidy if they are sending milk products to India. We don't know that.

But currently, it's heavily subsidised and it will be much cheaper than what we have here. OK, so the question may be, the consumer will get a better product if we remove the tariff. That could be a question.

But the answer is, at what cost? I have 80 million families to support. You know, so it's a question of food sovereignty over consumer choice.

Both are important. Consumer choice is also important, but it can be calibrated. It can be, it can come over a period of time.

Last question. So, you know, we started on the point of tariffs and you talked about why we have tariffs and it's essentially for two or three reasons, including cultural sensitivity and, of course, the nature of the cross-border negotiation.

But it's somewhere it also boils down to the farmer. So as you look at the farmer today and you did talk about how, whether it's cooperative or private sector, for them, the focus and a lot of their investments has been the farmer and, you know, keeping the farmer happy and satisfied so that, you know, she or he continues to supply them consistently and so on. So what is it that we can do to, you know, reduce the fragmentation in this space and let's say create more sort of economies of scale, at least for the people who are producing, whether it's milk or value added products?

Quite a few things. See, the collection efficiency will cover a lot of things. Today, the farmer has to, you know, bring milk, say, five kilometres from home.

I have to go nearer, nearer to his doorstep. That is one. Two, is today farmer is not covered under the financial ecosystem of the country.

Many of them are non-banked. The banks don't, you know, offer them support to buy cows and to become a bigger producer. So how can industry, the dairy sector, join hands with the financial institutions and somehow create a system of providing for the farmers, helping the farmers to come up, you know, from one to two, three to 10, 10 to 100.

There are farmers with 100 cows also. So they have been supported by somebody or some institution. And that is how they have come up.

But otherwise, a farmer with one cow is very difficult for him to get a loan from a bank to buy another cow. So one is collection efficiency that has to improve. Two, they have to be a part of the financial system of the country, which there are ways of doing it.

And some of that we have done in the past. And I think that has to be strengthened. And then we have to invest in traceability and sustainability by way of educating the farmers, by way of making her understand the importance, the importance of health, like say things like antibiotics or toxins, presence of toxins in milk.

Antibiotic is because when a cow falls sick, you just shove a pill down her throat or push an injection. Why? Because there are not enough veterinarians available.

Why? Because there are antibiotics available off the counter. So the entire ecosystem has to work towards a better future for the farmer.

So let's say toxins. How do toxins come in milk? Toxins come in milk through feed, what we are feeding the animals.

So how does one avoid it? How does one make it zero? And that is one way we will be able to confidently export to Europe, because these are some of the non-tariff barriers we still have.

So you are right in asking what should the industry do? The industry can do a lot. And the farmer, mind you, is there to give her best, to produce the best quality and transport the best quality to you, provided you bring the farmer within the financial ecosystem, educate the farmer about what is happening if we don't meet the criterion.

So there is a lot of investment and collection facility. I have to go near him and a cow gives milk twice. But if I'm collecting once, the farmer is storing that milk overnight at her residence.

That may cause some bacterial load on the milk, which the farmer is not responsible for. So it's my job to go and collect it twice a day or go close to the farmer.

Right, and which is why I guess it is a local industry. But since you mentioned it, let me add a supplementary question. So when you say farmers are not financially included or as much as they should be, why is that?

I mean, particularly when we have so much financial inclusion happening around the country, including in terms of access to loans and incentives and benefits and so on.

I see there is a lot of progress. If you see over the last 20 years or 10 years, I see a lot of progress, a lot of inclusion that has happened. But let's come back to that question, does a farmer with one cow get a loan from a bank to buy another cow?

I would say in 8 out of 10 cases, it would be a no, unless there is a collateral or there is a guarantor, which in most cases the processor company does give guarantee. So it's not as simple as it would be for somebody with a collateral. So I think it's while there has been progress, I have seen a lot of progress in my tenure in the industry.

But I would say that there is still a lot to be done. And like people like you and I, if we need money, we get money. So it's not the same with the farmer.

Right. That's a sombre note and a very useful one to end on. Rajiv, it's been a pleasure speaking with you. Thank you so much for joining me.

My pleasure once again, and thanks for coming with such nice, lovely questions. And I'm passionate about what I do. So I was very happy to answer all your questions and I hope it will be a useful episode.

Indeed, it will be. Thank you so much, Rajiv. Thank you.