India - Livestock sector review : enhancing growth and development

Report No. 14522-IN India Livestock Sector Review: Enhancing Growth and Development May 23, 1996 Agriculture and Water Operations Division Cou[ntrv Department 11 South Asia Region Document of the World Bank  Currency Equivalents Currency Unit = Rupees (Rs) Average Exchange Rates (Rs/US $) 1990 1991 1992 1993 1994 1995 3/1996 Rs/US $ 17.50 22.74 25.92 30.49 31.37 31.42 34.45 Weights and Measures Ii - liter ha - hectare kg - kilogram rnt - metric ton PC - pieces Abbreviations and Acronyms APMA - Agricultural Product Markets Acts APEDA - Agricultural and Processed Food Products Export Development Authority CPR - Common Property Resource CBPP - Contagious bovine pleuro-pneumonia DCP - Digestible Crude Protein DGFT - Directorate General for Foreign Trade DM - Dry matter EOU - Export oriented unit GOI - Government of India ICAR - Indian Council of Agricultural Research IRDP - Integrated Rural Development Program MEF - Ministry of Environment and Forests MMPO - Milk and Milk Products Order NABARD - National Bank for Agriculture and Rural Development NAFED - National Agriculture Cooperative Marketing Federation NCDC - National Cooperative Development Corporation NDDB - National Dairy Development Board NECC - National Egg Coordination Committee NWDB - National Wasteland Development Board OF - Operation Flood SMP - Skim milk powder WMP - Whole milk powder Fiscal Year GOI - April I to March 31  TABLE OF CONTENTS EXECUTIVE SUMMARY ...................i POLICY MATRIX .................. xiii Chapter I INTRODUCTION .I 2 LIVESTOCK PRODUCTION AND PERFORMANCE TRENDS ..5 A. Recent Population and Output Trends .5 B. Consumption of Livestock Products .7 C. Demand and Supply Projections .9 D. Bovine Production Systems .10 E. Small Ruminant Production Systems .12 F. Poultry Production Systems .13 G. Conclusion .14 3 BALANCING LIVESTOCK SECTOR GROWTH AND FEED AND FODDER SUPPLY . .17 A. Feed Consumption in India .17 B. The Feed Deficit .20 C. Addressing the Feed Deficit .22 D. Addressing Constraints in the Poultry Feed Sector .30 E. Conclusion and Recommendations .31 4 LIVESTOCK AND LIVESTOCK PRODUCT MARKETING.. 35 A. Livestock Marketing .35 B. Meat Processing .36 C. Marketing of Wool .37 D. Marketing and Processing of Hides and Skins .38 E. Marketing and Processing of Dairy Products .38 F. Poultry Marketing .48 G. Market Price Beavior .50 H. Livestock Output-Feed Price Relations .52 1. Marketing Intermediaries .52 J. Vertical Integration .53 K. Improving the Market Information System .53 L. Conclusion and Recommendations .54 This report is based on the findings of World Bank Missions, who visited India in June 1993 and June-July 1994, comprising Messrs/Ms. Gallus Mukami (Task Manager), C. de Haan (Lead Adviser), and D. Umali- Deininger (Economist) (Bank); consultant's reports prepared by Alpha Agritech Ltd (small ruminants, poultry, export, and feed and fodder) and JPS Associates (institutions); and recommendations of the joint Government of India and World Bank Livestock Sector Workshop held in New Delhi in July 1995. This report was produced by D. Umali-Deininger, C. de Haan, and G. Mukami. Contributions were made to this report by B. Blarel, D. Byerlee, W. Magrath, N. Jodha, A. Venkataraman (Bank) and G. Nartea (consultant). Peer reviewers are A. Brandenburg, L. Msellati, and D. Van der Sluijs.  5 RECENT TRADE REFORMS AND THE LIVESTOCK SECTOR ....................................................... 57 A. Recent Trends in Livestock and Poultry Exports ........................................ 57 B. Trends in Livestock and Poultry Exports .................................................... 59 C. Livestock Trade Policy Reform ........................................ ............... 59 D. International Competitiveness ....................................................... 62 E. GATT and Its Implications ....................... ................................ 63 F. Policy Implications and Recommendations ................................................ 65 6 LIVESTOCK SUPPORT SERVICES ....................................................... 67 A. Central and State Governments and the Livestock Sector .......................... 67 B. Public Spending in the Livestock Sector .................................................... 68 C. Animal Health ....................................................... 70 D. Animal Breeding ....................................................... 74 E. Livestock Research ....................................................... 77 F. Livestock Extension ....................................................... 79 G. Livestock Credit Programs ....................................................... 80 H. Livestock Insurance ....................................................... 82 I. Policy Issues and Recommendations ....................................................... 82 Annex A: Marketing Channels for Livestock and Livestock Products .87 Annex B: Government Programs in Wasteland Development .91 Annex C: Export Oriented Units and Units in Export Processing Zones, Eligibility and Privileges .93 Statistical Annex .97 List of Tables in Text 1.1 Ownership of Landholdings and Livestock by Size of Farm (percent) .............2 2.1 Average Annual Animal Yields (kg/animal) .................................................. 6 2.2 Egg and Poultry Production ..................................................7 2.3 Per Capita Consumption of Livestock Products in India and Selected Countries, 1992 (Kilograms per year) .8 2.4 Ratio of Wholesale Egg and Broiler Prices to Selected Livestock Product Prices, 1980-1990 .8 2.5 Demand and Supply Projections for Selected Livestock Products 2020 (millions of metric tons) .10 2.6 Distribution of Bovines and Sheep Ownership by Size of Holding, 1986-87 ................................................. I 3.1 Land Use Classification in India, 1950-51 to 1988-89 (millions of ha) ............ 18 3.2 Production of Mixed Animal Feeds by the Organized Sector, 1964-90, (thousands of mt.) ....................................................... 20 3.3 Requirements and Availability of Feeds in India(million mt DM) ............ .......... 21 3.4 Changes in Common Property Resources 1951-1981 ....................................... 22 3.5 Selected Indicators of CPR Degradation, 1980s ............................................... 23 3.6 Selected Indicators on CPR Management, 1950s to 1982-85 ........................... 24  3.7 Nominal Protection Coefficients for Selected Feed Ingredients, 1988-1993 ....................................................... 28 3.8 Relative Values of Feed and Livestock Product Output in India and the United States, 1980-93 .28 3.9 Government Interventions in Feed and Feed Ingredient Marketing .31 3.10 Tariff Schedule for Selected Feed Ingredients, 1995 (percent) .30 4.1 Food Aid Received by NDDB, (million of 1990 dollars) .41 4.2 Government Spending and World Bank Loans for Dairy Sector Development .................... 41 4.3 Findings of World Bank Review of Cooperative Performance in Selected States .42 4.4 Financial Performance of Sample Cooperative Unions, 1993-94 .43 4.5 Applications for Dairy Processing Licenses as of May, 1994 ........................................................ 42 4.6 Price Ratios of Selected Livestock Products, 1980-92 ...................................... 51 4.7 Real Eggs, Broiler, Layer Chick and Broiler Chick Prices, (1990 Rupees) ...... 52 4.8 Ratio of Prices of Selected Livestock Products to Feed Concentrate and Feed Ingredients, 1980-92 (Rupees per metric ton) ................... ................ 52 4.9 Ratio of Poultry Product Prices to Selected Input Prices (1980-93) ................. 53 5.1 Share of Selected Livestock Products in Total of Agricultural Trade (1987-92, percent) .58 5.2 Trade Policy Status: Major Livestock and Feed Products ................................. 60 5.3 Licensing Policy, 1994 ........................................ 61 5.4 Export Policy Reforms ........................................ 62 5.5 Comparison of Indian and World Market Prices for Selected Dairy and Meat Products, 1991-95 (dollars per metric ton) ............... 63 5.6 Domestic and World Prices of Selected Poultry Items, 1991-92 (dollars) ....... 64 6.1 Government Planned Expenditures on Animal Husbandry and Dairying, 1969-97, Rs million .68 6.2 Actual Government Expenditures on Animal Husbandry and Dairying, 1992-93 (millions of rupees) .69 6.3 State Expenditures Animal Husbandry and Dairying, 1993-94 (Millions of rupees) ...................................... 71 6.4 Livestock Sector Spending in Selected States, 1993-94 ................................... 71 6.5 Number of Veterinarians and Animal Health Auxiliary Personnel in India, 1993 ........................ 72 6.6 Major Livestock Diseases in India ........................ 73 6.7 ICAR Research Spending, 1987-91 ........................ 78 6.8 The Share of Livestock Research in Total Public Agricultural Research Spending, 1992 (percent) .78 6.9 NABARD Refinancing Disbursement for the Livestock Sector by State, 1992-93 (Thousands of rupees) ................... ....................... 81 6.10 Economic Classification of the Types of Livestock Services ........................... 83  List of Figures in Text 1.1 Real Livestock Output Value (1985 Rupees) ....................................................2 2.1 Livestock Populations, 1961-1993 (millions) ...................................................5 2.2 Value of Poultry Product Output, 1990 Rupees ................................................ 6 2.3a Rural Per Capita Monthly Expenditures, 1991-92 ................................ ............ 9 2.3b Urban Per Capita Monthly Expenditures, 1991-92 ...........................................9 3.1 Composition of Feed Consumption in India ...................................................... 18 4.1 Milk Utilization in India ....................................................... 40 4.2 Real Wholesale Price Indexes of Selected Livestock, 1980-92, 1985=100 .......................... 50 4.3 Seasonal Egg Price Indexes, 1990-93 .......................... 51 List of Text Boxes 3.1 Design Principles of CPR Institutions .......................... 26 3.2 The Silvipasture Scheme: Recent Experience and Emerging Lessons ............. 27 4.1 Milk Marketing in Punjab ................................................. 39 4.2 Important Features of the 1992 Milk and Milk Products Order ............. .......... 45 4.3 Features of an Effective Competition Policy Agency ............................... ........ 47 4.4 The Failure of a Poultry Cooperative ......................... ........................ 49 6.1 Centrally Sponsored Disease Control Programs ............................................... 74 6.2 The European Commission Project: Strengthening of Veterinary Services for Livestock Disease Control .75  INDIA LIVESTOCK SECTOR REVIEW: ENHANCING GROWTH AND DEVELOPMENT EXECUTIVE SUMMARY 1. Sustained Economic Growth Opens Demand-Led Opportunities for Livestock Sector. India's program of reform and economic liberalization opens significant market-led opportunities for the livestock sector. Sustained economic growth and rising domestic incomes are driving the rapid growth in livestock product demand. This has fostered the rapid expansion of livestock output in recent years. Between 1985 and 1992 the value of livestock output grew by 6 percent a year in real terns, from Rs 196 billion to Rs 302 billion (1985 rupees). The dairy and poultry industries contributed the major share of this growth. By 1990, livestock accounted for about 32 percent of the total value of agricultural output. Revenue from exports of live animals and livestock products' grew even faster, at 13 percent a year in real terms, from $1.1 billion in 1987 to $1.8 billion in 1991. 2. Livestock Sector Growth is Poverty Alleviating. Sustained growth in the livestock sector has a significant beneficial impact in generating employment and reducing rural poverty. More than 630 million people (74 % of the population) live in rural areas. 2 Of the total households in the rural areas, about 73 percent own livestock. Income from livestock production accounts for 15-40 percent of total farm household incomes. More importantly, small and marginal farmers account for three-quarters of these households, raising 56 percent of the bovine (cattle and buffalo) and 62 percent of the sheep populations.3 Thus, increasing livestock product demand will be a major factor raising incomes in the rural areas in general, and of the rural poor in particular, provided that India's productivity is internationally competitive. 3. Sustained Growth of Livestock Sector Requires Policy Reforms to Promote Increased Productivity. The ability of the livestock sector to meet future consumption growth and to contribute to poverty reduction will require the elimination of policies and regulations that hinder productivity growth at the farmn and processing sectors. Increasing the productivity of the processing sector will benefit both producers and consumers by raising farm prices and lowering consumer prices. It will also enable the livestock sector to remain intemationally competitive. The recent liberalization of external trade in livestock products heightens the importance of improving the efficiency of the domestic processing industry in order to remain competitive with imports. This is particularly important to the dairy sector, because of the recent liberalization of skim milk powder and butter oil imports (para 14). In view of the potential for imports to depress producer prices, and adversely affect the 30 million--mostly poor-- dairy farmers, it is critical that all available opportunities for increasing marketing efficiency be explored in order to reduce the I Livestock products include live animals, meat and meat preparations, dairy products, eggs, and leather and woolen products. 2 G. Datt, "Poverty in India: 1951-91," World Bank Policy Research Working Paper, forthcoming. 3 Small farmers own less than 2 hectares, marginal farmers own less than I hectare.  - ii - currently high marketing margins. The beneficial impact of such measures to farmer's welfare would be further strengthened by improved incentives for the uptake of technologies which enhance productivity and further improve farm profitability. 4. Singular Focus of Public Expenditures on Dairy Sector is not Sustainable. Since the 1960s public spending on livestock has been concentrated in the dairy sector. Between 1974 and 1991, the sector received about $1 billion from the government under the five-year plans, $1.13 billion under five World Bank project loans, $480 million in government grants to the National Dairy Development Board (NDDB), and $1.15 billion in food aid to the NDDB (in 1990 dollars). During this period dairy accounted for nearly 5 percent of total central government spending in agriculture. State government expenditures on dairy over the same period likely totaled an additional $5 billion (1990 dollars). While these expenditures helped to more than double milk output (from 23.9 million mt in 1977 to 56.4 million mt in 1991), such outlays for a single sector are not sustainable over the long term. More important, structural and policy constraints inhibit the more effective use of these funds and discourage private investments in the dairy sector. 5. Livestock Development Needs to be Balanced with Environmental Conservation. Livestock has been one of the causes of environmental degradation in India. The growth in livestock populations, coupled with shrinking grazing areas, has put intense pressure on existing pastures, encouraged encroachment into forest lands, and contributed to the degradation of land resources. Moreover, livestock processing, particularly leather processing, also has been a major cause of industrial pollution. While livestock development activities generate significant benefits, it must be balanced with environmental conservation measures. 6. Agenda for Promoting Growth. Livestock could play a strategic role in promoting rural growth and reducing rural poverty. This study, the first World Bank livestock sector review since 1975, was undertaken at the government's request to identify key issues and recommend policy directions and investments to promote the livestock sector's growth and development (see the matrix at the end of this summary). Promoting growth and increasing marketing efficiency in the livestock sector will require reforms at both the central and state government levels. The most pressing issues include: * Creating a level playing field for all market participants in both output (dairy and meat) and input markets (feed and veterinary services). This will require liberalizing dairy and feed marketing and promoting private participation in the delivery of animal health and breeding services. * Phasing out remaining trade restrictions on feeds and livestock products, while paying close attention to progress made in the restructuring of the domestic processing industry; * Integrating livestock development within a framework of environmental conservation. This goal will be best achieved by increasing the participation of local institutions in addressing degradation problems in common property resource areas. A. The Livestock Sector and the Economy 7. Livestock Fulfills Many Roles in the Rural Economy. The livestock sector plays a significant role in the welfare of India's rural population. The sector employs eight percent of the country's labor force, including many small and marginal farmers, women, and landless  - iii- agricultural workers. Milk production alone involves more than 30 million small producers, each raising one or two cows or buffaloes. Livestock provides a large share of draft power, with about half the cattle population and 25 percent of the buffalo population being used to cultivate 60 million ha of crop land (or about 30 percent of the total cultivated area). The organic fertilizer produced by the sector is an important input to crop production, and dung from livestock is widely used as fuel in rural areas. Livestock also serves as an insurance substitute, especially for poor rural households; it can easily be sold during times of distress. 8. Livestock Product Consumption in India Still Low by International Standards. Per capita consumption of livestock products in India remains low. For example, per capita milk consumption is about half the level in the US and Australia, while per capita poultry meat consumption is about 12 percent of per capita consumption in China. Beef consumption is extremely low compared with other countries, but this is mainly due to sociocultural factors; for religious reasons, a large portion of the population does not consume beef. These sociocultural factors also affect the consumption of buffalo meat. Livestock products, however, are an important component of consumer budgets. Poor rural consumers spend up to 15 percent of their budgets on animal products (dairy, meat, eggs and fish). Poor urban consumers spend up to 19 percent. 9. Increasing Per Capita Incomes Expected to Boost Livestock Product Demand. Sustained economic growth and attendant increases in per capita incomes are expected to boost livestock product demand substantially. Recent estimates of livestock product demand in the year 2020, assuming that the economy consistently grows at 5.5 percent per year, and population growth, price and income elasticities of the past ten years remain stable, indicate that demand for milk will increase by a factor of 10 to about 497 million mt by 2020. Demand for eggs and poultry meat will increase by a factor of 7 to 7.21 million mt and 1.35 million mt respectively, while demand for mutton will increase by a factor of 8, reaching 2.5 million mt. If output growth rates between 1980-92 are maintained, poultry, beef and mutton demand growth will be adequately met by domestic supplies.4 If the dairy output growth rate is maintained, a domestic milk deficit of almost 200 million mt is expected. Meeting domestic consumption growth, therefore, poses a particular challenge for the dairy sector. If Indian dairy farmers are to capture the demand-led growth opportunities, policy changes are necessary to foster efficiency and productivity growth at the farm and processor levels. B. Increasing Livestock Marketing Efficiency Critical To Meeting Future Growth in Demand 10. Operation Flood (OF) has been Successful in Jump-Starting Dairy Sector Development. Operation Flood was launched in 1970 to promote the integrated development of the dairy sector. Its primary objective is the creation of farmer-owned and farmer-controlled organizations based on the Anand pattem of cooperative development. In setting up dairy cooperatives, the OF sought to capitalize on the beneficial features of cooperatives. The cooperatives would (i) provide farmer members an assured market for their output which is critical for a perishable commodity like milk, (ii) enable farmers to directly share the benefits 4 During the 1980-92 period the average annual growth rate 5.6 percent for milk; 6.6 percent for eggs; 6.5 percent for poultry meat; 3.5 percent for mutton.  - iv - from the returns generated by the cooperative, and (iii) offer a farmer-controlled mechanism for delivering essential support services such as technology transfer. The National Dairy Development Board (NDDB) was established to oversee the planning and implementation of the program. 11. OF has been successful in spreading the dairy cooperative concept and providing an important demonstration effect on the potential for dairy development in India. In its 25 years, Operation Flood replicated the cooperative model in more than 200 districts. In 1993, 8.4 million member farmers (estimated to be about one-third of the total dairy farmers) were supplying 5 million mt of milk to 65,000 milk cooperative societies, who in turn deliver the milk to 170 milk unions for processing and marketing.5 The successful demonstration effect of the dairy cooperative movement has encouraged private sector participation in the dairy industry. The non-cooperative private dairy processing sector currently handles about 80 percent of marketed milk. The cooperative movement has also served as a check and balance for private dairy marketing activities. 12. Many Cooperatives Perform Poorly. In the 1990s, a large number of cooperatives were found to be performing poorly. A 1994 World Bank review of 117 cooperatives receiving assistance under the World Bank National Dairy Project II found that 52 percent incurred losses. During the two year period 1993-94, the 117 cooperatives incurred combined losses of Rs 1.1 billion ($37 million), which had to be covered by budgetary transfers from the center and state budgets. In view of the problems of fiscal imbalances in the central and state governments, continued subsidization of the dairy cooperatives is not sustainable. 13. Continued Protection of the Dairy Sector Maintains Inefficiencies in Processing Industry. Three key measures were undertaken by the GOI to promote the development of the nascent dairy cooperative sector. Protected as an "infant industry," dairy product imports were canalized through the NDDB until 1994 to shield the sector from competition from cheaper imports. Only imports in the form of food aid were allowed to enter the country and proceeds from the sale of the food aid were appropriated exclusively by NDDB to finance its cooperative development efforts. In addition, domestic competition from the non-cooperative private sector was limited by the Industries Development and Regulation Act, 1951, which restricted entry into the dairy industry through licensing. In the context of liberalization, the licensing requirement was abandoned in 1991, only to be re-introduced in 1992 under the Milk and Milk Products Order (MMPO), in response to political pressure. 14. Although the MMPO was amended in 1993, several key regulations were retained which will inhibit incentives for increased competition and efficiency in the dairy industry. These include: (i) licensing of all enterprises processing more than 75,000 liters of milk per day or greater than 3,750 kg a day of milk solids, with the license renewable every five years; (ii) new processors must develop their own milkshed or milk collection area and cannot encroach on cooperative milksheds; and (iii) processing of milk into higher-value products could be banned during the lean summer months. The licensing requirement restricts entry and thus limits competition and production growth. It discriminates against achieving economies of scale and technology modernization to improve quality, which would help the industry to become more domestically and internationally competitive. Restricting growth, the adoption of cost reducing S National Dairy Development Board, 1993.  v - innovations, and competition between processors would raise market prices for dairy products. The delineation of milksheds for cooperatives and new private entrants limits competition by creating "de facto" monopolies and discourages production at least cost. They eliminate farner options for obtaining the best price for his/her milk output. Although the milkshed or "zoning" regulation helps ensure the viability of the processing enterprise, they also increase the cost of processing because it acts to limit the processor's ability to expand to optimum size and source from the most efficient dairy producers. Arbitrary restrictions on the processing of milk to higher-value added products hurt farmers, because they depress processor demand for farmer's milk. It also increases processing risks, contributing to higher operating costs. 15. The continued protection of the dairy processing industry, especially the cooperative sector, has fostered inefficiencies in the processing and marketing of milk products. Although producer milk prices in India are significantly lower than in the United States and Western Europe, dairy product prices (butter and whole and skim milk powder) were substantially higher (20 to 50%) than international market prices. Only during the mid-90s, the rupee devaluation and a sharp rise in world dairy prices--as a consequence of a production shortfall in major dairy producing countries, narrowed the gap between Indian dairy prices and world market prices. Fluid milk marketing margins are high in India - for example, it is about 67 percent higher than in the United Kingdom. 16. Dairy Cooperatives As a Vehicle for Protecting the Welfare of Poor Milk Producers and Consumers. Many state governments used the cooperatives as a vehicle to promote social objectives, in particular to ensure a remunerative price for milk producers and the availability of milk for consumers at affordable prices. To achieve these objectives, states exercised considerable control over cooperative operations, including controls over input and output pricing and the appointment of state officials to cooperative management positions to ensure the achievement of the milk-related social objectives. 17. State Interventions Contribute to Weak Performance of Cooperatives, Inhibiting Their Ability to Be Competitive with Private Sector. State interventions, and thus the diversion from the original farmer-controlled cooperative concept, contributed to the poor performance of many cooperative unions. For example, social pricing policies implemented in some states resulted in negligible or zero processing margins. For example, government pricing of milk supplied to the cooperative federation in Tamil Nadu prevented profitable operations and the move to reduce the producer price in Karnataka in order to maintain profitable operations was blocked by the state government. In Maharashtra and Punjab, the state governments set tie minimum producer price. In Maharashtra, the selling price is fixed if the union delivers supplies to the government dairy. In Andhra Pradesh and Karnataka, selling prices of the cooperative federations require government consultation. 18. Weak Management and Inadequate Market Orientation of Some Cooperatives Contribute to Their Poor Performance. Outside of state interventions, weak management and poor market orienatation resulted in the poor economic performance of some cooperatives. A lack of flexibility in adapting to changing market conditions, poor quality control, over-staffing, underutilization of capacity due to the limited milk market, processing inefficiencies and weak marketing and commercial orientation further contributed to the poor financial performance of these cooperatives and resulted in their continued dependence on state financial transfers/subsidies. In some federations and unions, the frequent turnover of state appointed  - vi - officials in cooperative Boards and top management contributed to poor incentive structures and weak management commitment. 19. Improving the Efficiency of the Dairy Processing Industry Will Generate Significant Gains for the Poor, the Dairy Sector and Society in General. Increased efficiency of the dairy processing industry is critical in many respects. First, increased competition and improved operating efficiency could raise producer milk prices and directly benefit the large majority of small and marginal dairy farmers. Second, it will enable the industry to better respond to opportunities created by increasing domestic demand. Third, it will improve the industry's ability be compete with imports, especially in the current more open trade environment. The relaxation of import restrictions on skim milk powder and butter oil, which can be reconstituted into fluid milk, will increase competition from imports. Although the inflow of imports will benefit consumers, it would depress prices for farmers if current marketing margins are to be maintained. Increased efficiency of and competition in the processing industry could mitigate this effect. 20. Cooperatives Have Considerable Potential to Improve Their Performance. Continued protection of cooperatives will only sustain the inefficient operations of the poorly performing cooperatives, which in the long run will hurt both farmers and consumers. Introducing incentives that improve cooperative management and performance would help ensure the sustainability of cooperative operations and the continuous stream of benefits for farmers. Elimination of state interventions and closer adherence to the Anand Model, with greater farmer control of operations (rather than government control), and upgrading of skills in production, marketing, and financial management would help cooperatives meet the new marketing challenges. Improved cooperative performance will generate increased profits for the cooperative and permit greater returns to the member's investments. It will ensure sustainable operations and generate earnings for further productivity improving investments which will enable cooperatives to compete on an equal basis with private entrepreneurs. It will strengthen the cooperative's capacity to continue providing production-related and associated social services demanded by members. 21. Creating a More Level Playing Field. The achievements and contributions of cooperatives to the development of the dairy sector and in providing new income generating opportunities for small farmers and the poor in rural areas are remarkable and laudable. Indeed, it has served as a model for cooperative development in other countries. However, having been in operation for nearly 25 years, the dairy cooperative sector should no longer be treated as an "infant industry". As in any sector that has reached maturity, promoting market competition is needed to ensure the development of a sustainable and efficient industry. This implies ensuring a level playing field for all participants and the elimination of any barriers to entry for any firmi. In many countries (for example, Germany, The Netherlands, the United States), cooperatives compete in the same market as other private enterprises when it comes to economic activities such as dairy processing, marketing, and export. Indian dairy cooperatives, therefore, would have the potential to compete in such activities as well. 22. The creation of a level playing field for all market participants will require a package of reforms revolving around four key actions. * Eliminating All State Interventions In Cooperatives. The states should discontinue interventions in cooperative operations and transfer full control  -vi'- of cooperatives to farmer members in line with the proposed Model Cooperative Act . With farmers assuming full control, the cooperatives can take the necessary measures to improve their financial and management efficiency and competitiveness. The NDDB, in continuation of its program to improve cooperative efficiency, should focus greater priority in its development efforts in the next five years to facilitating the immediate restructuring of the poor performing cooperatives. * Lifting Of MMPO. In particular, it will involve the elimination of the licensing requirement, restrictions on the sourcing of milk or the milkshed requirement, restrictions on the production of higher value milk products and storage activities. Instead, each state should establish an objective set of criteria for the registration of firms, which relate solely to public health and safety, environmental protection and general prudential requirements. * Establishing Mechanism To Monitor Milk Market To Ensure Fair Competition. The govemment's proper role in the new more open market will be to establish an appropriate mechanism to ensure that fair competition persists, that is to guard against predatory pricing and dumping by any market participant (see Box 4.3). * Strengthening of Public Monitoring and Enforcement of Hygiene Standards. Public sector enforcement of hygiene and sanitation standards will become more critical as the number of market participants increases. Monitoring and enforcement mechanisms will need to be strengthened. 23. The GOI Presently Opposes the Elimination of the MIMPO. The GOI opposes the elimination of the MMPO on two major grounds. First, the impact of increased competition on cooperatives, and the possible closure of some of them could disrupt milk supply to the urban and metropolitan areas. Second, the shift to commercial operations of cooperatives could have an adverse impact on poor cooperative farmer members. There are concerns that particular milk routes/suppliers could be dropped, due to the unprofitability of servicing these areas. This will result in the loss of markets and income for affected milk producers. 24. Promoting Competitiveness of Cooperatives. The ability of cooperatives to compete with other enterprises has been undermined by extensive state interventions in their operations and poor commercial orientation due to weak management. These contraints will be addressed by the first measure described above. Phasing out of state interventions complemented by technical assistance from NDDB to restructure and improve cooperative operations will put the cooperatives in a level playing field with other private enterprises. 25. Introducing Targeted Compensatory Measures Where Absolutely Necessary. The potential adverse effects on very poor farmer members of cooperatives are important and could be addressed if found to be critical through targeted compensatory measures. These measures could take the form of a temporary and declining per unit transport subsidy or a flat subsidy to poor cooperative milk producers in remote areas. This will serve as a transition mechanism, while alternative economic opportunities are examined and promoted for these areas. If the purpose of the state price controls on cooperatives are to ensure access to milk by poor  -viii- consumers, then there will be a need for more targeted assistance programs, which may take the form of food vouchers and primary school nutrition programs. 26. Phasing in By Starting in At Least Three States. Some states have expressed interest in liberalizing their dairy processing sector to promote growth in their dairy industries. Thus, the reform program could be initiated first in these selected states and subsequently be broadened to the rest of the states in India after the pilot phase of 3 years. The experience and lessons from the initial pilot phase would serve as an important basis for improving implementation of the reform program in the rest of the country. 27. Cooperative Provision of Support Services Should Not Undermine its Economic Viability. Cooperatives play an important role in delivering key production and social services to members. But these supplementary services should be kept within the bounds of the profits generated by the cooperative, so as not to undermine its economic viability. Moreover, these supplementary services need to be kept separate from other operational activ..ies to ensure transparency and accountability. 28. Sustained Growth in Poultry Sector Will Continue to be Driven by Private Sector. Poultry meat and egg output displayed exceptional growth over the past two decades-with minimal government intervention and investment. Egg and poultry meat production grew by an average of 7 and 6 percent a year respectively, between 1971 and 1993, with production concentrated in private noncooperative enterprises. The Eighth Five-Year Plan's (1992-97) proposal to relaunch the poultry cooperative development program should be dropped. Past experiences with poultry cooperatives involved in production and marketing in many states were poor, and further public sector subsidies to develop the poultry cooperatives would only crowd out the relatively efficient private poultry industry. C. Ensuring an Adequate Supply of Livestock Inputs 29. Balancing Feed Supply and Demand is a Major Challenge for the Indian Livestock Sector. National feed balances are 20-30 percent short of what is needed. This deficit is equivalent to about 250 million mt of dry feed per year. Estimates of concentrate (cereais, brans, and oilcake) shortfalls place the deficit at 35 million mt, but more conservative estimates indicate supply and demand are near equilibrium. Future projections, however, show a widening gap. 30. Several factors contribute to the feed deficit. The continued growth of the livestock population has been fostered by increasing demand, sociocultural factors which inhibit the killing of cows, low output prices which slows down the uptake of more productive stock and increase the incentive to maintain larger herds to compensate for low productivity, and a shift to small ruminants in the more degraded areas. As a result of population growth, the pressur-e on the traditional grazing areas (pastures and forests) increased. Moreover, the total grazing area in the country also declined as a result of the government's land distribution policies, which in some cases included the distribution of common property areas. The increased use of concentrate feeds could reduce the demand for fodder, but it is discouraged by government dairy policies and other market interventions. Addressing the feed sector's problems will require a four-pronged strategy that:  - ix- * Improves incentives for adopting improved stock, both to increase productivity and feed efficiency and to remove the incentives to keep large herds of low-productivity animals; + Improves the management of the environmentally fragile grazing areas to restore and increase their productivity; * Eliminates economic barriers to the increased availability of concentrate feed; and + Increases integration of crop and livestock production systems, and promotes more efficient use of crop by-products. 31. Addressing the Resource Degradation Problem will Require GOI and State Action. To restore the productivity of the degraded common grazing areas and common fodder supply sources, efforts should be made to establish or strengthen grassroots community and user groups who would be responsible for managing the common property areas. A comprehensive approach would involve: * At the central government level: Establishing national guidelines for allowing user groups to manage the common property grazing areas. + At the state level: Pursuing legislative reforns to allow user groups to manage common property grazing areas. Adopting mechanisms (such as a microplanning approach and collaboration with nongovernmental organizations) to identify common property areas and, in cooperation with users and user groups, develop area management plans. Alternative management approaches could include cut-and-carry and stall feeding systems in the rural areas, the introduction of grazing fees, and rotational grazing; and - Formulating supportive mechanisms (such as initial matching grants and loans) to compensate user groups for the temporary closure of degraded grazing areas until productivity is restored. 32. Liberalizing the Domestic Concentrate Feed Sector Important for Increased Concentrate Feed Use. The domestic marketing of feeds and feed ingredients needs to be further liberalized to promote market efficiency. Liberalization would involve eliminating laws that impose storage and movement restrictions on feed ingredients and limit poultry feed (except feed in pellet form) and oilseed manufacturing to small-scale enterprises. 33. Animal Health and Breeding Services Delivery Need to be Improved. In addition to proper feed and production management, livestock health and breeding services are crucial in achieving the productive potential of livestock. The delivery of animal health services is primarily a state activity. The supply and quality of these services, outside of the cooperatives and the externally funded campaigns, have been poor. To increase the availability of and access to animal health services, the state's focus should shift toward delivering purely public services such as sanitary control, border controls, quarantine operations, and extension services. The private sector should take over activities such as clinical treatment and nonconmpulsory vaccinations. Key steps to promote private participation in animal services include:  * Creating a level playing field by instituting full cost recovery for state delivered "4private good" services (clinical services, noncompulsory vaccinations, artificial inseminations) and, * Establishing appropriate incentives, such as leasing of central and state government veterinary facilities, opening private subcontracting opportunities for key government tasks (such as compulsory vaccinations and food inspection), and flexible civil service arrangements. 34. Genetic upgrading to increase livestock productivity and feed efficiency will require promoting farmer adoption of improved breeds. Livestock breed improvement activities in india are still concentrated in the public sector. About 700 central and state livestock breeding centers cover cattle, buffalo, poultry and sheep. The impact of these centers has been limited. In cattle breeding, the National Dairy Development Board and private breeders, using semen from imported and local bulls, are more effective than bull production in state farms. In buffalo breeding, government involvement has been rather limited, but a number of private breeders and artificial insemination companies are emerging. These efforts should be encouraged. The quality of the state artificial insemination service has been poor, as reflected by the iow conception rates. Private operators would likely obtain better results. In small ruminant breeding, the central government's program of importing and distributing fine wool breeds have been rather unsuccessful. Such breeds are not well adapted to most Indian climatic and management conditions. Village-based selection schemes using local breeds would have more impact and should be encouraged. In poultry breeding, the private industry has all but taken over, and government involvement should be phased out. 35. Livestock Research Priorities Need to be Reoriented. Livestock research is concentrated on cattle, whereas the attention paid to buffalo (which supply half the national milk output) and small ruminants (which supply most of the national ruminant meat production) does not correspond to the importance of these sectors. Poultry, for which suitable production technology is readily available and a vibrant private sector exists, continues to receive seven percent of the total research resources. The key weaknesses of the livestock research sector include a shortage of trained personnel, poor staff/operating costs ratios and lack of client orientation especially for smallholder production. An exception in dairy is the National Dairy Development Board (NDDB) research program, which has been more successful due to its better client orientation. Research efforts should be reoriented to focus on smallholder farming systems management, feed and fodder production, breeding schemes, and the testing of "on-the-shelf' technologies. 36. Livestock Extension Needs to be Strengthened. Livestock extension services have been sadly neglected. Livestock technology within the integrated public sector agricultural extension service is not disseminated. NDDB has effectively incorporated livestock extension in its cooperative support activities. Several nongovernmental organizations (NGOs) are also conducting livestock research and providing extension services. One NGO, the Bhratiya Agro-Industries Foundation (BAIF), is active in five states with annual research and extension expenditures of about Rs 140 million. An animal husbandry extension scheme to support the animal husbandry activities in the states is proposed under the Eighth Plan and will cover all livestock. An increased focus on livestock extension at the state level would be justified in view of the need to intensify livestock production. This would only be feasible if it is accompanied by increased privatization of veterinary services, so that state veterinary staff can be shifted to extension work. The shift to extension work needs to be accompanied by appropriate training in extension techniques.  - xi - Adequate and innovative incentive programs need to be developed to make the services more client- and result-oriented. The creation of another unresponsive bureaucracy should be avoided. D. Preparing for the Future 37. During the past 15 years, World Bank assistance to India's livestock sector has concentrated on dairy development. These projects contributed significantly to the development, expansion, and strengthening of the dairy cooperative sector, which served as the primary mechanism for dairy development. Several other World Bank-supported state-level agricultural development projects in areas such as social forestry, watershed development, and area development have also included livestock development and fodder production components. 38. The GOI has recognized that a comprehensive development strategy is needed for the livestock sector to take advantage of the synergism that could be achieved in coordinating government development activities, many of which have been undertaken with World Bank assistance. The assessment of the current status of the livestock sector, undertaken by this study, indicates sustained growth of the sector will require policy reform to promote increased efficiency, complemented by an investment program to facilitate the supply response by livestock farmers and entrepreneurs to the emerging opportunities. The government's policy reforms, in particular, should focus on the: * Elimination of remaining commercial trade restrictions, including barriers to private sector entry (such as the revision of the MMPO) and the small-scale reservation of poultry feed and oilseed manufacturing; * Formulating national guidelines to improve the management of common property areas. At the state level, policy reform should focus on the: + Discontinuing interventions in the operations of dairy cooperatives; * Promoting competition in livestock markets by removing state restrictions on private trade; * Rationalizing state intervention in the delivery of agricultural support services (agricultural research and extension, animal health services, breeding) to focus on the delivery of public goods; * Establishing the legal and regulatory framework to improve the management of common property areas; * Implementing cost recovery programs for all non-public good support services provided by the state; and 39. State-level investment programs with national institutional components, focusing on a number of innovative interventions, would improve the capacity of farmers, private traders, and private providers of support services to respond to emerging opportunities. At the national level the investment programs should focus on: * Institutional reform, including clearer definitions of public and private, and union vs. the state responsibilities;  * Improving data collection and dissemination of livestock market information, strengthening the Department of Animal Husbandry and Dairy in policy analysis and formulation, and developing efficient private-public sector quality control institutions; * Technical support for key private organizations, such as the Veterinary Order and the Compound Livestock Manufacturers Association; and * Livestock research and extension support in priority areas. 40. At the state level, the investment programs should be directed toward: * Improving common property resource tenure and management regimes, with an emphasis on grassroots involvement: * Developing innovative techniques for sustainable resource use; and * Promoting alternative service delivery systems for animal health and breeding and livestock extension and credit, with an emphasis on private sector and user group involvement.  LIVESTOCK SECTOR REVIEW KEY PROBLEMS AND RECOMMENDATIONS Problem Area Recommendation 1 Supportive Measure Expected Outcome Risks I. Increasing Livestock Marketing Efficiency Dairy marketing GOI GOI => Increase competition and Inadequate assistance The Milk and Milk Products Introduce amendments to the MMPO in at * Strengthen public monitoring and promote efficiency in the for cooperative Order (MMPO) limits least three states. After three years, expand to enforcement of hygiene standards dairy processing industry restructuring could lead competition in the dairy to other states. Specifically: => Improve import to bankruptcy of some products market and * Remove restrictions on milk sourcing State government competitiveness cooperatives, the maintains inefficient (milksheds) to encourage greater * Develop where critical targeted = Raise milk farmgate prices disruption of the milk operations of existing firms. competition. compensatory measures for poorest =, Encourage technology up- collection and the . Eliminate restrictions on processing milk dairy farmers in remote areas (mostly take reduction of income of into high-value-added dairy products supplying milk to cooperatives) who small farmers supplying * Eliminate restrictions on storage volumes are adversely affected by liberalization milk to cooperatives. and provisions that allow the government of the milk market. These could to inspect and seize private stocks, except include a temporary per unit transport under state of emergency. subsidy or flat subsidy per household. * Establish objective criteria for State government registration of firms, relating * Discontinue state intervention in dairy exclusively to public health and safety, cooperative operations and assist in environmental protection and general restructuring of cooperatives. prudential requirements. * Eliminate state price controls on liquid milk Livestock market State government z Reduce marketing costs information Data on Improve production and market information production, prices, supply and (especially prices and supply) collection and demand for policy dissemination systems, including use of mass fomiulation and trader use media. are poor and often not available. Trade Restrictions. Most GOI GO] => Provide a price ceiling for Trade reform without zxports remain subject to Quantitative export restrictions (such as * Eliminate n lestic marketing consumers accompanying reform of quantitative restrictions. licensing, canalization) should be eliminated. restrictions on feed ingredients. => Provide a price floor for the marketing and * Promote cooperative restructuring producers processing sectors will adversely sffect producer .velfare, especially in the dairy sector. xiii  Problem Areas I Recommendations | Supportive Measures Expected Outcome Risks H. Ensuring an Adequate Supply and Efficient Delivery of Inputs Degradation of common GOI GOI = Reduce land and forest Social unrest may property grazing and forest Introduce national guidelines for allowing Review current legislation affecting the degradation result, if reforms are not areas. Land policy reform in user groups to independently manage the management of common property = Promote sustainable livestock based on extensive 1950s contributed to the common property grazing areas. grazing areas. production systems consultations with the shrinkage of CPR areas and > Increase productivity of affected stakeholders the disintegration of the State government State government existing grazing areas traditional institutions that Establish regulatory framework and promote Explore possibilities for cooperation with managed these areas. Coupled the establishment of community and user NGOs and other development institutions with an increasing population, groups to manage the degraded common these two factors resulted in property areas the conversion of the CPR into * Identifying common property areas and open access areas, causing relevant users and, in cooperation with degradation and grazing areas. user groups, developing an area management plan. New management approaches that could be explored by user groups include cut-and-carry and stall feeding, the introduction of grazing fees, and rotational grazing. Determining safety net mechanisms (for example, initial grants or loans) that may be needed to provide safety nets to user groups until the productivity of the degraded areas is restored. Domestic market GOI => Increase incentive for feed Increased imports may interventions. Interventions Liberalize the marketing of feed ingredients industry to modemize and lower incomes of feed such as market controls and . Eliminating storage and movement increase efficiency and cereal producers. A restrictions on entcrprise size restrictions on feed ingredients. = Increase the competitiveness reduction in vegetable reduce the efficiency of * Eliminating licensing requirements for and profitability of the oil prices with the domestic feed ingredicnt feed ingredient imports (especially livestock industry, especially rationalization of marketing. amino acids, and feed quality wheat the poultry industry oilseeds market may and maize). > Reduce pressure in grazing lower demand for ghee * Abolishing immediately limits on areas. in particular and milk in enterprise size of poultry feed and general. oilseed manufacturing. xiv  Probiem Area I Recommendations I Supportive Measures Expected Outcome Risks II. Ensuring an Adequate Supply and Efficient Delivery of Inputs cont'd Veterinary services State government GOI => Increase availability and Payment of full costs Public sector animal health Provide only pure public good services such Govemment should withdraw from quality of veterinary services could affect access by services are characterized by as sanitary control, border controls, pharmaceutical production, which => Reduce farm losses due to the poor. Continuous poor delivery and lack of quarantine operations, and progressively could be franchised out to the private diseases monitoring will be accessibility Subsidization of withdraw from private sector responsibilities sector and to concentrate on research in => Enhance farmer adoption of required public sector services acts as a such as clinical treatment and animal areas not covered by privatc sector. improve breeds barrier to private entry. breeding. Key steps to be undertaken include: => Increase public sector * Creating a level playing field by State government effectiveness in providing instituting full cost recovery for services To complement increased private public services, such as disease where private participation should be participation in veterinary services, surveillance, disease control promoted (clinical services, some Department of Animal => Reduce fiscal costs noncompulsory vaccination) Husbandry and Dairying veterinary * Creating appropriate incentives, such as staff should be shifted to extension leasing of goverr.ment facilities, opening work after appropriate training in private subcontracting opportunities, extension techniques. and flexible civil service arrangement (such as leave of absences, and so on.). Breeding services State government > Increase availability and Artificial insemination State breeding services are . Introduce full cost recovery of artificial quality of animal breeding adoption rate may drop. inadequate and service quality insemination services to creatc a level services is poor. The public sector playing field with private sector. = Enhance farmer adoption of continues to maintain poultry * Retain selected state breeding farms to improve breeds breeding stations, which only maintain the genetic pool of indigenous = Reduce fiscal costs crowd out private sector stock. Review altemative usies for involvement. remaining loss-making farms (for example leasing to private sector, public-private joint ventures). * Close poultry breeding farms. Agricultural research GOI and State governments = Increase availability of Public research activities * Livestock research activities should improved technologies suitable suffer from a lack of client focus on the problems of smailholder for smallholder production orientation (especially for production systems. systems smailholder production), a * Support for research in the commercial shortage of trained personnel, poultry sector should be reduced and poor staff and operating significantly because such research is ratios. already being conducted by the private sector. Poultry research should focus on smallholder free-range poultry production. xv  Problem Area I Recommendations | Supportive Measures Expected Outcome Risks II. Ensuring an Adequate Supply and Efficient Delivery of Inputs cont'd Agricultural extension GOI COI and State governments Improve uptake of productivity Limited attention is being paid New and altemative extension delivery Promote vertical integration between feed enhancing technologies to transmitting appropriate methods (including NGO and private sector mills and processors and farmers, Improve competitiveness of technologies to farmers involvement) to improve extension delivery through innovative technical assistance domestic production relative to should be explored and tested under the arrangements (such as temporary imports proposed animal husbandry extension extension cost sharing mechanisms scheme between government and processors). xvi  CHAPTER 1 INTRODUCTION 1.1 India's agricultural sector will have a significant impact on the future growth of the country's economy. Agriculture accounts for about 30 percent of gross domestic product (GDP) and about 16 percent of the value of total exports. It employs 65 percent of the labor force and 84 percent of all active women. Moreover, of the country's 310 million poor (36 percent of the total population), 76 percent live in rural areas and depend on agriculture as their main source of livelihood. Agricultural growth is therefore important for overall economic growth and poverty reduction. 1.2 In the past forty years agriculture has made significant strides in meeting the growing demand for food. The production of foodgrains more than tripled from 51 million tons in 1950/51 to 176 million in 1990/91. As a result, India is now nearly self-sufficient in food grains. 1.3 The agricultural sector, however, has been discriminated against relative to manufacturing for most of the last 25 years.2 The average level of protection for agriculture between 1970/71 and 1987/88 was about half that for manufacturing. Two recent developmepts, however, suggest that this bias will be reduced. In July 1991 the Indian government introduced a program of economic stabilization and liberalization. Although the reforms are directed almost entirely at the manufacturing sector, the devaluation of the rupee and its expected shift to full convertibility has indirect effects on the entire economy-including agriculture-by making it more export competitive. In addition, the opening up of Indian agriculture under the General Agreement on Tariffs and Trade (GATT) and the expected changes in world agriculture under the GATT will most likely accelerate the improvement in terms of trade. These developments are also expected to change the economy's incentive structure, with agriculture attracting an increasing share of resources from the private sector over the next few years. 1.4 India's program of reform and economic liberalization opens significant market-led opportunities for the livestock sector. Sustained economic growth and rising incomes are driving the rapid growth in livestock product demand. This has fostered the rapid expansion of the livestock output in recent years. Between 1985 and 1992 the value of livestock output grew by 6 percent a year in real terms from Rs 196 billion to Rs 302 billion (1985 rupees) (Figure 1.1). By 1990 livestock accounted for 32 percent of the value of agricultural output. Revenues from exports of live animals and livestock products (about 8 percent the total value of Indian exports in 1992) have grown even faster, increasing by 13 percent a year in real terns from $1.1 billion in 1987 to $1.8 billion in 1991.3 This growth was driven by exports of leather goods, meat, and meat products. With improved domestic production and marketing efficiency and a world market reshaped by the GATT, the Indian livestock sector could become even more competitive. I Govemment of India (GOI), 1992, Eighth Five-Year Plan 1992-97. 2 G. Pursell and A. Gulati, 1993, "Liberalizing Indian Agriculture: An Agenda for Reform" Policy Research Working Paper 1172, World Bank, Washington, D.C. and C.H. Rao and A. Gulati, "Indian Agriculture: Emerging Perspectives and Major Policy Issues," International Food Policy Research Institute, Washington, D.C. 3 Such exports include live animals, meat and meat preparations, dairy products, eggs, and leather and woolen products.  -2- 1.5 Livestock sector development has a significant beneficial impact in Figure 1.1: Real Livestock Output Value generating employment and reducing (1985 Rupees) poverty in rural areas. More than 630 320 million people (74 % of the population) 300 302 live in rural areas, and 237 million (38 r. 280 percent) of them are poor. In 1986/87, Z 260 234 2 2 73 percent of rural households owned 240 *0 220 201 0 1 livestock. Small and marginal farmers D 200 196 account for three-quarters of these 180i l households owning livestock, raising 56 85 86 87 88 89 90 91 92 percent of the bovine (cattle and buffalo) and 62 percent of the sheep population (Table 1.1).5 Rural households depend Source: Ministry of Agriculture. on livestock for nutrition and income income from livestock accounts for 15-40 percent of total farm household incomes. The sector employs 8 percent of India's total labor force, including many small and marginal farmers, women, and landless agricultural workers. Thus improving the productivity of, and increasing incomes from, livestock enterprises would benefit the rural poor both directly and indirectly, through the associated multiplier effects in the nonlivestock rural economy. 1.6 Livestock provides other benefits to the rural sector. Livestock supplies a large portion of draft power for agriculture, with about half the cattle population and 25 percent of the buffalo population being used to cultivate an estimated 60 million ha of crop land (about 30 percent of the total cultivated area). The organic fertilizer produced by the sector is an important input into crop production, and dung from livestock is used as fuel in rural areas. Livestock also serves as an insurance substitute, especially for poor rural households, since it is an asset that can easily be sold during times of distress. 1.7 Livestock sector development, however, must be Table 1.1: Ownership of Landholdings and Livestock balanced with measures to conserve by Size of Farm (percent) the environment, because excessive Farm Size Distribution of Distribution of livestock population causes (hectares) Holdings Livestock Ownership overgrazing and land degradation, Bovines Sheep especially in the semi-arid North. I ha 57.2 373 402 The continuing growth in livestock s 199tha 18.4 19.1 22.0 numbers, coupled with shrinking 2-3.99 ha 13.9 21.3 18.0 traditional grazing areas, has put 4-9.99 ha 8.3 17.0 13.0 intense pressure on existing grazing more than 1O ha 2.1 5.0 7.0 areas, encouraged encroachment into a. Cows and buffaloes. forest lands, and ultimately Source: Department of Agriculture and Cooperation, based on Input Survey. 4 The total number of the poor in India is estimated at 310 million, 76 percent (236.7 million) are in the rural areas, the remainder (73.3 million) are in the urban areas (G. Datt, "Poverty in India: 1951-1991," World Bank Policy Research Department Working Paper, forthcoming). s Small farmers are farmers with area holdings of less than 1.99 ha. Marginal farmers own less than I ha.  -3- contributed to the degradation of land resources. Livestock processing, particularly the leather processing industry, also has contributed to industrial pollution. Thus, any development strategy for the livestock sector, must attempt not only to achieve growth and reduce poverty, but also to maintain agricultural and environmental sustainability. 1.8 The promising developments emerging from economic lih;eralization efforts and the GATT, as well as livestock's key role in alleviating poverty, have refocused attention on livestock's considerable potential and on the need for a coherent, long-term strategy to capitalize on the sector's emerging economic opportunities. World Bank lending to India's livestock sector during the past 15 years has mainly concentrated on dairy development including support for three state and two national dairy development projects totaling $584 million (current dollars).6 These projects helped develop, expand, and strengthen the dairy cooperatives, which were the primary mechanism for dairy development. Other donors, such as the European Union, have supported dairy development through food aid donations channeled through the National Dairy Development Board. In recent years the World Bank has supported state-level agricultural development projects in such areas as social forestry, watershed development, and area development. These projects also included livestock development and fodder production components. 1.9. The World Bank's last livestock sector review was in 1975. The current review was undertaken at the Indian government's request to identify key issues and future policy directions and investments to promote the growth and development of the livestock sector. Specifically, this study: * Assesses the technical and economic situation in the sector, focusing on feed and fodder and on cattle, buffalo, poultry, and small ruminants, * Identifies the main constraints to the development of these sectors, i Identifies opportunities for future investments and policy reforms that would promote environmentally sustainable production and efficient marketing and trade, paying particular attention to the changing roles of the public and private sectors and the more efficient use of scarce financial and human resources, * Proposes a plan for action. 6 These projects were the Karnataka Dairy Development Project (fiscal 1974), the Madya Pradesh Dairy Development Project (fiscal 1974), the Rajasthan Dairy Development Project (fiscal 1974), the National Dairy Project (fiscal 1978); and the Second National Dairy Project (fiscal 1987).   CHAPTER 2 LIVESTOCK PRODUCTION AND PERFORMANCE TRENDS A. Recent Population And Output Trends 2.1 Livestock Population. India accounts for a significant share of the world's livestock population. In 1993, the country contained 53 percent of the world's buffaloes, 20 percent of the goats, 15 percent of the cattle, 4 percent of the chickens, 4 percent of the sheep, and one percent of the pigs. India's livestock population continues to grow steadily, especially among goats and poultry (Figure 2.1). The near doubling of the goat population over the past 30 years reflects to some degree the increasing degradation of grazing areas, as declining feed availability increases the incentives for raising hardier animals. The near quadrupling of the poultry population can be attributed largely to increased demand, as a result of the rising per capita income and the increased availability of Western technology, which generated considerable private investments in the sector (para 2.7). 2.2 The cattle population increased to 195 million in 1987, but declined by 2 percent to 193 million in 1992 (Annex Table 2.1a). This decline can be attributed to the increasing yield per animal (para 2.3), the shift to small ruminant production in the more degraded areas, and the reduced dependence on cattle for draft power as mechanized alternatives became more widespread, especially in the irrigated areas. In contrast, the buffalo population grew by about 10 percent over the same period, except during the 1987-92 period when the growth rate dropped to 2.3 percent. 2.3 Livestock yield and output trends. As livestock populations expanded, output from most livestock categories also grew (Table 2.1). Goat and cows milk Figure 2.1: Livestock Population, 1961-93 (millions). and broiler production displayed [ the highest annual growth rates, 450 with poultry output growing by ! 400 nearly 15 percent during 1988-92. 350 Despite the two percent drop in 300 cattle numbers, total cow milk 200 output increased by 7.5 percent 150 between 1988-92, partly a result of 100 the increasing number of crossbred 5o cows. 0 - Cattle Buffalo Sheep Goat P igs Poultry 2.4 By 1992 milk from cows Co19611972.1978m1982u1987u1992 accounted for about 48 percent of __ _ __ milk supply, buffalo milk acco suntedpforlanother 48ffalo p , Source: India Directorate of Economics and Statistics. accounted for another 48 percent, and the rest was supplied by goats (Annex Table 2.2).  - 6 - 2.5 Meat output increased by an Table 2.1: Average Annual Animal Yields average of five percent during 1988-92, (kilograms per animal) driven largely by the outstanding increase in poultry meat output (see Table 2.1). Yield per increase in output Goat meat output increased by about 5 Commodity animal, 1990 (percent) percent a year during the same period, India 1980-88 1988-92 while other meats (buffalo, beef, and Milk 5.6 5.7 mutton) increased by three or four Cows percent. Indigenous 170-1,299 6.5 7.5 Crossbred 661-2,934 2.6 Milk products continue to Buffalo 529-2,254 4.8 3.8 account for about two-thirds of the total Goat 44-358 5.6 10.8 value of livestock output. In 1991, meat Beef 101 53 and meat products accounted for 14.7 Buffalo 138 3 3.2 percent of total output; eggs (3.6%), wool Mutton & lamb 12 0.0 3.1 (0.3%), dung (10.9%), and other products Goat 10 2.8 4.8 accounted for the remainder (Annex Pig 35 1.0 Table 2.3). Poultry na 29 14.1 Eggs (pieces) 159-281 7.5 4.9 2.7 Poultry Industry Growth. Wool na 3.1 0.0 Poultry meat and egg output displayed Source: FAO Production Yearbook, various years; Animal Hwuba,dry and impressive growth over the past two Dairying, 1993, Report of the Technical Committee of Directioi: for decades. Poultry and egg output Improvement of Animal Husbandry and Dairying Statistics. increased by more than 50 percent in real terms (1990 dollars) from Rs 18.7 billion in 1980 to Rs 46.8 billion in 1993 (Figure 2.2). In 1991- 92 the two products accounted for nine percent of the agricultural share of the gross domestic product. Egg production grew an average of seven percent a year between 1971 and 1993, reaching 24.8 billion pieces by 1993 (Table 2.2). Andhra Pradesh, Maharashtra, Punjab, Tamil Nadu, and Haryana are the top five egg-producing states, accounting for about 60 percent Figure 2.2: Value of Poultry Product Output, of total egg production (Annex Table 1990 rupees. 2.4). Egg production increased as the 50 share of imported hybrid layers, first introduced in the 1960s, grew to account 40 for 56 percent of the estimated total . 30 layer population of 150 million by D 20 1993.' 10 2.8 Poultry meat output grew by an 0 average of six percent a year during the 1980 1985 1990 1491 1992 same period, reaching 454,000 mt in - Eggs ---Poultry Meat Total 1993. About 60 percent of poultry meat is produced in Andhra Pradesh, Maharashtra, Punjab, West Bengal, and Source: Annex Table 2.5 7 Indian Poultry Industry Yearbook, 1994.  Karnataka.8 Unlike the layer Table 2.2: Egg and Poultry Production industry, broiler raising is mostly concentrated around Eggs Population Non-broiler Total Poultry (thousands of major cities like Hyderabad, Year (billions) (millions) (millions) (millions) metric tons) Bombay, Bangalore, Calcutta, 1971 5 3 4 110 114 121 Ludhiana, and Madras, where 1980 12.5 30 116 146 179 better infrastructure and 1985 16.1 75 90 165 274 1990 23.3 190 160 350 412 marketing facilities exist. A 1991 23.7 215 165 380 440 large portion of the growth in 1992 22.7 210 200 410 427 poultry meat output derives 1993 24.8 235 200 435 454 Average Annual Growth Rate from the immense population (percent) growth of the broiler sector, 1971-85 8.3 23.3 -1.4 2.7 6.0 which grew by an average of 20 1985-93 5.5 15.3 10.5 12.9 6.5 percent a year during 1971-93 1971-93 7.3 20.3 2.8 6.3 6.2 (see Table 2.2). Some estimates Note: 1993 figures are estimates place broiler meat production at Source: Indian Poultry Industry Yearbook, 1994; FAO Producion Yearbook, place ~~~~~~~~~~various issues. about two-thirds of total poultry meat production.9 The growth in the layer industry also indirectly contributed to the increased supply in poultry meat, through the increased supply of culled hens. 2.9 Several factors contributed to the rapid growth of the poultry sector. Rising incomes, a growing popularity of chicken-based fast food restaurants, declining prices of poultry meat and eggs (para 4.67), and lower prices of broiler meat relative to milk and mutton (para 2.11) increased the attractiveness of broiler meat for consumers. On the supply side, quick returns to producers, the availability of western technology, vertically integrated operations, and declining feed prices increased the economic attractiveness of broiler production. B. Consumption of Livestock Products 2.10 Despite the continuing increase in supply, per capita consumption of livestock products in India is still considerably lower than in industrial countries and in other developing countries. For example, per capita consumption of milk is about half the level in Australia and the United States, while per capita poultry meat consumption is about 12 percent of the level in China. Consumption of beef and veal is extremely low relative to other countries, but this is primarily due to sociocultural factors. For religious reasons, a large portion of the population does not consume them. Moreover, the impact of these sociocultural factors spills over to the consumption of buffalo meat. USDAIFAS, 1994, "Agricultural Situation, Annual Report," AGR No. IN 4084. USDA/FAS, 1990. "Agricultural Situation and Outlook Report." AGR No. IN 0046.  -8- 2.11 Annual per capita consumption of eggs (30) Table 2.3: Per Capita Consumption of Livestock ProdLets in and poultry meat (0.43 kg) India and Selected Countries, 1992 (kilograms per year). is still significantly lower in Product India Other CountriLs India than other countries, Milk (fluid milk) 65.0a China-3; Australia-104; U.S.-104 and thus offers opportunities China- 63;Japan-276;Australia- 70; for growth (Table 2.3). Eggs (pieces) 26.0 U.S.-181;Turkey-122 Moreover, 75- 80 percent of China-2; Philippines-2.4. Australia-36; the eggs and poultry meat Beef and veal I.1 U.S-.43; are consumed in urban and ,,,,,B,,Uf,.f,ael,