Milk may become a hurdle in PM Modi's inflation fight

High prices of milk and related products have the potential of becoming a political risk for the Modi govt ahead of next year's polls

By Adrija Chatterjee

Milk is ubiquitous in India — from the morning glassful that most middle class school kids glug to its use in Hindu religious rituals. Now it could become a headache for Prime Minister Narendra Modi’s government as prices soar.

The average retail price of milk in India has increased by 12 per cent from a year ago to Rs 57.15 ($0.6962) a liter. A mix of factors is at play — a jump in the cost of cereals has made cattle feed more expensive coupled with lower dairy yields as cows were inadequately fed due to the pandemic rupturing demand at the time.

In turn, milk — which has the second-largest weight in India’s food basket — pushes up overall inflation as well. India’s headline inflation for March fell below the central bank’s target of 6 per cent as high interest rates cooled overall demand, according to data released Wednesday. However, milk inflation trended higher than the overall figure at 9.31 per cent.

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High prices of milk and related products — emotive items that most poor families aspire to and wealthier people see as indicators of status — have the potential of becoming a political risk for Modi’s government ahead of national elections next summer.

“This trend of higher milk prices is problematic, since it is a highly price elastic product and has a direct impact on consumption,” said R.S. Sodhi, president of the Indian Dairy Association.

For now, the demand-supply mismatch has helped a rally among dairy stocks in India as analysts expect this situation can help organized players expand their share of overall market in India.

However, Sodhi said the balance sheet of dairy companies may eventually come under stress as the cost of procurement is rising. One factor is the increase in the prices of cereals and rice bran, ingredients used in animal feed, which is discouraging farmers from feeding their cattle sufficiently and is reflecting in milk prices that have risen 12 per cent-15 per cent during winter months, he said.

Unseasonal rain and heat waves have also contributed to this jump in feed prices. Cereal inflation came in at 15.27 per cent for March 2023.

But trouble was brewing even before prices of cattle feed began to rise.

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When the coronavirus pandemic hit and India introduced one of the world’s strictest lockdowns, demand for milk and milk products dipped as many restaurants and sweet shops were forced to shut down either temporarily or permanently.

India accounts for almost a quarter of the world’s milk supplies, but those massive volumes are produced in large part by tens of millions of small farmers who maintain modest numbers of animals. The drop in demand meant they were unable to feed their livestock well.

“A cow has to be fed irrespective of whatever quantity of milk it is giving and this is a pressure point for the producer,” said Jayen Mehta, who heads India’s largest dairy cooperative, Gujarat Cooperative Milk Marketing Federation, which owns the iconic Amul brand.

And while the South Asian nation consumes the bulk of the milk it produces, exports have also been rising, especially once the global virus disruption eased and demand for milk products picked up across the the world. India exported dairy products worth about $391.59 million in the 2021-22 fiscal year compared to $321.96 million in the year before that.

“In terms of the outlook for this year, we believe that milk prices will continue to increase, since there is a shortage of milk heading into the peak demand season,” Madhavi Arora, economist at Emkay Global wrote in a report this month.

Demand for ice cream and yogurt jumps as summer temperatures soar. That’s followed by the season of Hindu festivals, which starts around September — milk-based sweets are a holiday staple — and carries on for the next few months.

While Modi revamped a food program to make monthly rice and wheat rations free for about 800 million Indians, higher prices of other kitchen staples add to the pressure on his government to do more to help citizens cope with the rising costs of living. That’s crucial as he prepares to seek reelection next year in a country that has by far the largest number of poor people worldwide.

“It’s an issue that affects ordinary people rightly,” said Neerja Chowdhury, a New Delhi-based political columnist. “But whether it becomes a poll issue depends on the opposition, how effectively they can use it and make it into a right issue that make people vote in a particular way.”

Analysts expect Modi to win as the opposition remains in disarray. But the government may still have to do some heavy-lifting to beat back price pressures, given the Reserve Bank of India has already paused monetary tightening amid mounting growth risks.

While economists expect overall inflation to ease going ahead, things are not looking up for this staple. India’s central bank last week said that prices of milk may continue to be firm going into the summer season due to tight demand-supply balance and fodder cost pressures.

Amul’s Mehta describes it as walking a tight rope. On one hand, it is about limiting the impact of inflation on consumers for an essential item, while simultaneously ensuring producers get a fair price to encourage them to continue producing milk, he said.

For now, even middle class families are tweaking their milk consumption. Ruchika Thakur, a lawyer and a parent to a five-year-old, says cutting down on milk purchases is not an option so she’s started buying cheaper options to tackle the surge in cost.

“I think twice before making that extra cup of coffee,” she said, adding that there is no room for buying more, especially for a family of eight who consume three liters of milk each day.