ReportNo. 431a-IN FILE COPY Appraisal of Karnataka DairyDevelopment Project India May 21, 1974 Regional ProjectsDepartment Asia Regional Office Not for PublicUse Document of the InternationalBank for Reconstruction and Development International DevelopmentAssociation This report was prepared tor official useonly by the BankGroup. It may not be published. quoted or cited without BankGroup authorzation. The BankGroup does not ac(ept responsibility for the accuracyor completeness of the report. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
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Report No. 431a-IN FILE COPYAppraisal of KarnatakaDairy Development ProjectIndiaMay 21, 1974
Regional Projects DepartmentAsia Regional Office
Not for Public Use
Document of the International Bank for Reconstruction and DevelopmentInternational Development Association
This report was prepared tor official use only by the Bank Group. It may not be published.quoted or cited without Bank Group authorzation. The Bank Group does not ac(ept responsibilityfor the accuracy or completeness of the report.
AI - Artificial InseminationAMUL - Anand Milk Union Ltd. (Kaira)ARC - Agricultural Refinance CorporationDCS - Dairy Cooperative Society0OI - Government of IndiaGOK - Government of KarnatakaIDC - Indian Dairy CorporationICDDC - Karnataka Dairy Development CorporationNDDB - National Dairy Development BoardNDRI - National Dairy Research InstitutePLDBs - Primary Land Development BanksRBI - Reserve Bank of IndiaBVWI - Bangalore Veterinary Vaccine InstituteFVS - Faculty of Veterinary Science
FISCAL YEAR
July 1 - June 30
INDIA
KARNATAKA DAIRY DEVELOPMENT PROJECT
Table of Contents
Page No.
SUMMARY AND CONCLUSICNS ....................... i.. -v
I. INTRODUCTION ........ ............................. 1
II. BACKGROUND .................... ...... , ,... , ......... 1A. General ................................... 1B. The Dairy Sub-Sector ., ..... ...... 2C. Agricultural Credit . .............. ......... . 4D. Government Policies ........ . . . . . . ..... ..0. .. 5
III. THE PROJECT AREAS ................. .... .............. 6
IV. THE PROJECT .............. .. ... 8A. General Description........ 8B. Detailed Features.... 9C. Cost Estimates ...... ........................ 13
V. ORGANIZATICN AND MANAGEMT.ENT. . . 17A. Karnataka Dairy Development Corporation (KDDC) 17B. Unions and Cooperatives ..................... 18C. Supporting Activities . ...................... 19D. Lending Operations .......................... 20
VI. PRODUCTION, MARKETING, PRICES, SUBSIDIESAND FINANCIAL RESULTS ....... ........................ 20
VII. ECONOMIC COSTS, BENEFITS AND JUSTIFICATIONS .... ....... 23
VIII. RECOMMENDATIONS ................. ............... ..... . 24
This report is based on the findings of an appraisal mission which visitedIndia from September 29, 1973 through November 3, 1973. The mission wascomposed of Messrs. R. Milford, P. Dax, C.W. Wolffelt (IDA), F.H. Knobeland W.A. Hardison (Consultants). Mr. A. Seth and Mr. Krafft (IDA) alsocontributed to the report.
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ANNEXES
1. The Dairy Subsector
2. Cooperative Societies and the AMUL Model
3. Agricultural Credit
4. A. Marketing and ProcurementB. Terms of Reference for Marketing Study
5. The Village Dairy Cooperative Society and DCS ModelsTable la, lb, lc
Id, - Village Herd ProjectionsTable 2 - Economic Costs & Value Added per Liter of MilkTable 3 - Operating Costs and Cash FlowTable 4 - Village StatisticsTable 5 - Distribution of Land
6. Milk Producers' UnionsTables 1-3 - Milk Processing Facilities: InvestmentsTable 4 - Feedmills: InvestmentsTable 5 - Administration and Services: InvestmentsTables 6-9 - Consolidated Investment ProjectionsTable 10 - Services: Operating CostsTable 11 - StaffingTables 12-14 - Income & Operating Costs: PlantsTables 15-16 - Income & Operating Costs: FeedmillsTable 17. - Volume & Capacity ProjectionsTables 18-20 - Sources & Uses of Funds: UnionsChart I - Organization Chart of a Union
7. Karnataka Dairy Development Corporation (KDDC)Appendix II - Qualifications and Terms of Reference for ConsultantsTable 1 - KDDC: InvestmentsTable 2 - KDDC: Projected Income StatementTable 3 - KDDC: Projected Cash FlowTable 4 - KDDC: Projected Balance SheetTables 5-19 - KDDC: Production Farms: On-Farm Investments,
Sales and Operating Expenses, Herd ProjectionsChart I - Project Organization Chart
8. Supporting ActivitiesTables 1-2 - Veterinary Biological Production Institute:
Table 3 - Animal Health Program: Faculty of VeterinaryScience Investments
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9. Project Cost and Flow of FundsTable 1 - Project Costs by Major InvestmentsTable 2 - Project Costs by Disbursement CategorilesTable 3 - Project FinancingTable 4 - Estimated Disbursement ScheduleTable 5 - Consolidated Government Cash FlowChart I - Flow of Project Funds
10. Rate of ReturnTable 1 - Economic Rate of ReturnTable 2 - Sensitivity Analysis
MAP
INDIA
KARNATAKA- DAIRY DEVELOPMENT PROJECT
SUMMARY AND CONCLUSIONS
Dairying in India
i. India's agricultural sector accounts for about 40% of IndianGNP and employs 70% of the total work force. Although past agriculturalsector emphasis has been on increasing foodgrains output, the Government ismaking fresh efforts to diversify agricultural investment, to exploitregional development potentials And increase rural employment, with specialattention being paid to the dairy sub-sector. Over the past two decadesthere has been a marked decline in the per capita consumption of milk, aprimary source of animal protein for the bulk of the population. Underthe Fifth Five-Year Plan an effort will be made to improve the situationby allocating Rs 7 billion to increase milk production from a level of21 million tons in 1972 to 30 million tons by 1979. This project is thefirst of a series of proposed projects designed to contribute towardsachieving this output target. It is also the first Bank Group projectsupporting the dairy/livestock sec-.or in India.
ii. Some 50% of the world's buffaloes and 17% of its cattle existin India. However, the indigenous varieties of cattle (which make up thebulk of cattle) and buffaloes produce very low milk yields. Their maincontribution has been to provide draft power. The direct contribution ofthe livestock sector accounts for only 14% of the total agricultural sector'sshare of GNP and about 5% of total exports. India remains dependent onimports of dairy products. To significantly increase dairy production, alarge scale effort to develop higher yielding animals, together with expansionof facilities for collection, processing and marketing of milk, and betterprograms of animal health care and breeding are required.
iii. Dairying in India is a subsidiary farm activity for which womenhave the primary responsibility. Few farmers use their land principallyfor dairy production. Most of the milk marketed is produced by: (i) thelandless (rural and urban) who maintain from one to several cows per householdand who purchase all feeds; (ii) small farmers who grow a portion of the feed(mainly straw) for a herd which ranges from one to five cows; and (iii) milkcolonies and cattle settlements where large groups of animals are kept.India has an acute shortage of animal feed, most of which is low quality. Ifmilk production is to be significantly increased, more of the available feedsupply must be channelled to high producing animals. The demand for cerealgrains as human food and the favorable export position of oilseeds andoilcake preclude any large increase in the future supply of concentrate feedsfor livestock. It is, therefore, important to develop animal productionsystems which will result in more efficient uue of available supplies and toencourage development of more high quality forages, particularly by integratingthese crops into existing farming systems.
1/ Formerly known as Mysore.
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iv. A notable bright spot in the Indian clairy picture is the success-ful experience of the Kaira District Cooperative Milk Producers Union Ltd.(AMUL) in Gujarat. AMUL is centered on the formation and operation ofhundreds of village milk producers cooperatives (a typical member owns twobuffaloes and tills less than 1 ha). These village level cooperatives arewelde.i together into a cooperative Union (AMUL) which owns and operates itsown facilities for milk and feed processing, collection and distributionand provides its members a full range of technical services. The Union isresponsible for setting milk prices and never refuses to buy milk in anyquantity from members. Thus, the farmer is assured of a year-round outletfor his milk at fair prices. New members are provided with a package ofservices which includes routine veterinary health coverage, concentratefeed, fodder seed, and training. The outstanding success of the AMULexperience has encouraged GOI and a number of other States to foster theestablishment of similar programs elsewhere in the country. In fact, mostof the Fifth Plan dairy programs are based on the AMUL model.
Status of Dairy Development in Mysore
v. Although its environment and experience differ considerably fromGujarat, Karnataka is a progressive dairy State. Foremost in crossbreeding,with a total of about 100,000 crossbred cattle, it has some of the bestextension and animal health services in the country. It has eight milkprocessing plants and about 45 chilling centers, of which two plants and10 chilling centers are in the Project area. The present Project is designedto build on the foundations already laid, and to further develop the statedairy industry to serve small scale producers using AMUL as a model.
The Project Description
vi. The proposed IDA credit of US$30.0 million is to develop anintegrated program for increasing milk production in rural areas (about450,000 farmers, most of whom farm less than 2 ha or are landless, wouldbe involved) through a five-year program focusing on quality crossbreeding,animal health and the development of facilities for milk collection,processing and marketing. Under the Project, village cattle owners wouldform Dairy Cooperative Societies (DCS) which would in turn be grouped intofour Unions. The Unions would manage milk collection, processing andmarketing, and would be controlled by the farmers. Each Union would ownand operate dairy and feed plants and would be capable of providingtechnical, extension, milk collection and marketing services to (he DCSmembers. In addition to the establishment of about 1,800 DCSs and thefour cooperative milk producers Unions, a Karnataka Dairy DevelopmentCorporation (KDDC) would also be formed to coordinate project implementationand to operate farms for dairy research and the production of purebred exoticbreeding stock. The health program, needed to protect the investments incrossbred cattle, would involve strengthening the capabilities of theBangalore Veterinary Vaccine Institute which produces biologicals andvaccines, and of the Bangalore University of Agricultural Science (VeterinaryFaculty) which carries out animal health research and veterinary activities.
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vii. DCS membership would be composed of cattle owners, 10% of whichare expected to be landless and another 50% marginal or small farmers withholdings of less than 2 ha. Milk production would be increased by focusinginputs at the DCS and farmer level. Farmers would receive credit forpurchase of locally crossbred heifers. The DCS would be the village levelcenter for milk collection, daily payment to producers, and for supplyingconcentrate feed, seeds and AI services. The DCS would also administergovernment calf-rearing grants to individual members. By year five it isexpected that, in a typical DCS, one-third of the native cows will have beenreplaced by crossbreds, increasing annual milk production from a pre-projectlevel of 60,000 1 to about 290,000 1.
viii. Under the Project each Union would be provided with staff andfacilities required to carry out its principal functions of: (i) assistingthe village societies with organization and management; (ii) establishingand supervising milk transportation; (iii) processing and marketing themembers' milk; (iv) operating feed milling facilities and organizingtransportation of feed to DCSs; (V') providing animal health and breedingservices; (vi) channeling calf-rearing grants to the DCSs; (vii) payingfor milk received from DCSs; and (viii) inspecting and auditing theaccounts of the DCSs.
Project Implementation
ix. The KDDC would be the main body for implementation and coordinationof project activities and would play an essential role in the initialestablishment of village cooperative societies and milk producers' unions.It would be responsible for recruiting four spearhead teams, one for eachunion, which would become the nucleus staff of each union as it is formed.These spearhead teams would concentrate on promotion, organization andoperation of the DCS's. KDDC would own and operate dairy plants and otherfacilities, either transferred from GOK (such as the Bangalore and MysoreDairies) or built under the project, until the unions had been adequatelycapitalized and staffed, minimum facilities had been constructed, and asufficient number of DCS's had been organized.
x. To ensure formation of DCS's and unions along AMUL lines, KDDCwould engage the services of staff of the National Dairy Development Board(NDDB) to help in recruitment, training and field supervision of eachspearhead team. The construction of milk and feed plants would be carriedout by KDDC with assistance from NDDB. NDDB would perform feasibilitystudies on plant location, design and capacities, prepare specificationsfor requesting construction bids, and supervise the construction of newfacilities. Additionally, consultants in tropical pasture agronomy andpasture management would be hired to assist the KDDC in the developmentof pasture programs and in the testing of small-farm management systems.
xi. The total project cost is about US$64 million equivalent includingduties and taxes of which the foreign exchange component is about 21% orUS$13.6 million.
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xii. The proposed IDA credit of US$30 million would cover 47% of totalproject costs. The remaining 53% would be financed by GOI (13%), GOK (19%),ARC and participating banks (13%), and farmers (8%).
xiii. IDA funds would be channelled in two ways. Credit funds for cross-bred cattle purchases, and for union, DCS and KDDC investments in facilities,totalling US$26.2 million would be nade available to the AgriculturalRefinance Corporation (ARC) repayable over 9 and 15 years atWZ1I/4% and 6-3/4%aunual interest respectively. GOI would bear the exchange risk., ARCwould in turn on-lend the funds to participating banks (two or threecommercial banks and the land development bank) at an annual interest rateof 7%. The banks would lend to farmers, KDDC, and the unions at 9.5% perannum. The grace and repayment periods would vary. Loans to farmers wouldhave up to one year grace and repayment over 3 to 6 years; the unions 5years grace and repayment over 10 years; and the KDDC up to 6 years graceon capital, 3 years grace on interest and repayment over 9 years. Repaymentsto ARC would be scheduled to coincide with those to the banks. The 9.5%interest rate is in line with prevailing interest rates, and reasonablein relation to the risk element involved, and the need for appraisal andsupervision of individual loans. Funds of US$3.8 million for consultants,importation of exotic cattle, the Bangalore Veterinary Vaccine Institute,and the Bangalore University of Agricultural Science (Veterinary), would bechannelled throulgh GOI to GOK on established GOI terms prevailing at thetime. (At the present time, these are 4.75% interest per year over 15 years.)
xiv. Materials and equipment valued at US$13.1 million or 21% of totalproject costs, would be procured on the basis of international competitivebidding in accordance with the Association's Guidelines. Domestic supplierswould be accorded the usual preference of 15% or the rate of customs duty,whichever is lower. Importation of exotic dairy heifers, bulls, and frozensemen (US$1.0 million) would be procured on the basis of price quotationsfrom at least 3 countries free from foot and mouth disease where suitableanimals are available.
xv. Other equipment items valued at US$6.2 million would be procuredfollowing local bidding due to the small sizes of individual items andthe need for piecemeal procurement over time.
xvi. The equipment, chemicals and glassware for the crossbred healthprogram in the Faculty of Veterinary Science and for the Bangalore VeterinaryVaccine Institute (US$2.9 million) would be purchased locally because;bulking of orders would be impractical due to small and spaced orders; mostof the world's leading manufacturer's of scientific equipment are representedin India and are competitive; and local maintenance service offered by theseestablished retailers would be needed to maintain much of the equipment tobe purchased under the project.
xvii. Buildings and civil works (valued at about US$8.2 million) forthe KDDC farms, union dairies and health support program would be dispersedin time and place, and would be unsuitable for international bidding. Thesefacilities would be constructed by local contractors.
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xviii. The proceeds of the IDA credit would be disbursed against the fullc.i.f. costs of imported equipment and materials and the ex-factory costof local equipment bid internationally; against the full c.i.f. costs ofimported cattle and semen; against She full net-of-tax expenditures by KDDCfor technical and management services; against 90% of ARC refinance for DCSmembers crossbred cattle purchases; and against 60% of locally procuredexpenditures on equipment and civil works.
Economic Benefits
xix. The project would provide a number of important economic andsocial benefits. The direct economic benefit of the project will be theincreased production of milk and heifers. The incremental milk productionis estimated at one million tons/yealr by year ten and the project isexpected to produce over 100,000 surplus heifers by year seven. Some 450,000farming households, or approximately 2.5 million people, would benefitby raising their standards of living and providing increased cash familyincome. Besides contributing to fuller employment in rural areas, theproject's establishment of four unions would provide employment for a staffof about 1,000 as well as support a milk transport service, consistinglargely of owner operators. Consumers would also benefit significantlyfrom the project. The availability of pasteurised milk would increase, sothat milk borne diseases such as TB would decrease significantly. Based onthe quantified incremental costs and benefits, the economic rate of returnto the project is about 33%.
INDIA
KARNATAKA"1 DAIR' DEVELOPMENT PROJECT
I. INTRODUCTION
1.01 The Government of India (GOI) has requested IDA assistance infinancing a dairy development project in the State of Karnataka. 1/ TheProject was prepared by the staff ,f the Animal Husbandry and VeterinaryServices Department in Karnataka aLong guidelines from the GOI AnimalHusbandry Division of the Ministry of Agriculture. Two Bank Group pre-appraisal/preparation missions in February/March and April/May 1973, helpedprepare the project.
1.02 Bank Group finance for agricultural projects in India totals aboutUS$520 million up to November 30, 1973. This would be the first IDA-financed livestock project. In supporting dairy development the Bank Groupwould help GOI implement its plans to diversify agriculture and focusattention on an important rural development program, which has so far beenneglected. This report is based on the findings of the IDA appraisal missionthat visited India in October/November 1973. The mission was composed ofMessrs. R. Milford, P. Dax and C. Wolfelt (IDA) and W. Hardison and F. Knobel(Consultants). Messrs. A. Seth and N. Krafft (IDA) also contributed to thereport.
II. BACKGROUND
A. General
2.01 Until recently livestock development has received relatively littlesupport. During 1951-69, the livestock subsector received only 8% out of thetotal of Rs 22,100 million allocated to the agricultural sector. Withinthe subsector dairy development has the highest priority, given t4e import-ance of milk and milk products as a major source of animal protein for thebulk of the population, particularly the large vegetarian segment. During1951-69, milk production increases of only 1.2% yearly did not even meetpopulation growth of 2.3%. The quantity of milk available daily consequentlydecreased from about 130 grams to about 115 grams per capita, 15% of U.S.levels.
1/ Karnataka was formerly known as Mysore.
B. The Dairy Subsector -
2.02 About 17% of the world's cattle and 50% of its buffaloes arelocated in India. Their main contribution to the country's economy hasbeen draft power. Livestock produc ts account for only 14% of the agriculturalsector's output and about 5% of total exports. About 90% of total milk isproduced on holdings of less than 10 ha. Substantial increases in product-ivity can be achieved through widespread adoption of better feeding andmanagement practices and through use of animals with a high milk productionpotential.
Livestock Breeds and Production
2.03 India's present bovine population is about 177 million cattle and56 million buffaloes. The bulk are indigenous zebu types (some 26 differentbreeds) with a few exotic dairy animals and an undetermined number ofcrossbreds. Six buffalo breeds are common throughout the country. Althoughcattle outnumber buffaloes 3:1, the latter, because of their higher milkproduction per animal (200 kg vs 500 kg/lactation), produce 50% of the totalmilk. Exotic dairy bulls and/or semen have been imported and used forcrossbreeding for the past 70 years. While all the exotic dairy breedsperform well in the local environment (given good feeding and management),the Friesian and Jersey are most widely used, primarily because of readyavailability. The Friesian's high milk yield and the Jersey's high fatmilk also favor their use. Under experimental conditions first lactationyields of Fl (first generation) crossbreds average about 2,500 kg comparedwith 600 kg for their indigenous dams under normal conditions. Milk pro-duction of crossbred cows in village herds ranges from about 1,000 to 4,000kg per lactation. Not only are the crosabreds superior to native cattlein milk production, they also mature faster, produce their first calf at anearlier age, utilize feed mor^t efficiently and the bulls frequently makebetter draft animals.
2.04 Dairying is essentially a subsidiary farm activity for which womenare primarily responsible. Few farmers use their land principally for dairyproduction. Most of the milk marketed is produced by: (i) the landless(rural and urban) who maintain from one to several cows per household andpurchase all feeds; (ii) the small farmer who grows a portion of the feed(mainly straw) for his herd of, generally, one to five cows; and (iii) milkcolonies and cattle settlements where large groups of animals are kept.
Feeds and Feeding
2.05 Not only has India an acute shortage of animal feed, but most ofit is of low quality. In fact, many animals subsist largely on cerealstraw. To feed all the cattle and buffaloes adequately would require anestimated 200 million tons of TDN (total digestible nutrients) annually but
1/ For further details see Annex 1.
the feed available (estimated at 170 million tons of green fodder, 245million tons of dry fodder, and 10 million tons of cereal grains, oilseedcake and milling by-products) represents only about 115 million tons of TDN.The annual shortfall is thus about 85 million tons. For a significant milkproduction increase to be achieved, either more animal feed must be madeavailable or more of the available feed supply must be reserved for highproducing animals. For the near term, the demand for cereal grains as humanfood and the favorable export position of oilseeds and oilcake preclude anysignificant increase in the supply of concentrate feeds for livestock.However, there is considerable scope for raising the milk output by growingmore high quality forages, particularly by integrating these crops intoexisting farming systems. There is also considerable scope for more efficientuse of available feed and for significant improvements in dairy marketing andprocessing.
The AMUL Model
2.06 The Kaira District Cooperative Milk Producers Union Ltd, (AMUL),headquartered at Anand in Gujarat State (Annex 2) provides a developmentmodel for dairy activities well adapted to India's circumstances. Briefly,AMUL is centered on the formation and operation of hundreds of village milkproducers' cooperatives (a typical member owns two buffaloes and tills lessthan 1 ha, and over 11% of members are landless). These are welded togetherinto- a cooperative Union which owns and operates its own milk and feedprocessing, collection and distribution facilities and provides its membersa full range of technical services. The Union now numbers about 225,000families in 785 village cooperatives and processes about 150 million 1. annuallyOf these farm families, 80% are small landowners or landless and fall intothe lowest 40% income group. The Union is governed by a farmer-electedBoard and operated by a market-oriented management of hired professionals.Responsible for setting milk prices, it never refuses to buy milk in anyquantity from members thus assuring the farmer of a year-round outlet forhis milk at fair prices. AMUL has constantly upgraded its services andnew members are provided with a package of services, including routineveterinary health coverage and training facilities, which is financed bythe Union from milk levies, and concentrate feed and fodder seed which ispaid for by producers from deductions of their milk sales. Following thesuccess of the Kaira Union, five other Unions have been formed in Gujaratand were recently amalgamated into a Federation of Unions. The success ofthe Gujarat experience has encouraged GOI and several other States tofoster the establishment of similar programs in other parts of the country.
Technical Services. Research and Education
2.07 The GOI Livestock Health Section in the Animal Husbandry Divisionof the Department of Agriculture is responsible for all policies relatingto animal health at the national level. At the field level, the State'sVeterinarians, Veterinary Assistants and Veterinary Extension Officers areresponsible for executing State and Central programs. In most Statesveterinary aid is available through a network of veterinary hospitals,dispensaries and mobile veterinary units. The States provide Artificial
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Insemination (AI) services, generally executed by the same veterinary fieldstaff, and are also responsible for general extension at the village levelwith GOI providing technical guidance and financial assistance throughthe Community Development Programs. Horever, these programs have been fartoo small in relation to the country's need for increasing milk productionand have been hampered by a lack of trained staff. A notable exceptionhas been in Gujarat State, the home of AMUL.
2.08 The National Dairy Research Institute (NDRI), with principalresponsibility for national dairy research, is supported financially by GOI.Some good work has been done on crossbreeding and considerable experienceobtained at both Central and State levels. However there is a need toincrease production oriented research programs aimed at the small villagerwhere particular emphasis on integrating permanent pasture and fodderproduction into the traditional dry farming systems is needed.
2.09 Most secondary and tertiary education and training in livestockhas been directed to veterinary medicine and animal health and there is aneed, which GOI is increasingly aware of, for much more specialized trainingin animal husbandry and dairy technology to meet the requirements for theproposed expansion in dairy production. About 95 agricultural and veterinarycolleges in India offer degrees but a shortage of funds and facilitiesrestricts many of them. Employment in the dairy industry is presentlylimited and most graduates are employed by Government. Opportunities arelikely to expand with the increased emphasis on dairy development underthe Fifth Five-Year Plan. Most State Governments also recognize the need offarmer training and Government livestock farms are increasingly being usedfor this purpose. NDRI facilities throughout the country are also beingused for farmer training and post graduate research; NDRI in Bangalore isgiving diploma training in dairy production.
C. Agricultural Credit
2.10 Institutional agricultural credit is provided by cooperativebanks, commercial banks and GOI through the Reserve Bank of India (RBI)and the Agricultural Refinance Corporation (ARC) (Annex 3).
Cooperative Banks
2.11 The cooperative banking system is the villager's most importantinstitutional credit source, with the Cooperative Banks supplying short andmedium-term requirements, and the Cooperative Land Development Bankssupplying long-term investment credit. The former has a three-tier structure:State Apex Cooperative Bank, District Cooperative Banks and primary agri-cultural credit societies at village levels. The Land Development Banksystem usually has two tiers -- State Cooperative Land Development Banksand Primary Land Development Banks (PLDBa) with jurisdiction over a districtor a smaller area according to needs. Interest rates to the ultimateborrower range from 9.52 to 10X per annum. The on-lending institutionsgenerally receive a spread of 1.5 - 2.5%.
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Commercial Banks
2.12 Since 1969 the commercial banks have significantly increased theirrole in institutional rural credit. Under the Lead Bank Scheme certain banksare designated as Lead Banks and charged by RBI with assessing local resourcesand credit needs, mobilizing capital, and improving rural credit supply inspecific districts. Prevailing interest rates for agricultural advances tosmall farmers holding up to 2 ha are 8-1/2% - 9-1/2% per annum which are inline with IDA-financed Agricultural Credit Projects for which funds are nowreceived from the Agricultural Refinance Corporation at 7% and on-lent at9.5%.
Agricultural Refinance Corporation (ARC)
2.13 ARC is an intermediary channel for 13 current IBRD/IDA creditprojects. 1/ It was established in 1963 as an RBI subsidiary to provide theon-lending agricultural credit institutions with supplemental medium- andlong-term finance and guide them towards a development-oriented approach intheir operations. It sponsors orientation and training programs formanagement and technical staff of financial institutions, helps strengthenthe management and financial operations of banks and, with the expansion ofits own technical staff, increasingly assists financial institutions inappraising the economic and technical feasibility of development schemes aswell as in their supervision.
D. Government Policies
2.14 Within the livestock sector, dairy development has been stressedin GOI's Fifth Plan, since milk and milk products provide the primarysource of animal protein for the large vegetarian segment of the populationand the daily per capita availability has fallen (para 2.01). In the FifthFive-Year Plan GOI is encouraging the establishment of milk producercooperatives modeled on the AMUL approach. Animal production, health and AIfacilities are to be improved at State and Central levels and more emphasisis to be placed on increasing crossbred cattle. In this context, GOI providesa crossbred calf subsidy of Rs 600 per head, in the form of low priced cattlefeed, to encourage villagers to adopt better feeding practices to eliminatethe currently high losses of valuable crossbred heifers due to malnutrition.The National Dairy Development Board (NDDB) and the India Dairy Corporation(IDC) are two most important national dairy development agencies. They areparticularly involved in Operation Flood, assisted by the World Food Program(WFP) and aimed initially at increasing,the supply of milk to the main cities
1/ Full details of ARC's organization and financial operations are givenin Annex 4 of the Uttar Pradesh Agricultural Credit Appraisal ReportNo. 107a-IN, April 12, 1973. IDA is presently making a full appraisalof ARC.
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of Calcutta, Delhi, Bombay and Madras. The NDDB is responsible for technicalmatters and the IDC for financial matters. GOI is now encouraging NDDB towiden the scope of its activities and many States have engaged NDDB to helpplan local state dairy development programs, to train key personnel in allaspects of this work, to carry out feasibility studies and reconstruct dairyprocessing plants on a turnkey basis. Details are in Annex 1.
III. THE PROJECT AREAS
General Description
3.01 The proposed Project would be located in Karnataka State con-centrated in four milkshed areas, in four southern districts of Bangalore,Mysore, Hassan and Tumkur. Parts of four other districts -- Kolar, Mandya,Coorg and Chickmagalur -- with milk production areas contiguous to thesezones would also be included.
3.02 Karnataka has one of India's largest populations of high yieldingcrossbred cattle, 60% of which (about 60,000) are in the Project area. Averageannual rainfall in the proposed major milkshed districts varies from about700 mm in Tumkur to about 1,000 mm in Hassan. With altitudes of 3,000-5,000ft and resulting cool temperatures, the climate is ideally suited for exoticand crossbred cattle. Total rural population in the Project area is about 5.5million, distributed between 8,800 villages, each with an average of about 110households. Farms are mainly small, about 70% are less than 3 ha and abouthalf of these are less than 1 ha. The main Project area has about 3 millionbovines including about 0.5 million buffalo. An average household usuallyowns one native cow and about half the households own a buffalo cow. Hallikarand Amritmahal (in Hassan) cattle and Surti buffalo are the main indigenousbreeds.
Present Status of Dairy Development in Karnataka
3.03 Although of minor importance in terms of cattle numbers, KarnatakaState is among the most progressive dairy states in India. It is foremostin crossbreeding with a total of about 100,000 crossbred cattle, manylocated in village herds. Some of the best extension and animal healthservices in the country are available through the State Department of AnimalHusbandry and Veterinary Services, and these are supplemented by the Indo-Danish Cattle Development Project, the Southern Regional Station of the NDRI,the University of Agricultural Science, the Veterinary College and theMysore Serum Institute, all located in Bangalore.
Milk Marketing
3.04 In Karnataka, as in most of the country, there are three maintypes of suppliers of milk and milk products to the urban markets: (i)traditional village agents (middleman-collectors); (ii) city producers;(iii) the cooperative sector. The traditional village agent, acting as amiddleman/collector for private vendors in the cities, is still the mainsupplier. However the supply from city producers has increased significantly
in recent years, particularly in Bangalore city where this sector supplies 30%of the market (Annex 4). The eight Government dairies in Karnataka Stateoperate at about 60% installed capacity on a year round basis. Their shareof the market is small. Throughputs in the Bangalore and Mysore Dairiesnow average 70,000 and 3,000 of milk per day respectively and satisfy about16% and 3% of their respective urban markets. The major milk-shed areasof the State have between 40 and 45 chilling centers, of which 10 are in theProject area. All are Government owned. Milk reaches the processing plantsby their own milk tankers or by contract truckers while, at the village level,middlemen often procure and transport it to collection centers, generally bybicycle or oxcart. In Karnataka the cooperative sector is active at thevillage level, which includes many dairy cooperatives; there are now about250 supplying Government dairies.
3.05 Milk prices in Karnataka are uncontrolled and the urban freemarket price for raw milk varies from about Rs 1.60 - 1.90 per 1. However,the Government dairies sell 4.5% fat milk at significantly lower pricese.g. Rs 1.35 in Mysore city and Rs 1.50 in Bangalore city.
3.06 Under the present marketing system, the city producer sellingdirect to a regular consumer clientele is very competitive with the tradi-tional village producer even though the former must buy all his feedsupply. This is unlikely to change unless the village producer can beassured of a higher price than he presently receives. Most agent/collectorspay the village producer between 50 to 70 paisas per 1 for milk. However,village dairy cooperative members fare much better and the Bangalore dairynow pays Rs 1.10 per 1. Still higher prices could be paid if the villagecooperatives controlled their own milk processing and marketing through acooperative Union as they do in the AMUL Union.
3.07 Almost all the milk now produced commercially in Karnataka issold in local urban markets which have expanded at about 8% per annum since1967. If expansion continues at the same rate under the Project, therewould be a surplus in the Project area by about year five. This surpluswould be marketed as fresh milk in Madras which is readily accessible byrail or would be dried and marketed as powder in milk deficient areas ofthe country.
Agricultural Credit in Karnataka
3.08 Institutional agricultural credit in Karnataka is provided from thesame sources as elsewhere in India. The cooperative banking system meets30-40% of credit demand and in 1972-73 its short and medium term lendingportfolio was about Rs 45 crores (US$56 m) while Rs 16 crores (US$20 m) longterm loans were made. The LDBs are still the farmers' main source of mediumand long term credit; however, the commercial banks have significantlyincreased their role in providing institutional rural credit. Commercialbank loans to the agricultural sector in Karnataka almost quadrupled betweenJune 1969 and December 1972, while the number of branch banks (many in ruralareas) roughly doubled. The banks now have about 20% of their loan portfoliosin agricultural lending, either to farmers as direct loans, or as loans through
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village cooperatives. Karnataka was among the first States to adopt the LeadBank Scheme (para 2.12). ARC has also played an active role in Karnataka 1/.
Agricultural Cooperatives in Karnataka
3.09 The rural cooperative movement in Karnataka State dates from thebeginning of this century. Coverage extends to most villages but to under50% of the rural population. Some 19,000 cooperative societies, mostlyagricultural credit societies, are registered and though the cooperativemovement and experience in Karnataka has been better than in many other partsof India, only about 40% of the registered cooperatives function effectively.Government, commercial banks, and other institutions are making strong effortsto help rehabilitate and strengthen them.
3.10 Karnataka State has considerable experience with dairy productionthrough cooperatives and more are being organized. There are about 400village societies within the Project area; approximately 40Z are milkproducers' cooperatives that would come into the Project after being reformedunder the AMUL pattern. The rest, generally credit soscieties, would be thenuclei for the rapid establishment of village dairy cooperative societies(DCS). For further details on Agricultural Cooperatives see Annex 2.
IV. THE PROJECT
A. General Description
4.01 The proposed project is to develop an integrated program forincreasing milk production in rural areas of Karnataka State by providingmilk collection, processing and marketing facilities and technical servicesfor AI and animal health. It would organize village cattle owners to formDCS which would be grouped into Unions similar to the AMUL scheme in Gujarat.The Unions would employ the necessary technicians and managers, and would becontrolled by the farmers. Each Union would own and manage its own dairyand feed plants and would be capable of providing technical, extension, milkcollection and marketing services to the member DCS. About 450,000 farmfamilies, most of whom farm less than 2 ha or are landless, would be involved.
4.02 Under the proposed project the following activities would beundertaken:
1/ Mysore Agricultural Credit Project, Report No. PA-105a, November 30,1971.
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(a) The establishment of about 1,800 dairy cooperativesocieties, four milk producers Unions and the KarnatakaDairy Development Corporation;
(b) An AI program of crossbreeding native village cattlewith high producing exotic breeds, and associatedprograms for production of fodder and purebred exoticbreeding stock;
(c) Expansion of two existing dairy plants and construction oftwo new dairy plants and four new cattle feed mills; and theestablishment of milk collection routes and centers;
(d) Establishment of two regional diagnostic laboratories,support for an animal health research program, andproduction of veterinary biologicals and vaccines;
(e) Provision of consultant services to assist KDDC in demon-stration farms, applied research trials on pastures, andmilk marketing studies; and
(f) Provision of medium-term credit for purchase of crossbreds.
B. Detailed Features
New Institutions
4.03 The Karnataka Dairy Development Corporation (KDDC), to beestablished under the Project, would be the main body for the coordinationof Project activities. It would have an essential role in the initialestablishment of DCS's and the milk producers' Unions. To ensure that theessential features of the AMUL model are adopted when establishing theDCS's and the Unions, KDDC will engage NDDB. The NDDB would assist inrecruiting, training and first year supervision of spearhead teams, whichwould become the nucleus staff of each union as it is formed. GOI has agreedas a condition of credit effectiveness that KDDC be established under articlesagreed to by IDA, that KDDC would engage NDDB to assist in training ofspearhead teams and that recruitment of these teams has been initiated. KDDC'scapitalization, management structure, and support activities are discussedin paras 4.13 and 5.01 to 5.03.
4.04 Four unions would be established, and each would be constitutedby about 4-500 DCSs. Union bylaws would be similar to AMUL's (outlined inAnnex 6). The principal functions and responsibilities of a Union would beto: (a) assist the DCS with organization and management, including inspectionand audit of accounts; (b) establish and supervise milk and cattle feed trans-portation; (c) process and market the members' milk and operate the feed mills;(d) provide animal health and breeding services; (e) channel calf rearingand seed subsidies to the DCS. Capitalization and management structure ofthe Unions is detailed in para 5.05.
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4.05 About 1800 DCS based on the AMUL cooperatives would be formed overa five-year period. The majority of these would be formed in villages wherethere are no existing cooperatives. An assurance was given by GOK thatthese would be established under standard by-laws based on AMUL as outlinedin Annex 5. In some villages where viable multipurpose cooperative societiesexist it would be more expedient to the rapid formation of village milkproduction units to form a milk wing under the umbrella of the multipurposesociety provided adequate guarantees to protect the rights of the milkproducing members could be obtained. Similarly it would be useful to theProject to include a limited number of newly formed multipurpose societiesparticularly the farmer service societies. However, while recognizing thisapproach would help in more rapid Project implementation it is desirable thatall milk production units within the multipurpose societies should eventuallybecome autonomous DCS as soon as daily milk production was sufficientto assure viable operation of the DCS (about 500 1/day) or after a periodof about two years when management capacity has built up. Agreement wasreached at negotiations to include such multipurpose society milk unitswithin the project under modified by-laws acceptable to the Association.It was also agreed that these would become autonomous DCSs when daily pro-duction reached 800 1 or after two years whichever is earlier. Both DCSand multipurpose cooperative milk wing membership would be limited tocattle owners of which 10% are expected to be landless and another 50%marginal or small farmers with less than 2 ha. The DCS and milk wings wouldbe centers for milk collection, payment to producers and for supplyingconcentrate feed, seeds and AI services. The capitalization and managementof the DCS's are detailed in paras 5.07 and 5.08. Assurances have beenobtained from GOK, that through the KDDC and the Unions, it would promotethe formation of about 1800 DCS over 5 years, and 4 Unions, by December31, 1975, untder by-laws approved by IDA.
Crossbreeding and Milk Production
4.06 Initially, milk production would be from native cattle and buffaloes.Increased milk production would be achieved primarily by upgrading lowproducing native cows through an Al program of crossbreeding with highproducing exotic breeds (mainly Jersey and Fresian) and the provision ofbetter nutrition. Frozen semen from proven bulls would be imported and AIcarried out through the DCS and AI centers to be established.
4.07 Three of KDDC's five farms would be used to produce purebred exoticbreeding stock. KDDC would assume responsibility for the present State farmherd of 69 head, which it would increase to about 500 head by importingin-calf heifers. One farm will concentrate on producing crossbreds forsale to villagers participating in the Project. The foundation breedingherd of 400 cows for this farm would be allocated from the GOI's Amritmahalherd presently located on State farms. The two remaining farms will be usedto rear about 1,200 bull calves yearly. These calves would be obtained fromselected high producing exotic cows located in Bangalore city where noefforts have yet been made to salvage this valuable genetic material. TheKDDC farms would also be centers for frozen semen storage and distribution.
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4.08 The low quality crop residues which traditionally comprise themain roughage component of the native animals' diet are inadequate to main-tain the crossbreds and it is proposed to supplement it with balancedconcentrate feedstuffs and high quality green forage. Farmers, who wouldbe supplied with seed and planting material under the Project for smallareas of about 0.1 to 0.25 ac, would grow this forage. Each Union wouldalso operate a feed mill of about 100 tons per day capacity to produce thehigh quality concentrate feed requirements for the improved DCS herds.Construction of these mills is to be phased to match the growth in the demandfor balanced feedstuffs for milk production and calf rearing as the number ofvillage crossbreds increases through to year 6. It is envisaged under thisprogram that by year four of a typical DCS, about one third of the nativecows (producing about 500 1 per lactation) would be replaced by crossbredcows (producing about 2,000 1/lactation). Thus annual milk production ina typical DCS would increase from about 60,000 1 preproject to about 290,0001 by year five. Production and financial projections of a typical DCS aregiven in Annex 5.
Milk Collection, Processing and Marketing
4.09 The four Union plants would operate a fleet of both owned andhired trucks, along well-defined milk routes to collect milk daily in40 1 cans from DCS. On long routes, exist:ing or upcoming chilling centerswould be serviced by five 15,000 1 capacity road tankers which would alsofreight milk surplus to deficit plants.
4.10 The Project provides for (a) the expansion of the two existingdairy plants: Bangalore to 300,000 1/day from present 70,000 and Mysorealso to 300,000 1/day, from present 10,000; (b) construction of two newdairy plants of 200,000 1/day capacity; (c) a milk drying unit of 100,0001/day capacity in year five at Mysore to balance milk production withdemand; and td) a triblender at Banglore to reconstitute milk powder intoliquid milk during the lean season. Expansion of capacity would be phasedover five years to match the increase in milk supplies under the Project.The two new plants would initially have a capacity of 75,000 1/day withsubsequent expansion to 200,090 1/day. General layouts and building designswould be such as to allow subsequent expansion. With these developments theUnion would not have to cut back milk collection even in the flush season,for a lack of processing capacity.
4.11 Bulk vending and sales in bottled form are low cost retailmarketing methods and both would be used as needed. Vending booths wouldalso be established in major urban centers. The Project includes a marketingstudy to set up a suitable milk distribution system. Milk would be marketedoutside the Project area only after year five and this would go by rail.Establishment of the National Milk Grid coordinated by NDDB is expected toassure the movement of milk from 3urplus to deficit areas.
Research and Veterinary Biological Production
4.12 The Project would include equipment and chemicals to assist theBangalore Veterinary Vaccine Institute (BVWI) expand production of veterinary
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biologicals and vaccines and to enable the Bangalore University of Agricul-tural Science Faculty of Veterinary Science (FVS) improve its crossbreeding,animal health research and veterinary support programs including the estab-lishment of two regional diagnostic laboratories.
KDDC Supporting Activities
4.13 A provision has been made for internationally recruited consultantsto assist KDDC in its forage production program and in the design andexecution of the small farm management s:ystem studies. KDDC would undertakethe following Project-related activitiei,': (a) establishment on its farmsof about 50 demonstration farms of about 2 ha to be managed by villagers,to test the economic viability of various farm management systems throughincorporating permanent pasture/fodder crops grown exclusively for milkproduction; (b) execution of applied research trials on pastures and foragemixtures; (c) in collaboration with NDDB, execution of studies on milkproduction, marketing and feed supplies. Assurances were given by GOI andGOK that KDDC would employ consultants acceptable to IDA to conduct suchresearch. More details on the Corporation, including terms of referencefor consultants, production and financial projections are in Annex 7.
On Farm Investment
4.14 Credit through the cooperative and commercial banking system wouldbe provided for the purchase of locally bred crossbred cattle. In-calfheifers are now sold to urban milk producers at about Rs 3,000. Costestimates are based on the assumption that in each DCS six heifers would bepurchased in Year 1 and two annually in Years 2-6. Eligibility criteria forthe selection of participating banks has been approved by IDA.
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C. Cost Estimates
4.15 Detailed cost estimates are given in Annex 9 and are summarizedbelow:
Rs ('000) US$ (tC00)Category Local Foreign Total Local Foreign Total
7. TOTAL PROJECT COST 401,330 108,620 509,950 50,160 13,580 63,740
Estimates are based on September 1973 prices. Establishment costs duringthe development period are initial operating losses and working capital. Aphysical contingency of 5% has been applied on all items except credit forcrossbred cows (on-farm investment), and grants to farmers which are afinancial commitment. A price contingencyof 3% has been added to take intoaccount price increases in the last quarter of 1973. Further price contin-gencies have been calculated on the following price increase assumptions:for civil works, 18% in 1974, 15% in 1975 and 12% thereafter; for equipmentand local cost expenditures, 14% in 1974, 11% in 1975, and 7.5% thereafter.
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D. Proposed Financing
4.16 Finance to cover the total project cost of Rs 509.9 million(US$63.7 million) would come from the following sources:
TOTAL (Rs million) 43.2 64.2 95.9 66.6 240.0 509.9
TOTAL (US$ million) 5.4 8.0 12.0 8.3 30.0 63.7
Percent of Total 8.5 12.6 18.8 13.0 47.1 100.0
4.17 The proposed IDA credit of US$30.0 million would be to GOI andwould finance about 47% of the Project Costs. IDA financing would coverall direct foreign exchange expenditures (US$12.0 million) and about 35% oflocal costs. IDA funds for BVVI's and FVS's support programs, the purchaseof imported cattle, and for technical services would be channelled to KDDCthrough GOI (US$3.8 million). All other IDA funds (US$26.2 million) would bechannelled through ARC to participating banks under subsidiary loan agreements.Project lending terms are detailed in para 5.13 and Annex 3, Schedule A.Details of the financing plan are shown in Annex 9, Tables 2 and 3.
4.18 Government contributions (US$20.0 million) would finance about31% of project costs. They would cover the equity financing for investments(US$6.1 million) of the institutions set up under the project and providethe necessary start-up costs (US$6.9 million) to cover the expected deficitsover the first 3 years of operations. In addition, the Government wouldprovide funds to BVVI and FVS (US$1.6 million) and subsidize the sale of
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seeds and concentrate feeds to selected farmer groups (US$5.2 million) andprovide for local cost financing of technical services and imported cattle(US$0.2 million). The financial commitments of the Government, and the assur-ances given by GOI and GOR regarding their implementation are detailed in paras5.01 and 5.07. ARC and participating banks would contribure US$6.0 millionfor financing investments and working capital of KDDC and the Unions andabout US$2.3 million for on-farm investments. Farmers' contribution to theproject is estimated at US$5.4 million, part of which represents farmerspayments for crossbred cattle (US$2.5 million) the other part being theircapital subscription to DCS (US$2.9 million).
E. Procurement
4.19 KDDC would be the sole procurement agent for all items financedby IDA except for on-farm investment. All major equipment (Annex 4, Attach-ment 1) for the four milk-processing plants and feedmills (US$14.4 million)would be subject to international competitive bidding in accordance with IDAGuidelines with the exception of steam generating equipment (US$1.3 million)which was reserved for local procurement by GOI. As most leading manufacturersof this equipment are well represented in India and are competitive, tenderswould be advertised locally, and the representatives of supplier countriesinformed. Locally manufactured equipment would be allowed a 15% preferenceor the prevailing customs duty, whichever is lower. Appropriate assurancesfor this effect were given by GOI. Minor equipment items for the processingfacilities such as electrical installations, factory fittings, and furniture(US$4.5 million) would be purchased over five years as the phasing of operationsrequires, and would not be suitable for ICB, as ready availability of serviceand spare parts is essential.
4.20 As civil works for the construction of milk processing plants,feedmills, and farm buildings for KDDC, the Unions, FCS and BVVI (US$8.2million) would be dispersed in time and place, they would each be too smallto attract international bidding and would be subject to local contractingor built on force account.
4.21 Procurement of equipment for KDDC and Union farms, such as farmmachinery, irrigation equipment, breeding equipment, trucks, and four wheeldrive vehicles (about US$1.7 million) would be purchased following localcompetitive bidding, since these items would be purchased piecemeal overthe project period. Procurement for imported bulls, dairy heifers, andfrozen semen for the Corporation's breeding farms and the Union's AI centers(US$1.0 million) would be from at least three countries free from foot andmouth disease where animals of the required breed, type, and adaptabilityare available. Appropriate assurances to this effect were given by GOI.
4.22 The equipment, chemicals and glassware for the crossbred healthprogram in the FVS and for the BVVI (about US$2.9 million) would be pro-cured following local competitive bidding because: (a) it would be diffi-cult to bulk orders which will mostly be of a piecemeal nature; (b) most
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of the world's leading manufacturers of scientific equipment are representedin India and they are competitive; and (c) the local maintenance serviceoffered by these established retailers would be needed to maintain much ofthe equipment to be purchased under the project. Orders would be bunchedto the extent possible without adversely affecting physical progress.
F. Disbursements
4.23 IDA disbursements are expected to extend for seven years (Annex 9,Table 2). IDA would disburse against appropriate documentation of expendi-tures under the project:
(a) 100% of c.i.f. expenditures, or of ex-factory costs,of milk and feed-processing equipment to be procuredunder ICB;
(b) 100% of c.i.f. expenditures for imported cattle and semen;and the net of tax expenditure for technical andmanagement services;
(c) 60% of expenditures for locally procured equipmentand civil works; and
(d) 90% of ARC loan disbursements to DCS members to refi-nance project loans for crossbred cattle.
The Association's normal documentation would be required for items (a),(b) and (c), to be prepared by KDDC. Withdrawal requests for item (d) wouldbe made against statements of expenditure, the documentation for which wouldbe retained by the borrower for review by project supervision missions.Any savings from the credit would be reallocated by increasing the percentageof local cost financing.
G. Accounts and Audit
4.24 Commercial accounting firms audit the accounts of the commercialbanks and RBI examines the audited accounts; accounts of LDB's, CooperativeBanks and Cooperative Societies are audited by the Department of Audit andInspection under the Registrar of Cooperatives. About 90% of the cooperativesin Karnataka State are audited annually by GOK Department of Audit; theseaudits are satisfactory to IDA. However, the AMUL experience has shown thata single annual audit is insufficient. Efficient management of AMUL villagedairy cooperatives called for intensive and continuous audit service in-volving about 50 field inspectors from the State Cooperatives Department.This service has been highly satisfactory and has proven to be a majorfactor contributing to AMUL's success. Assurances were given that the
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Karnataka State Department of Audit would: (a) audit the accountsof the Unions and submit them to IDA within 120 days after the close of thefiscal year; (b) provide audit to DCS's, with at least one full audit andtwo book supervisions per year; (c) strengthen its staff to carry out theabove functions; and also that KDDC would maintain accounts, audited byauditors acceptable to the Bank and submitted to IDA within four monthsafter the end of each fiscal year.
V. ORGANIZATION AND MANAGEMENT
A. Karnataka Dairy Development Corporation
5.01 GOI and GOK would subscribe al1 of KDDC's capital. Estimatedstartup costs (Rs 3.3 million, Rs 2.5 million by GOI and Rs .8 million byGOK would be paid in cash, and GOK would also transfer to KDDC the owner-ship of buildings, cattle and equipment (estimated book value Rs 3 million)and government livestock farm (see Annex 7). Provision of the above initialcapitalization has been agreed to as a condition of effectiveness. Inaddition, GOI and GOK would each contribute ongoing equity financing inequal shares over 5 years to ensure KDDC's continued creditworthiness. Duringnegotiations GOI and GOK agreed to undertake this financial commitment,estimated at Rs 3.2 million. After Year 6, Government equity would beoffered for sale, at par value, to the Unions, who are expected to becomemajority shareholders by Year 10. An assurance was given that, after Year 6of the project, both GOI and GOK would annually offer for sale 20% of theirshareholdings to the Unions at par value.
5.02 KDDC would administer the project and would be responsible to a19 member Board of Directors. These would be one representative each from:GOI Department of Animal Husbandry, NDDB, 3 Lead Banks in Mysore, IndianInstitute of Management, the University of Agricultural Sciences, the GOKDepartment of Animal Husbandry, Karnataka State Land Development Bank,Karnataka State Cooperative Apex Bank, the Registrar of Cooperatives, andeight elected representatives from the Unions. As the Unions buy outGovernment's equity, elected Union representatives would replace Unionrepresentatives appointed by GOI and GOK. A General Manager, assisted byabout six division chiefs (Annex 7, Chart 1), would carry out executiveduties. The Registrar of Cooperatives and NDDB would assist management inProject implementation (Annex 7). The KDDC's Articles of Association havebeen agreed to by IDA and a General Manager whose experience and qualificationsare mutually acceptable to IDA and KDDC has been appointed.
5.03 GOK has agreed as to transfer to KDDC's operation the Bangaloreand Mysore dairies, as well as Government-owned chilling and AI equipmentin the project area by effectiveness. KDDC would operate such assets forthe benefit of individual Unions, until such time as they comprise at least80 DCS's, their board is elected and functional and their key managerial
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and technical staff is recruited. KDDC would keep separate operating andcapital accounts for each of the Unions until this transfer is effected, whichis expected within one year of effectiveness. Assurances were given by GOIand GOK that (a) KDDC would operate, for the benefit of the Unions, thedairy plants and properties in the project area and (b) that the assets andliabilities which had been accrued on their behalf would be transferred tothe Unions, after consultation with IDA when they comprise at least 80 DCSs,their board is elected, and their key management posts staffed.
B. Unions and Cooperatives
Milk Producers' Unions
5.04 Each cooperative milk producers' Union would have a 15 memberBoard of Directors comprising representatives of dairy farmers, governmententities, KDDC, and participating banks. Initial farmer representation onthe Board, in proportion to the cooperatives' equity in the Union (para5.07), would be eight, elected from among and by the chairmen of the affili-ated DCS (para 5.08). GOK's equity would be represented by one representa-tive each of: the district Lead Bank, the district Cooperative Bank, thedistrict Land Development Bank, the Registrar of Cooperatives, KDDC and theGOM Department of Animal Husbandry and Veterinary Services. A GeneralManager, appointed by its Board and approved by KDDC for the first yearfollowing establishment of the Union, would be responsible for day to daymanagement of a Union and also an ex-officio Board member. A Union wouldbe organized into five departments (Annex 6, Chart 1), with each departmentadministered by a suitably qualified and experienced head. Recruitment ofqualified supporting staff will be phased to match the growth of the Union(Annex 6, Table 11) and at full development total staff would be about 100.
5.05 GOK would provide interest free loans to cover the Union's start-upcosts (Rs 40.2 million). GOI and GOK would finance as equity 20% of on-going project investments for five years (Rs 45.5 million), so as to maintaina suitable (4:1) debt to equity ratio to ensure the Unions' creditworthiness.Assurances for these financial commitments were obtained from GOK. The Unions'paid-up capital would be equally divided between GOK and the DCS's. TheUnions are expected to earn surpluses from Year 4 and these would be declaredas bonuses to cooperatives in proportion to milk sold to the Union and asdividends or reinvested. The dividend and a part of the cooperative societiessurplus would be used to buy out, from the sixth year onward, GOK equityin the Unions, and the DCS's are expected to become majority shareholders byabout the tenth year of the project. Assurances were obtained that after1981 GOK would offer its shareholding in the Unions for sale at par value,to individual DCS's, until it has divested itself from all its equity. Thefinancial structure of the Unions would be monitored by the Karnataka StateDepartment of Audit and participating Banks. GOK's equity financing andits repayment by the DCS's are estimated in Annex 6, Tables 18, 19, and 20.Retained Union surpluses would be used for dividends and bonuses to DCSs andfor a second stage of plant expansion which will be required to process theincreasing milk procurements from DCS's after year 7.
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The Village Dairy Cooperative Societies
5.06 The village dairy cooperative society (DCS) would be the basicorganization unit of the project and each would be managed by a committeeof nine members, elected for a three year term. The committee wouldelect a chairman who would represent the cooperative and would be eligibleto stand for election to the Union Eoard of Directors. The committeewould appoint a paid secretary who would be responsible for day to dayrunning of the Cooperative. Each society would also have one to fcur helpersaccording to its size to assist the secretary. The helpers would be trainedin AI, emergency first aid and milk testing by Union technicians. The sec-retary and his helpers would be paid from the revenues of the society.
5.07 Each DCS would be capitalized by share purchases by members andentrance fees. For each newly formed DCS, GOK would grant (see para 5.03)capital equipment (Rs 2500/society), and operating deficit in the first year(Rs 1600/societies). Total cost to GOI is estimated at Rs 12.0 million forcapital equipment and operations deficit. GOK has agreed to meet thisfinancial commitment. Similar grants are available elsewhere in India whereGOI promotes producer cooperatives, including under AMUL, and are essentialto bring about a rapid transformation in the rural institutional frameworkthat the AMUL model implies. Newly formed DCSs would not be able to meetthe full charge of milk transportation until the volume of milk sold wassufficient to ensure economic viability at about year 2. Neither GOI orGOK are able to provide finance for transport grant (about Rs 24.8 million).However, to ensure that new DCSs would not be charged excessively for milktransport over the first two years an assurance was given by GOK that KDDCwould levy standard charge for milk transportation from all DCSs (about5 paises/liter) and that any additional cost would be met by KDDC throughadjusting selling prices.
C. Supporting Activities
Crossbred Health Program
5.08 The FVS would be responsible for this program. It will staffand operate the two diagnostic field laboratories financed under the Proj-ect and collaborate with the Veterinary Biological Production Institutein the use of these facilities.
Biological Veterinary Vaccine Institute
5.09 The Project would finance the expansion of the facilities of theMysore Serum Institute which would be renamed as the BVVI to reflect thechange in emphasis of its activities. The Institute would continue tofunction under the Ministry of Agriculture. However, in order to ensure afull representation of the organizations involved in animal disease controlin Karnataka, a Board of Management would be established. This Board wouldbe responsible for major policy matters involving the integration of the
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various disease control programs with production of the appropriate vaccines.The Board would consist of the Secretary of Agriculture (chairman) with tworepresentatives each from the KDDC and the GOKN Department of VeterinaryServices and one from the University of Agricultural Science, Faculty ofVeterinary Science. It would appoint a director who would be responsiblefor the day to day management of the institute and who would also be aBoard member, ex-officio.
5.10 Project funds for equipment to the FVS (Rs 13.1 million) andBVVI (Rs 10.2 million) would be channeled to KDDC. Requests for suchfinancing under the project would be prepared each year by the Faculty'sstaff and BVVI's director, respectively, and approved by GOK and IDA.Assurances were given to this effect.
D. Lending Operations
5.11 ARC would invite Banks operating in the Project area to partici-pate in the Project, and establish the eligibility criteria for theirparticipation, to be submitted for IDA's approval during negotiations. ARCwould refinance loans made under the project by participating banks to dairyfarmers, Unions and KDDC. Sub-loan proposals, on behalf of the Unions, wouldbe prepared by KDDC in consultation with NDDB and submitted to the partici-pating banks. Assurances were given that a subsidiary loan agreement betweenGOI and ARC had been approved by IDA and executed, and banks operating inthe area had been invited to participate in the project by effectiveness.Assurances were given that ARC would maintain audited project accounts, whichwould be audited by independent and qualified auditors acceptable submittedto IDA within four months after the close of the fiscal year.
5.12 Project lending terms and criteria are detailed in Annex 3, Sched-ule A. Farmers would pay at least 9-1/2% p.a., Unions and KDDC at least 9-1/22p.a., the participating banks, 7% and ARC 6 to 6-1/2%. These rates are inline with the current rates in the agriculture sector in India. For farmerswho cannot offer land as mortgage, milk cattle are not accepted as satisfactorysecurity, and guarantee of the state government or the DCS may be required bythe banks. However, about 90% of farmers in the project are owner operatorsand slhould meet the security requirements of participating Banks.
VI. PRODUCTION, MARKETING, PRICES, SUBSIDIES AND FINANCIAL RESULTS
Production
6.01 Some 1,800 DCSs would provide a market outlet for about 450,000individual smallholder families to sell their milk at a guaranteed pricethroughout the year. Initially production would be increased from existingnative cattle and buffalo by adoption of better management and feedingpractices, but the greatest increase will come from an intensive program
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of cross-breeding native cattle with high producing exotic breeds. Thecross-bred cows which will come into production in significant numbers inabout year 5 will yield about 2,000 litres/lactation compared with a maximumof about 600 liters/lactation for the native dams. At full development(about year 10) the annual incremental milk production from the projectwould be about one million tons.
Marketing
6.02 The Project would be vertically integrated. The Unions wouldprovide services and inputs to their member producers, process, distributeand market their milk. Payment for raw milk services would follow the AMULmodel (para 2.06). In addition to satisfying an anticipated increaseddemand in the Project area (Annex 4) it is estimated that, with theexception of Bangalore, the other three Unions will market from 30 to 40%of their yearly production outside the area beginning about year 5 (seepara 3.07).
Prices
6.03 Each Union would be free to set the sale price of its products,the procurement price of milk, and charges for services to members independ-ently of the price policies of the State in accordance with sound economicand financial practices. At negotiations GOK gave an assurance to this effectbut it was agreed that GOK may consult with the unions on their selling pricepolicies as it shall determine. In other states where milk producers' unionsare operating successfully, the Union's price for processed milk is more inline with the free urban market price than the subsidized prices of governmentdairies (see paras 3.05, 3.06). In the long run, however, average consumerprices are likely to decrease, for as the Unions reduce costs, increasethe availability of milk, and differentiate their products (see Annex 4,para 17), prices in those urban markets where milk now is a scarce commoditywould have to be reduced to remain competitive. Village producers would earnabout Rs 1.20/liter of milk, a price nearer to the urban producers', andmuch higher than under the traditional intermediary system (see Annex 4,para 3). Villagers would become more competitive for feed supplies andwould retain, for their own use, the fodder now sold to urban producers(see Annex 4, paras 10 to 14).
Grants, Subsidies and Cost Recovery
6.04 The present policy of Government dairies implies a subsidizationof milk consumption that is not justified and would come to an end when theUnions determine prices in their members' interest. The only non-recoverableexpenditures under the project are Government startup grants to the DCS's(para 5.07), and to farmers (para 6.05), which are justified to facilitatethe set-up of new cooperative organizations and the spread of proven cross-breeding technology to rural areas. Loan components under the project arealI recovered at commercial interest rates. While the intended sale, atpar value, of Government equity in KDDC and the Unions (see paras 5.03 and5.05) would be a concessionary capital transfer, it would be contrary to
- 22 -
Government policy to earn capital gains from the cooperative sector. Farmincome and the sale of milk are not taxed, but the Government would earnsales tax on processed milk products. The overall impact of the project onpublic finance is shown in Annex 9, Table 5.
6.05 In order to promote the spread of new farming technologies, ofwhich crossbreeding is one, the Government is sponsoring subsidy programsto selected farmers taking up non-traditional activities. Fodder crops arenot part of the traditional cropping pattern. GOK offers a 30% price subsidyon the purchase of high-grade fodder seeds. Seeds would either be purchasedin the market or produced on KDDC and Union farms. Also, GOI would financethe free distribution of concentrate feeds, produced by the Union feedmills,among selected landless and marginal farmer members of the DCS's for theirfirst crossbred calf up to a maximum of Rs 600 per head. These farmersotherwise could not afford the investment of rearing the animal with high-quality feeds. Both programs are expected to end after Year 5 when thecrossbreeding technologies have taken root. The Unions would administerboth programs. GOI has agreed to reimburse the Unions for the cost of feeds,which would be distributed in kind among selected project farmers for raisingcrossbred calves.
Financial Results
6.06 All institutions set up under the project are financially viableand will generate a satisfactory rate of return. DCS will earn surplusesfrom Year 3 onwards. Financial rates of return at the Unions' processingactivities would range between 13% and 28% (see Annex 6, Tables 12 to 16).An economic price of about 3 paise and 1/2 paise per liter of milk wouldbe charged to recover investment and operating expenses of Unions' (seeAnnex 6, Tables 18, 19 and 20) and KDDC's respective service operations.KDDC's bull and dairy farms would each be an independent profit centre(see Annex 7, Tables 6, 9, 12, 15, 18). BVVI's vaccine production wouldalso generate profits.
6.07 The typical smallholder in the project area now owns one non-descript native cow, yielding about 300 liters of milk per lactationsurplus to her calf's needs. Part of this milk is consumed in his house-hold, so that cash income from the sale of surplus milk would seldom exceedRs 100 per lactation. Under the project, farmers would gradually replacenative cows by higher-producing homebred crossbreds, and a few (see Annex 9,Table 1, footnote 1) would purchase high-yielding crossbred cows. In addi-tion to providing for increased domestic consumption of milk, net cash incomefrom a crossbred cow would vary between Rs 400, and Rs 1,400 per year. Ifthe typical smallholder, under the project, increases his stock to twocrossbed cows, his net annual income from dairying would be about Rs 2,000received in daily payments. As the smallholders in the project area arepredominantly subsistence farmers, dairying will be their main source ofcash income and link to the money economy.
6.08 In addition to increased cash income through milk sales, theproject would afford small village farmers the opportunity to adopt amixed farming system through the integration of a profitable livestock
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enterprise into their traditional system. Since such a change would involvethe introduction of pasture/fodder crop ley, it would clearly result inlong-term benefits through a build-up in soil structure and fertilitythereby reversing the present downward trend in most parts of the Projectarea. It is anticipated that the studies proposed under the project (para4.13) would provide a sound economic and agronomic base for the adoption ofa mixed farming system through combining commercial dairying and traditionalcropping.
VII. ECONOMIC COSTS, BENEFITS AND JUSTIFICATIONS
7.01 The direct economic benefit of the project will be the increasedproduction of milk and heifers. The incremental milk production is esti-mated at one million tons/year by year 10. The economic rate of returnhas been calculated on the basis of milk processed in project plants(335,000 tons/year in year 7). Incremental milk production of DCS's afteryear 7 has not been taken into account. Milk is valued at Rs 1.50/liter,ex-plant (see Annex 5, Table 2), which is at the lower end of the pricerange in urban milk markets in the project area. The project is expected toproduce over 100,000 surplus heifer calves per annum from year 7 valued atRs 300/head, the projected market price.
7.02 The project would directly benefit about 450,000 farming house-holds, or approximately 2.5 million people, which is about half of therural population in the project area and would contribute to the fullerutilization of labor in the rural areas. The establishment of four milkunions with their own large milk plants and feed mills would provide directemployment for about 1,000 technical supporting staff. In addition, itwould support a milk transport service, involving about 50 vehicles, mostof which would be run by owner operators.
7.03 Significant social benefits at the village level would also bederived under the project particularly after the village cooperative dairysocieties become firmly established with a regular net annual surplus offunds. Such funds would most likely be used to augment or initiate villagedevelopment schemes involving education, health, family planning, minorpublic works and infrastructure. A further benefit to the village wouldaccrue from improved nutrition which would result from increased intake ofmilk particularly by children and infants. The benefits which would accrueto consumers would come from an improvement in nutrition as a result ofincreased availability of whole pasteurized milk in the urban areas. Alsoas the share of hygienic pasteurized milk to raw milk increases, the riskof milk born diseases such as TB, Brucellosis and gastrointestinal infections(particularly with infants) will decrease greatly.
7.04 Labor costs for green fodder production are included in the 3 p/kgprice charged for green fodder in the rural markets. Skilled and semiskilled labor for milk plants and feed mill operations, is costed at themarket price. Incremental family labor requirements for milking crossbreds
- 24 -
as opposed to native cows are minimal and are not likely to affect alter-native employment and are thus costed at zero. Based on these cost andbenefits assumptions, the economic rate of return has been estimated at33%, including incremental investment under the project. If the costs ofthe existing plants at Bangalore and Mysore are included, the rate ofreturn would be 30%.
7.05 The most significant element of risk facing the Project is thetask of creating DCS and Unions to establish a new cooperative controlledmarketing channel for the increased amount of rurally produced milk. NDDB'sexperience in replicating the AMUL pattern in Gujarat and other parts ofthe country indicates that human responses to such a program are varied butthat the obstacles, though many, are surmountable. A sensitivity analysisto test the effect of higher costs and lower benefits on the estimated rateof return was carried out. If investment and operating costs are 15% higherwhile the benefits due to delays in farmer response or decreased productionare 15% lower, the rate of return is estimated to remain over 10%.
VIII. RECOMMENDATIONS
8.01 During negotiations the following major points were agreed to:
(a) from GOK, that through KDDC and the Unions, it wouldpromote the formation of about 1800 DCSs, over five years,and four Unions, by December 31, 1975, under bylaws thatwould be approved by IDA (paras 4.04, 4.05);
(b) from GOI that:
(i) all major equipment of the milk-processing and feedmill facilities would be procured through internationalcompetitive bidding, in accordance with IDA Guidelines(para 4.19);
(ii) exotic dairy heifers, bulls and frozen semen would beprocured on the basis of quotations from at leastthree countries free from foot and mouth disease whereanimals suitable to the project are available (para4.21);
(c) from GOK that the Department of Audit would provide auditto DCS's, with at least one full audit and two book super-visions per year;
(d) from GOI and GOK that, as equal shareholders in KDDCthey would, after 1981, offer for sale at least 20% oftheir shareholdings annually to the Unions, at parvalue (para 5.01); until the Unions have became majorityshareholders;
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(e) from GOK, that it would, after 1980, offer itsshareholding in the Unions for sale, at par value,to the individual DCSs, until it had divested itselffrom all its equity (para 5.05); and
(f) from GOK that each Union would be free to set the price ofits products, charges for services to members, and procure-ment price paid to members; however in such cases as GOKshall determine it may consult with the unions on theirselling price policies (para 6.03).
8.02 The following conditions of credit effectiveness were agreed to:
(a) KDDC had engaged NDDB to assist in trainingof dairy union spearhead teams, and recruitmenthad been initiated (para 4.03);
(b) GOI and GOK had contributed Rs 2.5 and Rs 3.8 million,respectively, to the equity of KDDC (para 5.01);
(c) GOK had transferred to KDDC the operational responsibilityof the buildings, cattle and equipment of the five governmentdairy livestock production farms (Hessarghatta, Lingadahalli,Ajumpur, Habbanaghatta) (para 5.01);
(d) KDDC had been established under articles mutually acceptedby GOK and IDA and GOK had transferred to KDDC operationalresponsibility of the facilities of the existing BangaloreDairy, Mysore Dairy, and related chilling and artificialinsemination equipment in the project area (paras 5.02 and5.03); and
(e) A subsidiary loan agreement between GOI and ARC had beenapproved by IDA and executed, and banks operating in theproject area had been invited to participate in the project(paras 5.11 and 5.12).
8.03 Given the above assurances and conditions, the project is suitablefor an IDA Credit of US$30 million.
ANNEX 1Page 1
INDIA
KARNATAKA DAIRY DEVELOPMENT PROJECT
THE DAIRY SUB-SECTOR
A. Introduction and General Background
1. Some 80% of the Indian people live in rural areas and 69% of thetotal labor force of about 185 million are employed in agriculture. Owner-cultivators comprise 43%, sharecroppers 31%, and landless laborers 26% ofthe agricultural labor force. Rural unemployment and underemployment ishigh in rural areas and the labor force is expanding more rapidly than itcan be absorbed into non-farm work. Small-scale farming predominates; theaverage size of farm holdings is less than 3 ha. Only 1% of the farmershave holdings larger than 20 ha, 6% farm from 10 to 20 ha, 30% farm from 2to 10 ha, and over 60% farm less than 2 ha of land. Yet the cows and buffa-loes owned by small farmers owning less than 2 ha of land produce most ofIndia's milk.
2. India possesses about 17% of the world's cattle and 50% of theworld's buffaloes. Yet these animals make a very low direct contributionto the nation's economy. They are of course the main source of draft powerfor the nation's agriculture. In 1970-71 the direct share of the wholelivestock subsector was about 14% of the total output of the agriculturalsector. In the same year the agficultural sector contributed about 45% ofnet national production. Agricultural exports made up about 35% of theannual total and of this only 5% were livestock products.
3. The contribution of India's large bovine population to the proteindiet of the bulk of the Indian population is small. Because of low averageincomes, of the religious sentiment towards cattle from the predominantlyHindu population, and of bans (or severe restrictions) on their slaughterin most States, very little beef is consumed. Most of the meat eaten comesfrom buffaloes; there are fewer restrictions on their slaughter. About 600,000are slaughtered annually (equivalent to about 120,000 tons of meat or 0.2kg per capita). Most of this is consumed locally although some is now beingexported to Europe for the catering trade and some to the US for pet food.Many senior government officials at central and state levels are becomingincreasingly aware of the need for changes in the slaughter policy to reducethe large number of useless or nonproductive cattle and buffaloes whichcurrently consume about one-half of the total livestock feed resources. Inthis context, plans are already underway to establish several modern slaughter-houses in the country to develop export markets. One of these will be inBangalore, Karnataka State.
ANNEX 1Page 2
4. Milk and milk products are by far the most important sources ofanimal protein in India and are acceptable to practically all segments ofthe population. However, by world standards, productivity is low and dailyper capita availability is only about 114 grams compared with 730 grams forthe US. Total milk production in 1969-70 from about 46 million lactatingcows and buffaloes was 20.8 million tons for an average of 450 kg per head,compared to New Zealand where production was 6.0 million tons from 2.3 mil-lion lactating animals for an average production of 2,560 kg per head. Thus,there is a tremendous potential for increasing milk production in India.This can be achieved by adoption of better feeding and management practicesand the utilization of animals capable of producing high quantities of milk.The genetic potential of Indian cattle, even the dairy breeds, is low becausethe main selection objective had to be the production of bullocks forwork. Relatively little attention has been given to selecting animals onthe basis of milk yield. Because of the large number of cattle available theirgenetic base is broad. Selection for milk production in buffaloes has beenmore widely practiced and as a result their genetic base is much narrower.Also, there is little scope for increasing production in buffaloes by crossingwith exotic strains. Therefore,-any further improvement in these animalswill be slow since it must result from selection within the Indian population.On the other hand, there is ample evidence to show that the indigenous cowwhen mated to an exotic dairy bull produces an offspring with a yield potentialvastly superior to its dam. The full exploitation of this practice is apractical and effective way of obtaining a rapid increase in milk output.
B. Milk Production
Cattle and Buffalo Population and Distribution
5. The present bovine population of India is estimated at approx-imately 177 million cattle and 56 million buffaloes. More than 50% of thetotal cattle are located in the five States of Uttar Pradesh, Madhya Pradesh,Bihar, Maharashtra and Rajasthan and nine states have more than 10 millioneach. Cattle in the State of Karnataka number just under 10 million. However,inspite of having a relatively lower population than many States, Karnataka isthe most advanced in the adoption of high producing exotic cattle and theircrosses with native breeds (para 7). The States of Uttar Pradesh, AndhraPradesh, Madhya Pradesh and Punjab account for more than half of thebuffaloes. Uttar Pradesh alone has 20% of the total while less than 6% arelocated in Karnataka.
Breeds and Performance
6. There are about 26 indigenous breeds of cattle in India which maybe generally classified as (a) draft breeds, (b) dairy breeds or (c) dualpurpose breeds. The important draft breeds include the Amritmahal, Bachaur,Bargur, Dangji, Hallikar, Kangayam, Kenkatha, Kherigarh, Khillari, Malvi,Nagore, Namari, Ponwar and Siri. The major dairy breeds are Sahiwal, Red
ANNEX 1Page 3
Sindhi, Gir and Deoni while the important dual purpose breeds are theHariana, Kankrej, Mewati, Ongole, Rathi and Tharparkar. There are six well-defined breeds of buffaloes in India. These are the Jaffarabadi, Mehsana,Murrah, Nagpuri, Nili and Surti. In addition, there are breeds of localimportance such as the Bhadawari in Uttar Pradesh, the Parlak Medi inOrissa and the Toda in Nilgiri Hills.
7. Exotic breeds of dairy cattle have been used for crossbreeding inIndia for the past 70 years. While the Friesian and Jersey have been themost widely used breeds, the Brown Swiss, Red Dane, Ayrshire, Shorthorn andGuernsey have also been used. All of the exotic breeds adapt well to theIndian environment if they are provided with good feeding and managementconditions. The popularity of the Friesian and Jersey is probably due togreater opportunity for selection in these breeds because of their largenumbers; the high fat content of Jersey milk and its smaller body size(thus lower maintenance requiremerts), and the high milk volume of theFriesian. The indigenous breeds most favored for crossing are the Sindhi,Sahiwal, Tharparkar, Gir and Hariana but the Ongole and Hallikar as wellas many nondescript cattle have also been used. During the period 1961-72approximately 2,600 head of exotic cattle were imported. The total numberof crossbred cattle presently in the country is not known. Karnataka State,an early leader in crossbreeding, still retains this position. The State isestimated to have about 100,000 crossbred animals of which 30,000 are locatedwithin the city of Bangalore. Howe'rer, a relatively large number are maintainedby village farmers who have demonstrated their ability to provid6 the animalswith the care which they require.
8. The estimated annual milk production per cow in India is about200 kg and per buffalo about 500 kg. The following selected data show themilk yields of crossbred cows compared with their indigenous dams.
ANNEX 1Page 4
(a) National Dairy Research Institute (N.D.R.I.) Karnal(Source: C.A.B. News Letter, No. 78, Sept. 1973 andWorld Rev. Anim. Prod. Vol. 8, Jan-March, 1972)
305-day 3rd/4th Age at 1st1st lactation lactation calving
(kg) (kg) (mo)
Fl Brown Swiss x Sahiwal 3,046 3,569 30F2 Brown Swiss x Sahiwal 2,355 - 353/4 Brown Swiss x Sahiwal 2,535 - 30Sahiwal 1,783 - 40Brown Swiss x Sindhi 2,867 - 31Sindhi 1,633 - 34
(b) Southern Regional Station of N.D.R.I., Bangalore. Karnataka State(Source: C.A.B. News Letter, No. 78, Sept. 1973)
305-day 3rd/4th Age at 1st1st lactation lactation calving
(kg) (kg) (mo)
Jersey x Tharparkar 2,079 2,496 30.5Tharparkar 1,287 1,304 39.1
(c) Hessarghatta Livestock Farm and Research Station, Bangalore, Mysore
Average milk produced Age at 1stper lactation calving
(kg) (mo)
Jersey x Sindhi 2,700 25Red Dane x Sindhi 2,900 27Sindhi 1,500 32Jersey x Hallikar 1,945 25Red Dane x Hallikar 2,685 27Hallikar 500 44
(d) Indian Military Dairy Farms
Average milk produced Age at 1stper lactation calving
(kg) (mo)
Crossbreds /a 2,535 36.2Sahiwal 1,770 38.3
/a While several exotic breeds were used, Friesian waspredominant.
ANNEX 1Page 5
(e) Central Livestock Research and Breeding Station, Haringhata,West Bengal
Milk per lactation (kg) Age at 1st1st 2nd 3rd 4th 5th calving
(mo)
Jersey x Hariana 1,826 1,875 2,084 2,372 2,206 31Hariana 814 859 831 800 - 51
Milk production of crossbred cows in village herds in Karnataka State rangesfrom about 1,000 to 4,000 kg. In Bangalore City crossbred herd averages of3,000 to 3,500 kg are not uncommon and individual animals producing up to7,000 kg per lactation have been reported.
Production Systems
9. Dairying in India is a subsidiary activity, although it may bea family's major source of cash income. It is also an activity in whichthe women have almost sole responsibility. Their role is not limitedsimply to milking the animals or seeing that the milking equipment is keptclean and in order. They are also responsible for the feeding, breedingand health of the stock, the raising of herd replacements, and the disposalof all produce-milk, surplus animals and dung. The man is the farmer orcultivator or laborer and his contribution to the dairy enterprise is usuallyminimal.
10. The common systems of milk production in the country may bebriefly described as follows:
(a) The landless who usually keep their animals tied nearthe home or shop and who purchase' all feeds and foddersused. These may be either urban or rural and the numberof animals maintained per household varies considerably.
(b) The small farmer who may keep from one to five or more cowsas an incidental adjunct to his farming enterprise. Mostof the dry fodder (cereal straw and other crop residues)and a portion of the concentrate which he feeds may beproduced on the farm. He may even use a small area ofland for the production of green fodder.
(c) The milk colonies and cattle settlements containing largenumbers of animals which have been removed from urban andsuburban areas. The Aarey Milk Colony near Bombay whichis composed of some 16,000 milking buffaloes is an example.
Very few specialized dairy farmers in rural areas use their land primarilyfor fodder production; even fewer follow a farming system which integratesthe production of cash crops, fodder crops and milk.
ANNEX 1Page 6
C. The Feed Situation
Fodder Production
11. Of India's total geographic area of about 328 million ha, 20%is covered by forests. The cultivable area is about 140 million ha; thenet area sown annually is slightly over 139 million ha, and roughly 25million ha are under double or multiple cropping. In 1964, Whyte 1/reported that approximately 6.4 million ha were devoted to fodder crops.The current estimate is 6.7 million ha, 25% of which is said to beirrigated. The fodder crops commonly grown include the perennial grassessuch as napier, guinea, para and Rhodes, lucerne used either as an annualor a perennial, and seasonal crops such as maize, sorghum, berseem and cow-peas. Tropical legumes are little used for forage although there areareas in the country, including the State of Karnataka, where they are welladapted and, if grown, would contribute significantly to the overall feedsupply and to the productivity of the soil. Assuming an overall yieldof 25 tons of fresh material per ha, India's total annual production ofgreen fodder amounts to 168.4 million tons. India grows approximately100 million ha of cereal grains and 22 million ha of pulses or food legumes.The residues from these crops are low in nutrient content, are unpalatableand at best, provide no more than animal maintenance requirements, yetthey constitute by far the greatest single source of feed for India'slivestock. In fact a large number of animals subsist on nothing but thesepoor quality products. Assuming an average yield of two tons per ha,there are about 244 million tons of these crop residues (dry fodder) avail-able annually.
12. At present it is difficult if not impossible to assess thecontribution which the natural grazing lands (estimated at roughly 14 mil-lion ha) make to the feed res6turces of India's cattle and buffalo popula-tions, particularly those bovines which are kept for milk production.The grazing areas within daily walking distance of villages are notoriouslyovergrazed while more productive grasslands, such as those in forest areas,are generally inaccessible to cattle. For most of the year the herbage inthese natural grazing areas is very low in quality and would contributelittle to a productive ration. Little has been done to improve thesegrazing lands. Indeed there is a lack of information on suitabletechniques which could be adopted to achieve this and almost none of thebest forage and pasture species to use in such programs.
The Feed Industry
13. In 1971-72, India produced 93.6 million tons of cereal grainsand 11.1 million tons of food legumes. The area devoted to the major
1/ Whyte, R. 0. The Grassland and Fodder Resources of India. Scient.Monograph No. 22, Indian Council of Agric. Res. New Delhi, 1964.
ANNEX 1Page 7
crops, total production of each, and the principal producing areas in thecountry are given below:
Area Production Principal producingCrop (million ha) (million tons) areas
Rice 37.3 42.7 West Bengal, Bihar,(milled) Orissa, Andhra Pradesh,
Tamil Nadu, MadhyaPradesh, Uttar Pradesh
Wheat 19.2 26.5 Northern Plains and theCentral Plateau
Food legumes 22.2 11.1(principally chickpeas,pigeonpeas, black & greenpeas and cowpeas)
All the sorghum and millet and the major portion of the other cerealgrains are used for human food with the milling and processing by-productsand the cracked and split grains being available mainly as concentrate feedsfor livestock. Based on factors derived by Whyte and Mathur1/ the followingamount of concentrates were available for livestock feeding in 1971-72:
1/ Whyte, R. 0. and M. L. Mathur. The Planning of Milk Production in India.Orient Longmans Ltd. 1968.
ANNEX 1Page 8
('000 tons)
Maize, as grain 503
W4heat, as wheat bran 795
Barley, as grain 250
Rice, as rice-bran 3,000
Food legumes, mainl5 as seed 2,212
Total 6,760
Factors
Maize and barley - As grain, 10% of total production
Wheat - As bran; 3% of total wheat pro-duction
Rice - As bran; 5% of paddy production
Food legumes - Mainly as grain; 20% of totalproduction
In addition to the above, India's production of oilseed cake in 1971-72was about 4.9 million tons, about 75% of which came from peanuts and rape-seed. Slightly more than one million tons of oilcake was exported,leaving 3.8 million tons available for feeding to livestock. Thus thecombined quantity of feed concentrates available was approximately10.6 million tons. This estimate is very close to the figure of 9.8 milliontons estimated by Whyte and Mathur from 1962-63 production data.
14. None of the grains or by-product feeds are sufficiently wellba]anced in nutrient content (i.e. energy, protein, mineral content) topermit them being successfully fed singly. Thus, they are commonly fedas components of compounded or mixed feeds and tend to supplement oneanother so thaL inherent deficiencies of the individual feeds are not apparent.The ;-roess of compounding also provides a concentrate ration containingspecified amounts of feed nutrients, e.g. a given percentage of protein orminerals. The farmer may obtain the individual feed ingredients and dohis own mixing on the farm or he may purchase feeds which have been compoundedat a feed plant. In 1972, these feed plants registered with the CompoundLivestock Manufacturers of India produced 0.37 million tons of concen-trate feeds, 0.18 million tons of which were poultry feeds. Average totalfeed production was up 432 over the previous year, while the production ofcattle feeds increased only 30%. Because of price and availability theIndian farmer presently feeds a relatively high proportion of single feeds,
ANNEX 1Page 9
e.g. rice bran, compared to compound feeds. Also, a lot of feed is presentlywasted, thus the amount actually consumed is considerably less than thatavailable. The total installed capacity of all the compound feed factoriesin India, both public and private, is about 8.5 million tons annually. However,only about 50% of this capacity is presently utilized. Karnataka State has sevenmajor feed mixing plants and annual production is about 30,000 tons. Ifall of the feed were used for milk production, this would be sufficient foronly 30,000 crossbred cows (assuming 2,000 kg milk per cow yearly and concentratefeeding at 1 kg per 2 kg milk). If crossbred cow numbers in the State increaseas anticipated, there must be either a considerable increase in local feedproduction or large importations of concentrates from other parts of thecountry.
Feed Requirements
15. Feed must be consumed for body maintenance and production(growth, milk, and/or growth of the fetus). The total feed requirementsof India's cattle and buffalo populations calculated in terms of energyneeds (expressed as Total Digestiile Nutrients (TDN)) are summarized below:
Total TDN required annually(million tons)
Cattle
Males over 3 years 13.35
Females in milk 25.20
Females dry and breedable 34.40
Young stock 42.55
Others 3.93
Sub-total 119.43
Buffaloes
Males over 3 years 17.50
Females in milk 21.75
Females dry and breedable 18.25
Young stock 19.42
Others 0.80
Sub-total 77.69
Total 197.12
ANNEX 1Page 10
Thus approximately 200 million tons of TDN are needed annually to feedIndia's bovine population adequately. However, the estimated supplyof TDN available is only about 114 million tons, as follows:
Total TDNFeed (million tons) (million tons)
Green fodder 168.45 21.90
Dry fodder 244.45 86.56
ConcentratesFeed grains and 6.76 4.54by-products
Oil cakes 3.80 2.11
Total 114.11
Based on these calculations there is an annual shortfall of about 85 mil-lion tons of TDN.
16. The energy needs of lactating animals represent less than 25% ofthe total energy needs. Furthermore, of the 46.9 million tons of TDNestimated for milking cows and buffaloes, only about 10%. actually goes formilk production. The remainder is used to meet the animals maintenancereq!irements. This reflects the very high proportion of total feed that isused for non-productive purposes, particularly in the case of animals with-alow production potential. Thus while a crossbred cow producing 2,500 kgof milk annually has a total TDN requirement about 60% higher than a localcow of similar body size producing 250 kg of milk, the crossbred uses about40% of her energy intake for producing milk compared with the local cow whichuses only about 7%.
17. A mixed ration based on the availability of all feedstuff inIndia (green fodder, dry fodder, feed grains, mills by-products and oilcakes), is very low quality, containing only 33% TDN and less than 6%protein, because 74% of the ration -is dry fodder. A good dairy productionration should contain at least 60% TDN and 14% total protein (50% TDN and0% protein for maintenance alone). Otherwise the animal is unable toconsume enough of the ration to satisfy her nutritional needs. The aboveration, based on available feed ingredients, is little better than strawand illustrates why relatively heavy concentrate feeding is a standardpractice among Indian dairymen. Until greater quantities of high qualityforage are available, large amounts of concentrates must be fed in orderto produce milk. A ration consisting of only concentrate feedstuff,proportional to their availability, contains 69% TDN and about 26% crudeprotein. Although it is too high in protein if fed in conjunction withadequate amounts of good forage, this is quite an acceptable ration. Itdoes demonstrate, however, that the major shortage is energy feeds.
ANNEX 1Page 11
Potential for Increasin_Milk Production
18. On the basis of the above estimates there would appear to belittle hope of increasing milk production unless the bulk of the availablefeed, principally concentrates and green fodder, can be channeled to highproducing animals. If feed availability cannot be increased more non-productive animals will have to be slaughtered or will have to subsist oneven smaller quantities of feed than at present. In view of India'sgrowing human population there is little reason to expect any increasedquantities of cereal grains or mill by-products to become availablefor livestock feeding. The reverse is much more likely to be the case.Also, since oilseeds and oilcake are major export earners, it is unlikelythat the supply of protein supplements will increase. However, there isconsiderable scope for increasing the production of high quality forageand herein lies the hope for raising the output of milk and doing iteconomically.
D. Supporting Technical Services
Veterinary Services
19. A number of cattle diseases are endemic to India. Importantamong these are foot and mouth disease, rinderpest, theileriasis, anaplas-mosis, piroplasmosis, brucellosis, anthrax and black quarter. To controlthese and other diseases requires the coordinated efforts of the CentralGovernment, Governments of all the States and Union Territories, the IndianCouncil of Agricultural Research (I.C.A.R.), the Indian Veterinary ResearchInstitute (I.V.R.I.) and the various Veterinary Colleges throughout thecountry. In the Central Government a Livestock Health Section under thedirection of a Joint Commissioner in the Animal Husbandry Division of theDepartment of Agriculture performing the following functions: (a) epidemio-logical studies to determine the incidence of mortality and morbidity causedbv the important diseases in the country, (b) coordination, liaison andguidance in the operation of a centrally sponsored scheme for the eradica-tion of rin(lerpest, (c) establishlent of animal quarantine and certificationservices, and (d) strengthening of the 15 Biological Production Centers inthe countrv. Veterinary aid for carrying out the necessary prophylactic andcurative disease control measures is made available to livestock owners bythe State Governments through a network of about 7,300 veterinary hospitals,dispensaries and mobile units. These services are supported by diagnosticlaboratories at district, regional and state level. The I.V.R.I. atIzatnagar is the primary center for the production of veterinary biologicals.Furthermore, it is a major institution for training and research in veterinaryscience and animal health. A number of research projects financed by theI.C.A.R. are carried out at the Institute. All of the 21 Veterinary Collegesin India provide training in veterinary science and many of these offeropportunity for post-graduate studiLes and research.
ANNEX 1Page 12
20. The KArnataka State Department of Animal Husbandry and VeterinaryServices has been in existence for the past 35 years. The Department staff,up to the Taluk level, presently number about 840. The State has 513 RuralVeterinary Dispensaries. These are operated by veterinary and livestockinspectors who have had university training in veterinary science and animalhusbandry. There are 271 Veterinary Dispensaries operated by veterinaryscience graduates and 34 Veterinary HospitE.ls. In addition, there are 175veterinary extension officers in the state. There is one Veterinary Collegein the State which turns out between 40 and 50 graduates each year. TheKarnataka Serum Institute is located in Bangalore City. This Institute, estab-lished in 1926, produces about 10 million doses of biologicals annually andis to be expanded under the Project.
Artificial Insemination Services
21. Artificial insemination services are widely available to dairymenthroughout India. Most of the inseminations are carried out through the 62Intensive Cattle Development Projects (ICDP) and the 536 Key Village Blocks(KVB). These programs cover a breedable population of around 12 millioncows and buffaloes and during 1971-72 a total of 2.7 million Al services wereperformed (1.1 million under "CDP and 1.6 million under KVB). The totalnumber of inseminations carried out annually, including the ICDP and KVBschemes is about 3.5 million. Most of the inseminations involved liquidsemen, although frozen semen is also used, particularly in intensive cross-breeding areas such as Karnataka State which imports considerable quantities.Data on conception rates are limited but appear to range from about 20 to70%, reflecting considerable variability in management and technique andindicating great scope for improvement, especially with respect to timing ofinseminations. The conception rate in buffaloes in the Kaira District MilkProducers Cooperative Union, Gujarat State, is 58%. Al programs have beenparticularly progressive in the States of Karnataka, Andhra Pradesh, Kerala,Tamil Nadu, Uttar Pradesh and West Bengal, and are gaining momentum in Bihar,Maharashtra, Orissa and Madhya Pradesh.
22. The State of Karnataka was an early leader in AI and there are now640 AI Centers in the State attached to KVB, ICDP, the Hill Cattle Develop-ment Scheme and various veterinary institutions. In 1972-73 the State
*r- - c,vt 215,000 inseminations, 200,000 with semen from exotic bulls.M¶ost of the AI services are performed by the veterinary and livestockinspectors attached to the Rural Veterinary Dispensaries. There is oneFrozen Semen Bank in the State which presently produces 2,000 doses of semendaily. This output is expected to be increased further as a result of arecent expansion of the semen Bank's facilities.
Dairy Extension
23. Agricultural extension in India, including dairy extensionis carried out through the Community Development Program which is a programof aided self-help planned and implemented by villagers with Governmenttechnical guidance and financial assistance. The program is implemented
ANNEX 1
Page 13
in block units of over 100 villages each with a total average area of 250
square miles and a population of about 80,000. Its execution is the responsi-
bility of the State governments with overall coordination by the Central
"inistry of Agriculture. A block development officer and eight extensionofficers specializing in various fields, including animal husbandry, operate
at the block level. Each block is divided into groups of about 10 villages,for wlhich a village level worker acts as a multi-purpose extension agent.The extension workers at the block and village levels disseminate knowledgeor research findings of practical importance to village farmers 'and they alsotransmit village problems back to the various research organizations for
study and solution. At present there are some 4,500 block development officers,
55,000 village level workers, 6,000 agricultural extension farmers and 6,000
animal husbandry extension officers engaged in community development work.WVhile considerable progress is be:ng made in some areas of rural development,extension workers in animal husba7ndry have not been effective in bringingabout major improvements in livestock production mainly because of the lackof training in ir,proved anjiral proluction techinology of these workers.
24. The NDRI has a Division of Dairy Extension and the IVRI has aDivision of Extension with major responsibilities in the area of dairy
extension. Both institutions provide training for field extension person-nel. In 1972, NDRI sponsored the First Dairy Husbandry Officers Workshopin which 72 State extension officers from the Northwestern part of Indiaparticipated. The Dairy Extension Division at NDRI is involved in twoactivities of special interest. One of these is the Village Model DairyFarm Demonstration Units which were set up to: (a) compare the economicreturns from dairy farming with those from the production of cash crops,and (b) develop a mixed cash crop - dairy farming system. Preliminaryresults are encouraging. HIowever, since the demonstrations have beenrestricted to irrigated conditions and to only one region, much more work
is needed before recommendations applicable to other conditions and other
areas of the country can be made. The other activity involves the pro-duction of cross-bred animals from native cattle, mainly Tharparkar. Todate about 450 native cows have been brought, to the Institute and in-seminated with semen from exotic bulls. About 360 cows have been bred to
date and 40 females are now available for distribution to farmers. Theseare sold as in-calf heifers for about Rs 2,000 each.
25. In Karnataka the Department of Animal Husbandry and VeterinaryServices is responsible for dairy extension work. At the village levelthe veterinary and livestock inspectors and the veterinary extensionofficers advise cattle owners on matters pertaining to animal health,disease control, breeding, and livestock feeding and management. In
general extension services are poor, particularly in the areas of fodderproduction and cattle feeding. The experiences of the Kaira Union (AMUL)
in Cujarat have demonstrated that extension services which are built intoand controlled by a cooperative union are much more effective than those
operated by Government, mainly because the union is farmer owned and asa result the individual farmer can demand good service.
A N NEX 1Page 14
Dairy Research
?h 6. Introduction: Nuch of the basic information needed for thedIevelon!uzent of the dairy industry in India is provided by the NDRI atKarral and its regional stations at BanFalore, Bombay and Kalyani.In acldition a number of agricultural and veterinary institutions carryout research in dairying or in closely related areas. Important amongthnse sre the IvRI, the Indian Agricultural Research Institute, the Alla-habid A-riculture Institute, and the Indian Grassland and Fodder ResearchInstitute. Research programs in the dairy field have also been initiatedat several of the recently established agricultural universities andveterinary colleges. Coordination of all these research activities isthe responsihility (if the ICAR.
27. Breeding. Early work in this field emphasized basic geneticstudies and breeding and management studies witlh the Indian dairy breeds.A number of cattle breeding farms were established to carry out the latterstudies and to provide improved bulls for distribution to farmers. Afterearly preliminary studies indicated the potentialities of crossing theindigenous cattle with exotic dairy bulls, the major research effort hasbeen devoted to crossbreeding as a method of producing high yielding dairycattle suitable for India's conditions. To accelerate this process theAll-India Dairy Cattle Coordinated Breeding Project was initiated in 1972.All of the major crossbreeding programs throughout the country are a partof this Project. The results obtained to date have been dramasic. Com-Dared with their indigenous dams the Fl crosses mature more quickly,pro(luce their first calf at an earlier age, yield double or triple theamount of milk, and are more efficient utilizers of feed. Breeding programsto establish and maintain the appropriate proportions of exotic blood insubsequent generations are currently underway. Recently the N.D.R.I.announced the development of a so-called new strain of dairy cattle, theKaran Swiss, which combines inheritance from Brown Swiss bulls and Sahiwaland Red Sindhi cows. While the exotic bulls used for crossbreeding inIndia have been selected on their progeny records, no Indian-born cross-bred bulls have been progeny tested to date. Efforts to improveproductivity in buffaloes are also being made through the All-IndiaBuffalo Coordinated Research Project.
2?3, Niutrition. Much nutrition research with ruminants has been carriedout in India, particularly over the last 25 years. It has dealt with thecomposition and nutritive value of Indian feedstuffs, including foragesand by-product feeds, the nutritional needs of cattle and buffaloes,and basic studies on energy, protein, and mineral metabolism, includingthe effects of climate. In general work underway encompasses the same areas.Hiowever, increased emphasis is being given to more efficient utilization ofagro-industrial by-products and the role of forage in feeding cattle. Theseare encouraging moves in view of the extreme shortage of animal feeds,especially concentrates, and the potential for raising the output of livestockproducts through the increased use pf good quality forage. The nutritionalresearch done to date in India has placed undue emphasis on laboratory anddigestion/metabolism studies. Very little production-oriented research inwhich economic considlerations are an integral part of the work has been under-taken.
ANNEX 1Page 15
29. Fodder Production. With the increased use of high producingcrossbred dairy animals, fodder production research is receiving more andmore attention. The Grassland and Fodder Research Institute at Jhansi isthe center for most of this research. Work is concentrated on productionsystems for irrigated conditions utiliziag perennial grasses such as thePennisetum hybrids and the multiple cropping of annual forages such asmaize, sorghum, oats and berseem. The grasses are grown alone or in com-bination with temperate zone leguminous forages. Under such conditions thetotal annual yield of fresh material is high (100-200 tons per ha). Littlework has been done to develop a system of fodder production under rain-fedconditions or where supplemental water is minimal. Detailed studies todetermine the comparative economic advantage of growing forage as analternative to cash crops, or in rotation with such crops, have not beencarried out. Other areas in which research is urgently needed includethe role of tropical and sub-tropical legumes in meeting the green fodderrequirements, the utilization of forages under grazing conditions, and thepreservation of surplus fodder. Until research information from the JhansiInstitute is available in these fields, dairy development will be slow andsporadic.
Education and In-Service Training
30. India has 19 agricultural universities, 72 agricultural colleges(including those functioning at the university campuses), and 21 veterinarycolleges. In addition a post-graduate school is operated by the IndianAgricultural Research Institute. In 1968-69 the agricultural and veterinarycolleges submitted a total of 9,700 students and produced a total of 6,900graduates. Mlost of these students were graduated with a B.Sc. in agricul-ture. Only a small number were animal husbandry majors. During the sameyear 1,960 students enrolled for post-graduate study at the Masters Degreelevel and 1,830 were graduated. Again, most of these were in the fieldof general agriculture. The N.D.R.I. at Karnal provides both under-graduate and post-graduate training in dairying. About 50 B.Sc. studentsare graduated each year but the undergraduate program there is beingphased out. At present there are 180 post-graduates at the Institute andthis number is expected to increase to 250 shortly. The Institute'sregional station at Bangalore provides post-graduate training but has noundergraduate program. Both institutions offer the two-year Indian DairyDiploma course as well as specialized in-service training courses. AtBangalore 15 to 20 dairy extension workers are given a three-month trainingcourse each year and about 120 farmers attend a three-day short courseevery year. Additional facilities are being planned to provide trainingfor a much larger number of farmers. Little factual information isavailable regarding the future requirements of trained personnel and theextent to which these requirements will be met. However, a very roughestimate indicates that not more than 20 of the total dairy personnelneeded during the Fifth Five-Year Plan will be available.
ANNEX 1Page 16
E. Bilateral and Multilateral Support
31. Substantial outside assistance to dairy development has been providedby hilateral and international agencies. Examples are the Indo-Danishbreeding project in Karnataka, the Indo-Swiss project in Kerala, and the Indo-German project in Himachal Pradesli. Improved quality animals have beenprovided through cooperation of the Australian Government and through HeiferProject, Inc., from the United States. Assistance has also come fromUnited Nations Agencies such as UNDP, UNICEF, FAQ, and the World Food Program(04FP). Significant contributions in animal husbandry education and researchhas been made by USAID, especially through the cooperation of several U.S.universities with the recently established agricultural universities in India.Another bilateral contributor which deserves special mention is the DanishGovernment. The Indo-Danish Cattle Development (IDP) at Hessarghatta, KarnatakaState, was conceived in 1961 and became operational in 1964. The originalpurpose of the project was to establish a dairy cum-crop production farm toprovide Indian farmers and government technicians with training in moderndairy production methods. The first agreement between GOI and the DanishGovernment expired in 1970 and was followed by a second which stipulatedthat the project would continue through November 1975. The new agreementprovided for strengthening the existing main center at Hessarghatta andestablishing three sub-centers (each with an area of about 50 ha) at Munira-bad, Kudife and Dharwar, Karnataka State. Up to mid-1971 the Danish contributionto IDP amounted to Rs 9.5 million. Denmark is also assisting GOI in estab-lishing a foot and mouth vaccine production center in Bangalore City.
Dairy Development Plans and Policies With Special Reference to the Fourthand Fifth Five-Year Plans
32. During the first three plans (1954-1969) GOI expended Rs 22.1million for all agricultural programs. Of this amount only about 8% wentfor animal husbandry and dairy development, reflecting the emphasis placed(and rightly so) on the production of food grains (cereals and legumes).Similarly, at State levels all programs were biased towards food grainproduction. However, although modest in terms of production increases,the development achieved in the animal husbandry field over this periodwas important in formulating the basis for future GOI and State dairydevelopment policies. The main achievements were:
(a) establishment of about 500 Key Village Schemesand about 60 Intensive Cattle DevelopmentProjects incorporating breeding and feedingprograms aimed at raising milk production at thevillage level;
(b) expansion of state breeding farms, particularlyfor the production of improved bulls;
ANNEX 1Page 17
(c) improvement of extension, veterinary and Alservices;
(d) the National Dairy DeveloDment Board was created in1965 as the main technical arm of GOI in dairydevelopment. It is financed mostly out of the feesearned on the dairy consultancy activities;
(e) training of technical personnel; and
(f) provision of credit for the purchase of milk animals.
The most significant achievements in the area of milk processing anddistribution were:
(a) organization of milk supply to the cities of Bombayand Calcutta (this was the forerunner of OperationFlood);
(b) construction of 37 liquid milk plants; and
(c) increased capacity of refrigerated rail transit formilk.
33. Under the Fourth Plan, which terminates in mid-1974, the fundsallocated for dairy development have been significantly increased. By theend of the plan period expenditures on animal husbandry will be aboutRs 780 million and on milk processing and distribution about Rs 820 million.In addition to the expansion of on-going programs began under prev:ousplans, important new programs were commenced to:
(a) encourage crossbreeding of native cows with highproducing exotic bulls using imported frozen semen;and
(b) establish a foot and mouth vaccine production centerin Bangalore, Karnataka State.
34. In the milk processtng and distribution programs of the FourthPlan most of the effort has been concentrated on Operation Flood. Thisprogram aims at improving milk processing facilities and increasing milksupplies to India's four largest cities (New Delhi, Bombay, Calcutta andMadras). Under the program WFP is providing 126,000 tons of skim milkpowder and 42,000 tons of butter oil which is recombined into liquid milkat the processing plants in these cities. The profits from the sale ofthis milk is used to finance dairy development programs within OperationFlood. Operation Flood is managed by the Indian Dairy Corporation (IDC)which was set up in 1970 to serve as GOI's commercial arm with respectto dairy development and is financed in part by GOI grants and in partby the funds generated from the sale of this reconstituted milk.
ANNEX 1Page 18
35. In general the realizations of the first Four Plans have fallenshort of projected objectives. Many of the dairy plants erected under theplans are operating at 60% or less of their through-put capacity as aresult of shortfalls in the production and/or supply estimates. This short-fall is symptomatic of a more serious problem, viz. a growth rate of onlyabout 2% per year in milk production since 1951 which has been inadequateto keep pace even with population growth. Thus daily per capita availabilityof milk and milk products declined from 130 grams in 1951 to 114 grams in1970. Government planners have realized that this trend cannot continuewithout serious consequences since milk is the most important source ofanimal protein for much of the Indian population. It is now generallyrecognized that the village farmer has had little economic incentive tosupply milk to the predominantly government-owned dairies whichoften are inefficiently managed and tend to set consumer prices too lowrelative to production costs. Furthermore, village milk collection isgenerally poorly organized and is often controlled by middlemen whichfurther reduces already small producer margins. This has caused Centraland State Governments to reconsider their policies and has resulted inGovernment encouraging the setting up of public sector cooperatives basedon the experience of the successful Kaira District Cooperative MilkProducers Union Ltd. (more commonly known as AMUL). This is a commercialapproach that provides attractive financial and social incentives forfarmers to go into dairying. Farmers join village milk productioncooperatives that own and control the cooperative union which in turn ownsand operates the dairy plant, sets pricing policies, and provides numerousservices (technical and otherwise) to its members. Although this approachwill go a long way towards reaching the desired objective, namely, increasedmilk production, this cannot be fully realized unless the other majorconstraints, such as inadequate supply of high quality feed, limited numberof high yielding crossbred cows, and an insufficient number of welltrained dairy extension workers, are removed.
36. Under the up-coming Fifth Five-Year Plan, dairy development isgiven a high priority. A total expenditure of Rs 7,000 million has beenproposed by GOI and State working groups. The basic thrust will be onprograms that will integrate the industry from the production level (farmer)to the consumer. Farmers will be encouraged to increase milk productionand to supply consumers with s quality hygienic product at a reasonableprice.
37. Operation Flood will be continued and expanded to embrace 14 on-going small and marginal farmer development schemes in seven new States.The objective will be to double the number of milk animals now coveredunder the program. Each program will be established along commercial lineswith the ultimate aim of producer ownership of the processing facilitiesthrough cooperative unions patterned after the AMUL model (para 57). Asignificant feature of India's Fifth Five-Year Plan is the developmentof a National Milk Grid, the foundations of which have been developedduring Phase I of Operation Flood. During Phase II a coordinated systemof milk supply will be developed which will link together not only the
ANNEX 1Page 19
large centers of population but also about 10 of the important smallercities in the ccuntry. The system will provide for a more even distributionof milk by channelling it from surplus areas to high demand centers. Itwill also encourage milk production since farmers will be assured fairand stable prices for all the milk they can produce. Thus the enormousgap between milk supply and demand will be lessened.
38. Dairy development programs under the Fifth Plan emphasize breeding,feeding and disease control. Crossbreeding in suitable areas will bepromoted (the Plan envisages the mating of 8 million cows). Green fodderproduction will be increased with emphasis on fodder extension programsas well as production and distribution of the most productive foragespecies. Also, more emphasis will be given to increasing the supply ofconcentrate feeds to ensure that the high level of milk production expectedfrom cross-breeding and buffalo breeding programs will be sustained. Inthis connection the efficiency and output of existing feed plants willbe improved and new plants will be established where required. The newmills will be owned and managed by the proposed cooperative dairy unions.
39. Most of the funds fcr dairy development under the Fifth Five-YearPlan will come from local soux,ces, GOI will continue to receive significantcontributions from multilateral and bilateral sources. The WFP willcontinue to support Operation Flood through contributions of skim milkpowder and butter oil. Also, for the first time, the Bank Group will providesupport to this sub-sector. In addition it is proposed that some IDA fundsfor village dairy development will be provided under the Drought Prone AreasProject. Bilateral aid is expected to be mainly in the form of technicalassistance with the main contribution coming from Denmark, Australia and NewZealand.
40. Role of NDDB and IDC. These organizations, both of which arelocated in Gujarat State (NDDB in Anand and IDC in Baroda) have closeworking relationships one with the other and with AMUL. Both have a largedegree of autonomy and their participation in any and all aspects of dairydevelopment is restricted only by the agreed division of responsibilitybetween them with respect to technical (NDDB) and financial (IDC) matters.Over the years NDDB has developed a competent, well trained, productivestaff with broad expertise and experience which allows it to undertakevirtually any endeavor in the field of dairy development. NDDB currentlyoffers a full consultancy service in dairy development to State Governmentswhich includes siting, planning, construction and equipping of processingplants, as well as the training of plant personnel. It also includesprovision of "spearhead teams" to help organize village cooperatives andform these into viable unions. The training of locally recruited "spearheadteams" at Anand is provided as well. In short, NDDB is capable of undertakingthe complete organization of AMnUL units on a turn-key basis and in thiscontext, NDDB is expected to play a leading role in dairy development programthroughout India. However, its capacity is not unlimited and in order todo this at the rate envisaged in the upcoming Plan, NDDB will need to add anumber of high level, experienced technical personnel to its staff.
ANNEX 1Page 20
G. Conclusion
41. W4hile it is clear that a dramatic increase in milk productionis needed in India, it is equally clear that at present the basic resourcesrequired to bring about this increase are limited; e.g. there are relativelyfew dairy animals with the genetic potential for high milk production,feed supplies are critically short, trained and experienced personnel arebelow requirements, research information is lacking, and the extensionservice is largely ineffective. GOI is cognizant of these problems and in itsfuture plans for dairy development include steps to eliminate or reduce theseliniting factors. Marketing improvements are also required. The villagefarmer has little incentive to produce milk for the market because milkcollection at the village level is frequently poorly organized and is oftencontrolled by influential midclemen. Furthermore, the processing plans tendto set retail milk prices too low relative to production costs. The KairaDistrict Cooperative Milk Producers Union Ltd (A.MUL) in Gujarat State hassuccessfully dlemonstrated that these problems can be overcome and that dairy-ing can be made economically attractive to the small farmer. In view ofthis experience Government is encouraging the setting up of public sectormilk producer cooperatives based on the AMUL model as the basic approach toincreased milk output. This approach is the most promising. Its successdepends in large part upon the provision of competent well trained leadershipto work closely with, and to win the confidence of, the villager.
ANNEX 2Page 1
INDIA
KARNATAKA DAIRY DEVELOPMENT PROJECT
A. Agricultural Cooperatives
Karnataka State
1. The Cooperative movement in Karnataka State dates from the beginningof this century. Coverage extends to 99% of the villages but to less than50% of the rural population. Some 19,000 cooperative societies, mostlyagricultural credit societies, arz registered and though the cooperativemovement and experience in Karnataka has been better than in many other partsof India, State officials estimate that only about 40% of the registeredcooperatives are functioning effectively. Government, commercial banks,and others are making strong efforts to rehabilitate and strengthen thecooperatives; small societies are being merged, defunct societies arebeing liquidated, Government is providing capital, commercial banks are parti-cipating in credit (Annex 3, para E), and paid qualified secretaries(managers) are being employed by the societies. About 7,000 primary socie-ties affiliated with 19 district cooperative central banks provi,ie short- andmedium-term credit to the villages (Annex 3, para 13).
2. Cooperatives come under the State Department of Cooperation, ofwhich the Registrar of Cooperative Societies is the statutory administra-tive head. The Registrar's functions include registration, developmentof cooperatives, training, extension services, audit and inspection;he is also the Chief Marketing Officer, Controller of Weights and Measures,and Registrar General of Money Lenders. Close to 2,000 professionalstaff work in the Registrar's office, most of them in the field as deputyand assistant registrars, auditors, inspectors and extension officers.
3. The Registrar of Cooperatives estimates that about 400 activesocieties exist within the Project area; approximately 40% are milk producers'cooperatives and would come into the Project. The rest -- generally creditsocieties -- could be a nucleus for new milk production cells.
4. Karnataka State has experience with dairy production cooperatives.The Mallur Milk Producers Cooperative (33 miles west of Bangalore) illustratesthe type of village cooperative that would be set up under the Project. Itwas organized in 1965 with 76 members and has now 568 -- membership acceler-ated in 1968 when a commercial bank provided a line of credit. This, togetherwith other funds from the Bangalore dairy plant and the District Cooperativebank, serve some 2,000 people or about 500 families. The cattle populationis 815, of which 43 are indigenous cows, 489 crossbred cows and 101 milk-ing buffaloes. The balance of stock is bullocks and young animals. Thesocieties resources and investments together with the sources of originalfinancing are as follows:
ANNEX 2Page Z
Loan funds (originalResources and Investments Rs amounts) obtained from: Rs
Paidup Capital 4,570 Bangalore dairy plant 30,000
Cash 250,030 District Co-op Bank 12,000
Co-op Building and Site 15,000 Canara Bank 218,245
Health Clinic 10,000(Society jointly guarantees
School Building 12,000 these loans to members andhas had only two defaults}
Furniture and other 4,000
The Society employs one full time secretary who receives Rs 145 per monthand four part-time workers who each receive Rs 75 per month. Its expensesare covered principally by a spread of three paisas per liter of milk sold tothe Bangalore dairy plant. It also has some income from an interest spreadof about 2% from credit funds on-lent to members, enabling the Co-op toearn a modest annual profit.
5. Several significant features of the Mallur Co-op experience mustbe rated. Before the Co-op there was no crossbred cows (only 200 buffaloes),no health clinic, no school, no savings, no extension services, and thechief source of credit was the private money-lender. During the past fiveyears, the Co-op has built its own milk collection center from its earnings,supports a health clinic (staffed by a doctor and two nurses) and a school,and accumulates cash savings twice monthly in a nearby commercial bank1/.In summary, the social and economic benefits from a crossbred dairy productionprogram are manifold.
6. Reference should also be made to the Bangalore Dairy Milk ProducersCooperative Societies Union, the only Union operating in the State.Operations began in 1967. Its jurisdiction extends to four districts,Bangalore, Tumkur, Mandya and Kolar. It operates 13 milk routes collectingabout 25,000 1 of milk daily from about 135 village milk producers' societies.The milk is sold to Bangalore dairy plant. The Union provides milk testingequipment, veterinary medicines, food and milk cans to the Societies.Furthermore, it pays 45 Society secretaries out of one paisa per liter ofmilk delivered to the Bangalore dairy plant. Eighty percent of the Union'spaidup capital stock (Rs 443,0100) is held by Government.
1/ The Bangalore dairy plant pays the Co-op twice a week. The Co-op inturn deposits each member's milk sale proceeds to his respective accounts,regardless of the amount, in the nearby Canara branch bank. Depositsrange from Rs 5 to 400 and average about Rs 50 per milk producer.
ANNEX 2Page 3
B. The AMUL Story
7. The well known AMUL story 1/ is the history of 25 years(its silver jubilee was celebrated in 1971) of growing pains, progressand achievement, experienced by small cultivators, landless farmers andeven agricultural laborers in the Kaira district, Gujarat State. Thecore of AMUL's success was the organizing of thousands of small cultivators,each cultivating an average of three acres, into hundreds of villagecooperative milk producer societies which, in turn, were federated intoa union of societies known as the Kaira District Cooperative Milk Pro-ducers' Union Ltd., Anand. The term "AMUL" is an abbreviation of theUnion's judicial name and means Anand Milk Union Ltd. In the Sanskritlanguage it means priceless and is used as the trade name for all uiilkproducts sold by the Union.
8. The Union was started in 1946 with two village milk producers'societies. Its conception was the answer to a period of strife when thefarmers rebelled (actually went on strike for 15 days) against unfairprices for their milk that went to the Bombay market through milk con-tractors. Appealing to a dedicated public leader, they were persuaded tosolve their problem by organizing themselves in cooperatives. From ahandful of producers in two v.llage societies, producing about 250 1 ofmilk a day, the movement grew to where 432 members were producing 5,000 1a day in 1948. But this rapid growth brought problems. By the early50's farmer-members of the Union were confronted with flush winter monthsof milk surpluses that the urban markets of Bombay and Ahmedabad couldnot absorb. The answer was to set up a plant to process the extra milkinto such products as canned butter, ghee and milk powder. With finan-cial assistance from UNICEF and New Zealand Government and Technicalassistance from FAO, a milk processing plant was opened in 1955. Thisgave milk producers another boost and the Union organized many morevillage cooperatives. The next decade 1955-66 witnessed rapid expansionof the industry. More processing facilities were constructed, productmix was broadened, and milk production increased about five times. Froma small beginning of less than 100,000 1 collected in the first year,the Union today is collecting about 150 million 1 a year. Of furtherinterest is the catalytic effect that AMUL has had on dairy developmentin other districts. Eight other districts in Gujarat State have coopera-tive milk producers' unions which together with the Kaira district formedthe Federation of Gujarat Milk Producers' Unions in the latter part of1973. The long-time and dynamic leader of AMUL, Dr. V. Kurien, became theManaging Director of the new Federation.
1/ Also see IBRD report on the Survey of Successful Experiences in assist-ing the Smallholder Livestock Producer dated December 1973 by Dr. E.McCaully (Consultant).
ANNEX 2Page 4
9. Several unique features contributing to the success of the AMULpattern stand out. Its birth was based on self-help; its motivation stemmedfrom overcoming problems which were not minimal during its early history.Farmers needed to be convinced to organize themselves into cooperatives;financial'resources were meager and funds had to be found to establishproper milk collection facilities and to pay producers cash daily for theirmilk, and the vested interests of private milk contractors and theirvillage associates had to be replaced. The uniqueness of AMUL lies in itsability to provide numerous economic and social benefits to thousands ofsmall farmers (average landholdings are about 3 ac per family). Some ofthe more significant features include: (a) technical services on animalhusbandry and cropping programs (growing lucerne for green fodder); (b) freeand quickly available (even by telephone) veterinary health and AI services;(c) concentrate feed; (d) seed and vegetative cuttings; (e) training programsfor men and women; (f) continuous supervision of the village cooperativesand quarterly audit; payment every 10 days for milk based on a sliding scalefor butter fat and solids not fat content; (g) startup equipment for eachsociety -- butter fat testing equipment, and chemicals and milk cans; and(h) organizing and contracting for transport of milk from the villages toAMUL. Many societies use surplus earnings for community improvements suchas schools, health clinics, libraries, roads, water supplies, and youth centers.
10. Today, the AMUL system is based on some 785 village cooperativeswith total membership of 225,000 individual milk producers, all affiliatedwith the Union. In its last financial year, 1972-73, it had a businessturnover of about Rs 415 million (US$52 m). The Union returns a patronagerefund annually in cash to each society. A society makes about Rs 10 perRs 100 of business, or net profit of Rs 20-30,000 yearly. Its net earningsare distributed first as follows:
25% to reserve9% as dividend of share capital2% to an education fund maintained by the Union.
The balance is distributed as follows:
65% to producers as a bonus10% to village charity fund10% to cattle relief fund10% to co-op propaganda5% to staff bonus.
11. The AMUL experience was achieved over a span of about 25 yearswith substantial bilateral financial and technical assistance (UNICEF,New Zealand Government, FAG, WFP). It is, a story in which a Cooperativeproved to be an effective agency for rural development. This pattern canbe followed elsewhere in India and, in particular, in Karnataka under theproposed Project.
ANNEX 3Page 1
INDIA
KARNATAKA DAIRY DEVELOPMENT PROJECT
Agricultural Credit Situation
1. This Annex updates information on the agricultural credit situationin Karnataka State obtained in connection with the appraisal of two on-goingIDA credit projects. 1/
A. Cooperative Banks
2. There are two separate cooperative banking systems in KarnatakaState -- The Karnataka State Cooperative Land Development Bank which provideslong-term credit for development purposes and the Karnataka State Coopera-tive Bank which provides short-term loans for production purposes andmedium-term loans up to five years. Both come under the aegis of theCommissioner of Cooperatives and the Registrar of Cooperatives.
Karnataka State Cooperative Land Development Bank
3. The Karnataka State Cooperative Land Development Bank system (LDB)is a federation of 175 Primary Land Development Banks (PLDBs), one foreach taluk. 2/ LDB headquarters are at Bangalore but it is decentralizedthrough 19 district branch offices, one for each district. Established in1929, its main emphasis until 1965 was on providing debt redemption loansto farmers. The character of LDB has changed considerably since 1965 andloans are now given mostly for development purposes, mainly irrigation wells,pump sets and land reclamation. Its annual lending has increased steadily,reaching Rs 16 crores (US$20 m) in 1972-73 from Rs 6.4 crores (US$8 m) in1968-69. While its loan portfolio increased from Rs 31 crores (US$39 m) toRs 61 crores (US$76 m). Principal sources of LDB system funds are paid-upcapital, reserves and issuance of debentures. Share capital is contributedby the PLDB's (at a rate of 5% of borrowings from LDB) and the State government.As of June 30, 1973, paid-up capital was Rs 6.8 crores (US$8.5 m) (about
1/ Mysore Agricultural Credit Project, IDA Credit 278-IN of November 30, 1971;Mysore Agricultural Wholesale Markets Project, credit of March 7, 1973.
2/ Taluk is a political subdivision within a district.
ANNEX 3Page 2
equally divided between the PLDBs and the State) 1/; reserves and undistributedprofits Rs 1.9 crores (US$2.4 m); and issued debentures Rs 70 crores (US$88m). Net earnings have been improving in recent years, rising from Rs 1.7million (US$212,000) in 1969-70 to Rs 4.8 million (US$600,000) in 1972-73.
4. Recent improvements of the financial and management structuresof the LDB system are due largely to certain requirements stipulated inthe Mysore Agricultural Credit Project (Credit 278-IN). Among these arethat no PLDB would be eligible to participate in the Project if its over-due loans exceed 25% of demand. Beginning with an initial 50 PLDBs con-sidered acceptable at the time of Grey Cover Report, the mission was informedby ARC officials that 110 Banks have now met this criteria, 90 Banks havingreduced their overdue loans to not exceeding 25% of demand and 20 Bankshaving received the required percentage of collection capital contributionfrom GOK through Karnataka State Co-operative Land Development Bank. Anotherrequirement stressed that LDB's management should be strengthened by theaddition of two experienced credit specialists, that LDB branch officesshould be reorganized to maintain effective supervision over the PLDBs, andthat proper appraisal and lending procedures based on development criteriarather than value of collateral should be introduced. ARC has assisted inthis work through review and inspection of the PLDBs, training programs andseminars for management and technical personnel.
Karnataka State Cooperative Bank
5. The Karnataka State Cooperative Bank system was in 1915, has a three-tier structure, based on some 14,000 primary cooperative societies at thebase, 19 district cooperative central (union) banks at the secondary level,and an apex bank at State level. About 70% of the primary societies aretermed agricultural, the other 30% include consumer, marketing and smallindustrial societies. The primary societies hold share capital (10% ofborrowings) in the District banks which in turn hold share capital (20%of borrowings) in the apex bank. Central and State governments providesubstantial financial assistance by subsidies, placing long-term depositseither interest free or carrying nominal interest with the cooperatives,contributing to reserves and to a so-called stabilization fund for convert-ing uncollectable (due to natural calamities like floods and droughts) short-term credit into medium-term credit. The financial position of the 19 dis-trict banks and the State apex bank at the end of June 30, 1973 is shownin the following summary:
1/ State government has contributed about Rs 2.7 crores (US 3.4 m) duringthe past two years. The share capital was in turn transferred to thePLDBs to rehabilitate the weaker ones and enable them to make loansunder the Mysore Agricultural Credit Project, Credit 278-IN.
ANNEX 3Page 3
District Banks Apex Bank-------(Rs million)-------
Cash n.a. 9Investments n.a. 79Loans and advances 749 385Borrowings 359 212Deposits 419 177Paid-up Share Capital 131 34
Government Cooperatives (46) (12)Reserves 45 45Working Capital 935 474
The Government holds 35% of the paidup share capital stock in the coopera-tive banking system.
6. The apex bank's outstanding loan portfolio is about 40%short-term, 27% medium-term, 30% cash-credits (a form of revolvingcredit) and 3% other. The characteristics of the loan portfolios forthe district banks are similar. However, about 80% of the medium-termcredit represents conversion 6f uncollectable short-term loans intomedium-term loans. Straight medium-term loans have been for irrigationdevelopment and purchase of bullocks.
7. The RBI annually provides 40-50% of credit funds for thecooperative banking system. Funds are granted to the apex bank atconcessional interest rates of 1.5% and 2% below the Bank rate (cur-rently 7%) for short- and long-term cre(lit, respectively. The rateto the ultimate borrower is 9.5-10%; the intermediary district banks andthe primary societies each receiving a spread of 1.5-2%. Other borrowingsby the apex bank are from the State Bank of India (15% of total in 1972-73)and ARC (5% of total in 1972-73).
8. Overall, the ratio of overdues to amounts outstanding withthe primary societies for the district banks is unsatisfactory despiteconversion of a substantial amount of short-term to medium-term. At theend of June 1973, overdues stood at about 30%, some district banks reportingas high as 47% but with two reporting under 10%. Cooperative officialsreport that the situation of overdues has improved in the last couple ofyears; management has been changed in many district banks, district staffhas been decentralized to the village level for better follow-up andsupervision of the borrowers, and banks are instituting more legal actionagainst defaulters. One of the larger banks, Mandya, has one of the betterrepayment records with its some 500 affiliated primary societies. In1972-73 it recovered 90% of demand; in the previous two years it was about80%.
9. The audit system of the Registrar of Cooperatives classifiesthe district banks as A, B and C. A "C" bank is weak and virtually non-viable.Within the Project area it is possible that some of the credit required wouldbe met by district banks, especially for short-term production credit needs,
ANNEX 3Page 4
such banks could be Mandya and Karnatak-Dharwar, both classified as A banks,but Bangalore and Tumkur banks, classified as C banks would requirefinancial consolidation and strengthening of management in order toparticipate in the Project.
B. Commercial Bank.;
10. The 1969 nationalization of commercial banks in India signi-ficantly changed their role in providing institutional rural credit. Thenumber and value of loans outstanding to the agriculture sector in theState of Karnataka almost quadrupled between June 1969 and December 1972 from39,000 to 155,000 and from B 150 million to Rs 600 million respectively.During the same period, the number of bank branch offices roughly doubled.Thus Karnataka now has about 20,000 people per office compared with 36,000people per office nationwide. The thrust of this expansion has been in therural areas, many previously without banking services.
11. At the end of 1972, agricultural lending accounted for about20% of the loan portfolios as shown below:
Loan PercentPortfolio of Total(Rs crores)
Agriculture 60 19Small scale industry and transport 45 15Retail trade, small buniness and
professional self-employed 21 6Other Sectors 191 60
Total 317 100
Two channels are used to finance farmers: direct loans (about 75% ofcredit extended) and indirect loans through village cooperatives (25%). Theindirect lending is expected to increase as the banks gain experience anddevelop more technical expertise in lending to cooperatives (para 8). Creditassistance to the small and marginal farmers and agricultural laborers isalso increasing through various mechanisms (para 22).
12. Karnataka State now has 16 nationally-owned banks, three private-ly-owned banks and two foreign banks. Project participation is expectedfrom three of the major national banks, namely: State Bank of Karnataka,Syndicate Bank and Canara Bank. Together they provide banking servicesthrough about 800 offices distributed over the entire State. The StateBank of Karnataka is one of the associates forming the State Bank of IndiaGroup, established in 1955 by an Act of Parliament.
ANNEX 3Page 5
13. After the nationalization of banks, the Reserve Bank o: India(RBI) initiated the Lead Bank Scheme. Certain banks were designated asLead banks and charged with assessing local resources and credit needs,mobilizing capital, and improving the supply of rural credit on a rationaland productive basis. The scheme is innovative, stimulating the banks totry various approaches but, above all, to break away from traditional lendingpractices which tended to constrict the flow of finance to the rural sector.A close rapport has been established between the Karnataka Government and thecommercial banks. A high level study groupewith the Development Commission-er as Chairman and bank representatives as members, periodically reviewslending programs to remove "bottlenecks" hirdering the free flow of finance.The State Finance Minister regularly meets uith the Chairmen and ManagingDirectors of commercial banks. Similar committees operate in each districtwith the Deputy District Commissioner serving as Chairman. Lending terms ofthe commercial banks are related to the purpose of the credit and projectedrepayability of the project being financed. Prevailing interest rates foragricultural advances to small farmers holding up to 2 ha are 8-1/2%-9-1/2%per annum which are in line with IDA financed Agricultural Credit Projectsfor which funds are now received from the Agricultural Refinance Corporationat 7% and on-lent at 9.5%.
14. Lead banks within the Project area are the State Bank of Karnataka(Mysore, Mandya and Tumkur districts), the Canara bank (Bangalore, Kolar,Chickmagalur, Coorg and Ilassan districts) and the Syndicate bank (Dharwardistrict). However, lead banks are not the only banking instituticins in adistrict; other major and minor banks are also represented. In particular,the Project area contains a good mix of banks.
15. To better serve the credit needs of the rural sector, the StateBank of Karnataka has established seven Agricultural Development Branch banks(three more proposed within the next six months), staffed with a manager, atechnical officer, two field officers, an accountant and six clerks. Themanager and the technical and field officers are agriculturists trained inappraisal work and project supervision.
16. Another significant involvement of the commercial banks inrural credit results from Government policy of assigning weak primaryagricultural credit societies to the banks. The banks are required towork closely with each society to achieve financial discipline in itscredit operations. As of June 30, 1973, nearly 1,000 societies wereallotted to 12 commercial banks in seven districts of Mysore. Thebanks are functioning in about 75% of the societies. The allocationto the three lead banks is: State Bank of Karnataka, 421; Canara bank, 230;and Syndicate Bank, 92. The banks appoint the Secretary in consultationwith the Registrar of Cooperatives and share equally in payment of hissalary with the State government for the first three years. Thereafter,the society is expected to pay his salary (which is only Rs 100-150 permonth). In general, the banks expressed satisfaction with this responsi-bility. Certainly, it has resulted in a much improved repayment record bysome primary societies, one bank reporting 80% (drought year) to nearly 100%.
ANNEX 3Page 6
17. In summary, the Lead banks are financially sound, are expandingtheir resources, principally from growing deposits (15-20% in 1972-73),earn a reasonable margin of profit, are increasing their agricultural creditstaff at state and branch levels, and trying to develop a grass-rootsorganization with requisite technical competence.
C. Agricultural Refinance >orporation (ARC)
18. ARC is well known to the Bank Group, being the intermediaryrefinancing channel for the several IBRD/IDA credit projects. 1/
19. It was established in 1963 as a subsidiary of RBI to provide asupplemental source of medium- and long-term finance for agricultural creditinstitutions and to guide them towards a development-oriented approach intheir operations. In support of the latter objective, ARC sponsorsorientation and training programs for management and technical staff offirancial institutions, helps strengthen the management and financialoperations of banks, especially the land development banks and, with theexpansion of its own technical division, is increasingly assisting financinginstitutions in appraising the economic and technical feasibility ofdevelopment schemes as well as their supervision.
20. During its first ten years of operation, ARC disbursed Rs 219crores (US$274 m) against a total commitment of Rs 501 crores (US$626 m).About 90% of its refinance assistance has been for minor irrigation(78%) and land development schemes (12%). Other minor lending includes farmmechanization, plantation and horticulture, poultry, fishery, dairy andstorage facilities and market yards. About 90% of ARC's refinance assistanceso far has been disbursed through LDBs, 5% through State cooperative banks,and 5% through commercial banks. Future disbursements are expected to showa higher participation by commercial banks.
21. Until recently the spread between ARC's borrowings and lendingrates sufficient to meet expenses and, after allocations to special reserveand dividend payments, to show a small profit of Rs 0.37 crores (US$463,000)in 1972/73. Effective June 25, 1973, the interest rate to borrowinginstitutions was increased from 6.5% to 7% per annum. This higher spreadshould enable ARC to improve its appraisal capabilities to include economicfeasibility. ARC is in good financial condition, its equity position isunimpaired by losses, and its assets in GOI securities and debentures ofland development banks, are guaranteed in principal and interest by GOI andState Governments.
1/ Full details of ARC's organization and financial operations are given inAnnex 4 of the Uttar Pradesh Agricultural Credit Appraisal ReportNo. 107a-IN, April 12, 1973. A full appraisal of ARC is now underway.
ANNEX 3Page 7
D. Special Agricultural Crttdit Schemes
22. Two other rural credit schemes have recently been designed to focuson the needs of the small cultivator and agricultural laborer. They arethe Small Farmers Development Agency (SFDA) and The Marginal Farmers andAgricultural Laborers Agency (MPALA). 1/ These schemes, which beganfunctioning in 1971-72, gained momentum in 1972-73 and GOI has decided tocontinue them until 1975-76. State and Central Cooperative banks, commercialbanks and ARC are participating on-lending institutions with most of thefunds coming from GOI. A blend of grants and credit is used for a varietyof purposes -- purchase of milk animals, high-yielding seeds, fertilizers,pesticides and improvements stuch as irrigation facilities and land levellinz.There are four SFDAs and three MFALAs in Karnataka State; country-wide there are46 SFDAs and 41 MFALAs. During 1972-73 as compared with the preceding year,total country-wide disbursements by participating banks more than doubledfrom Rs 232 m (US$29 m) to Rs 495 m (US$59 m) under SFDA, and increased sixtimes from Rs 16 million (US$2 m) to Rs 94 million (US$12 m) under MFALA.
23. A third approach for reaching small farmers and agriculturallaborers which was recommended by the National Commission on Agriculture(December 1971) is also being tried. The Commission recognized that thepresent structure of both cooperative and commercial banks is inadequateto meet thB credit requirements of small and marginal farmers. It recommendedforming farmers' service societies that would be multi-purpose in function,namely: short-, medium- and long-term credit, supply of production inputs,supported by extension services and marketing of produce; thus in effect,providing an umbrella organization of services. Thirty-six societies areto be set up in selected lead bank districts which would also be covered bySFDA/MFALA schemes. Lead banks will take the initiative and will pay theManaging Director, who is expected to be an agriculturalist with at leastthree years' experience in cooperative lending.
24. The first such farmers' service cooperative society in Indiawas established July 1973 at Bidadi in Bangalore district under the sponsorshipof the Canara bank.
1/ Small farmer is one whose holding does not exceed 2.5 ha dry land or1.25 ha irrigated. Marginal farmer is one whose holding does notexceed 1 ha dry land or 0.4 ha irrigated. Agricultural laborer is onewho earns his income predominately as a laborer on the farms of others.
ANNEX 3SCHEDULE APage 1
INDIA
KARNATAKA DAIRY DEVELOPMENT PROJECT
Project Lending Terms and Conditions
Borrower: India, acting by its President.
Beneficiaries: Agricultural Refinance Corporation (ARC) and banksfor on-lending to dairy farmers, Karnataka DairyDevelopment Corporation (KDDC), and cooperativemilk unions; State of Karnataka for improvement offacilities of Bangalore Veterinary Vaccine Instituteand Bangalore University of Agricultural Science(Veterinary).
Relending Terms: (a) For credit for farmer's crossbred cattlepurchases, and for investment in KDDC andcooperative milk unions:
(i) From India to ARC:
(aa) For ARC refinancing up to 9 years,repayment would be at the end of 9years at 5.5 percent per annum.
(bb) For ARC refinancing for more than9 years and up to 15 years, repay-ment wouldbe at the end of 15 yearsat 6 percent per annum.
(ii) From ARC to Lending Banks: Repayable overa period of up to 15 years including upto 6 years grace, at 7 percent per annum.Grace and repayment terms would be set tocoincide with collections from ultimateborrowers by lending banks.
(iii) Lending Banks to dairy farmers: Repayableover a period of 3 to 6 years with upto 1 year grace at 9.5 percent per annum.
(iv) Lending Banks to unions: Repayable over10 years after five years grace, at9.5 percent per annum.
ANNEX 3SCHEDULE APage 2
(v) Lending Banks to KDDC: Repayable over9 years after up to 3 years grace oninterest and up to 6 years grace oncapital at 9.5 percent per annum.
ANNEX 4Page 1
INDIA
KARNATAKA DAIRY DEVELOPMENT PROJECT
A. Marketing and Procurement
I. The Milk Market in the Project Area
1. The marketing forecasts for the Milk Producers' Unions (Annex VI,Tables 12-14), reflect the basic assumption that processed milk will exclu-sively be sold in urban centers. Almost every village household has one ortwo cows, which form an integral part of the typical mixed farming systemby providing milk for the family, manure for fertilizer, and bullocks fordraft power. Because of the widespread ownership of cattle in the villageand a traditional consumer preference for fresh milk, the more expensiveprocessed milk will not substitute home-produced milk for rural consumption.
2. As elsewhere in India, the urban consumption of milk in Mysore issupplied by three sources: (i) the traditional village intermediary system,(ii) the urban dairy industry, and (iii) the cooperative sector. 1/ Underthe project, the latter would be transformed into Milk Producers' Unionsand would be organized to compete against other suppliers in capturinga dominant share of urban markets. The present market shares of these threegroups of producers are estimated in the Table below:
1/ Specialized commercial dairy farming is a fourth source of supply.It is relatively insignificant and is not expected to expand, partlybecause of the lower cost of production of smallholder-dairying underthe project.
ANNEX 4Page 2
BALANCE OF SUPPLY AND CONSUMPTIONIN THE MILKSHED AREA OF THE PROJECT - 1972 /a
Supply from Other AreasTraditional Government
Population Consumption Production system dairies(000) -------------------millions of litres ------- …
/a Estimates are based on the 1972 Livestock Census, 1972 PopulationStatistics of the Karnataka Bureau of Economics and Statistics and thefollowing parameters:
Per capitaConsumption Crossbred Native Buffalo
Bangalore 200g/day 2,000 1/yr -
Other 150g/day 1,500 1/yr - -Rural 46g/day - 300 400
It is assumed that there are no net exports from the project area.
/b Procurements of fresh milk only. Neglects skimmed milk powder whichaccounts for about 5X of Bangalore urban consumption.
The Traditional Intermediary System
3. Without an outlet to urban markets, dairying cannot become a sourceof cash income to rural smallholders. Traditionally this outlet is providedby agents who collect milk from farm to farm and sell it to private urbanvendors. This system supplies the bulk of the rural milk marketed forurban consumption in the Project area. The price paid to farmers variesfrom 50 to 80 paises per liter and the milk is sold at Rs 1.50 to 1.70 perliter in the cities. Thus, in spite of an inefficient transport andcollection system, traditional middlemen realize a high level of profit.Considering the low yields of native cows, smallholder income from the saleof surplus milk would seldom exceed Rs 100 per lactation.
ANNEX 4Page 3
The Urban Dairy Industry
4. Urban dairying in Mysore is well organized and has expandedconsiderably over the past decade, particularly in Bangalore city. Thecity industry has some of the highest yielding crossbred cows in thecountry, upgraded to the point where their production is comparable tothose of exotic breeds in their native environment. The Bangalore DairyAssociation provides strong political representation to the urban dairyindustry, and there are other such associations in the smaller urbancenters. As a result of their efforts, imported high-grade semen isprovided free to urban dairymen through the Department of Animal iHusbandry.However, no attempts are presently being made to rear male calves and asignificant loss of valuable, genetic material is being incurred.
The Cooperative Sector
5. Over the past decade, tha State Government has entered thedairy industry and established dairies which are the sole producers ofpasteurised milk in the State. There are eight such dairies in the State(see below) of which Bangalore Dairy is by far the largest.
MILK HANDLED BY DAIRIES UNDER THE MYSOREDEPARTMENT OF ANIMAL HUSBANDRY /a
Date of71/72 72/73 Commissioning---(000 litres)---
1. Hubli-Dharwar 4,099 4,666 to Dec. 19682. Gulbarga 751 1,121 Jan. 19713. Mangalore 1,172 1,709 June 19714. Bhadravathi 374 763 May 19715. Belgaum 812 1,240 Aug. 19716. Mysore 632 821 Nov. 19727. Kudige 403 592
/a Data on Bangalore Dairy follow in the next table.
The dairies are run by the Department of Animal Husbandry, except the BangaloreDairy, which is an independent government concern. To ensure supplies ofmilk for these plants the Department has fostered milk production throughvarious schemes aimed at multi-purpose village cooperative societies.There are now about 250 such cooperative societies supplying the governmentdairies; about half of them supply the Bangalore Dairy. Details on theBangalore and Mysore Dairies, which would be incorporated into the Unionsunder the Project, are as follows:
ANNEX 4Page 4
The Bangalore Dairy
6. The Bangalore Dairy was established in 1965 with equipmentfinanced in part by UNICEF. Until May 1971, it operated as a governmentdepartment. However, poor performance prompted Government investigationof its operations in 1969/70. The National Dairy Development Board (NDDB)were engaged as consultants, and on their recommendation the Dairy wasreorganized into a "government concern" responsible to a nine-member board, 1/and its management was strengthened and made more independent. Althoughthese measures helped to improve the Dairy's performance, operations arestill hampered by restrictions: the Dairy can only sell within Bangalorecity limits and it is not permitted to borrow from the commercial bankingsystem. More important is the ttcit government pressure to keep pricesdown. The nine members of the Bcard who must approve a price change are:
The Minister of Animal Husbandry - ChairmanDevelopment Commissioner - Vice ChairmanSecretary of FinanceSecretary of IndustriesSecretary of Agriculture and ForestryDirector of Animal HusbandryGeneral ManagerPresident of Bangalore Dairy Milk Producers' Cooperative UnionDirector of Bangalore Dairy
The Dairy has been selling 4.5% fat pasteurized milk at a price 20 - 40paises below the urban market price for raw milk (6% fat).
7. As shown in the table below, operations increased substantiallysince 1970-71. About half of the fresh milk procured comes from about 150Cooperatives Societies. However, the plant is still operating below itsinstalled capacity of 70,000 lit/day. With minor investments the capacityof the plant can be increased to 100,000 lit/day. No major expansionwill be needed until Year 3 of the project.
I/ The Minister of Animal Husbandry - Chairman, Development Commissioner -Vice Chairman, Secretary of Finance, Secretary of Industries, Secretaryof Agriculture and Forestry, Director of Animal Husbandry, GeneralManager, President of Bangalore Dairy Milk Producers' CooperativeUnion and Director of Bangalore Dairy.
ANNEX 4Page 5
BANGALORE DAIRY PROCUREMENT ANDPRODUCTION OF MILK AND PRODUCTS
1970/71 1971/72 1972/73 1973/74/a
PROCUREMENT
Procurement of Fresh Milk(million liters) 13.8 16.7 22.3 7.3
of which Cooperative Societies 6.4 /b' 7.8 10.2 4.2
/a In the first half of the fiscal year, which coincides with the droughtperiod. The seasonally adjusted annual figure for 1973/74 would be18.7 million liters for procurement with 11.4 million liters fromcooperatives.
/b First quarter not available; seasonally adjusted annual figure.
ANNEX 4Page 6
8. The Bangalore Dairy incurred losses of Rs 1.6 million in 1971/72
and Rs 2.4 million in 1972/73 (6.9% and 7.7% of sales respectively). Losses
are due to low procurements relative to capacity and the artificially lowselling price of milk. Like cther Government dairies, the Dairy is in a
squeeze between the need to raise procurement prices to increase suppliesand utilization of capacity, and political pressure to keep urban milk
prices down.
The Mysore Dairy
9. The Mysore Dairy was commissioned with a capacity of10,000 liters/day in November 1972, at a cost of Rs 2.4 million. Milkis being procured from 21 Village Cooperative Societies which supply
about 3,000 liters a day; a further 1,000 liters are procured from othersources. With this throughput the Dairy is operating at a loss. However,it is expected to reach full capacity by the next flush season. Assumingan overall spread of 25 paise/l between procurement and sales prices,the plant would break even at about 8,000 liters/day. Capacity would be
expanded to 50,000 liters/day by 1977 under the Project (see Annex VI,
Table 2).
II. Marketing Strategy
Procurement Prices
10. Under the project, the Milk Producers' Unions are not onlyexpected to gain a commanding share of the market in the project area but
also to export milk to other urban centers, both within and outside theState. To achieve this aim, procurement prices are critical. They must be
high enough to make it attractive to sell milk to the Unions rather thanthe traditional middlemen and, at the same time, permit the Unions to sellmilk competitively to the efficient and dynamic urban dairy industry.
11. Procurement prices will also determine, to a great extent, thesuccess of the cross-breeding program and the distribution of benefitsfrom dairying. The cost of producing milk (from the same breed of animal)varies, depending upon the smallholder's access to grazing lands andagricultural byproducts used as feed, as well as his access to market outletsfor these feeds. Although on average the smallholders' cost of producinga liter of milk is lower than that of urban producers, the profit marginsof urban producers may remain higher in the absence of processing anddistribution costs. At the suggested procurement price of Rs 1.30/literto the Cooperative Societies (about 1.22 to the farmer) smallholders'profit margins would vary between 20 and 65 paise/liter of milk from acrossbred cow. (See Chart I below.) Under present production conditionsthe margin of the urban producer varies from 50 - 80 paises liter of milk.Unless the profit margins of rural smallholders can reach the profit marginsin the city it will remain profitable for the rural producer to sell his
ANNEXPage 7
CHART I
TYPICAL FARM COSTS PER LITER OF MILK -
Rs.1.22 Procument Price.
Rs. 1.00
Rs.0.5G
Smaliholder 21 Smaliholder 3/ Smallholder Landless Farmer 'i Landless Farmer-Roughage free Roughage free Roughage free Buys Roughage Buys RoughageGreen Fodder free Grows Green Fodder Buys Green Fodder Buys Green Fodder Buys Green FodderRaises cow Raises cow Raises cow Raises cow Buys cow on credit
Concentrate Feed Roughage
W Green Fodder Amortization and Interest
-/Assuming a yield of 2,150 liters/lactaton; and feeding
M, kg of concentrate/liter of milk15 kg of green fodder/day6 kg of roughage/day
I2
lnvestment in raising a crossbred cow is estimated at 800, to amortized over 5 years.
3/Green fodder valued at 3 paises/kg.
4/ Green fodder valued at 5 paises/kg.
51Roughage valued at 10 paises/kg.
6/Cow purchased at Rs.2,500, and amortized over 5 years. The city producer faces similarcosts, plus labor and rent; but his selling price is upwards of Rs./ 1.50 liter.
World Bank-8518
ANNEX 4Page 8
best animals to city producers, 1/ thereby permanently impoverishing thegenetic stock of the village herd. Rural smallholders would also be unableto compete with urban dairymen in the market for high grade crossbredsfrom breeding places outside the project area. Thus the present publicsector policy of keeping the dairy price at a substantial discount belowthe market price is counter-productive to fostering rural production.
12. Any cross-breeding program to increase village milk productionwill have a long gestation period. Production will not increase significantlyuntil the fifth year when the first cross-bred heifers are ready to calve.Given these above cost conditions, the displacement of urban dairying willat best take a long time. At present, consumer preference is for fresh ratherthan pasteurized milk. Extra costs of producing raw milk in the city will,for the time being, be more than offset by the Union Dairies transport,processing, and distribution costs. The displacement of urban dairying willbe conditional on:
(a) massive increase in Union supplies which, by keeping urbanprices down and eliminating the local cartel monopoly ofurban dairymen, will decrease the urban profit margins;
(b) acquisition of consumer preference for pasteurized milk;
(c) development of a low-cost transport process and distributionsystem by the Unions;
(d) increasing milk yields in rural areas, reducing the unit costof production:
(e) increasing costs of city producers as rents, labor, and feedcosts increase relative to the costs of rural producers, whowould be encouraged to retain the green feed and roughagewhich they presently sell to the city producers.
13. Diverting the growth of milk production from relatively large-scaleurban producers to rural smallholders will contribute to a more equal dis-tribution of income in the project area. However, even at the villagelevel the procurement price will influence the distribution of benefits.Landless and marginal farmers who cannot grow green fodder and who must buyroughage face higher costs than smallholders with viable farms. Thus, if
dairying is to be profitable to this poorest segment of the rural population,the procurement price should allow a profit margin to them as well. FromChart I, it appears that at the Rs 1.30 procurement price, a landlessfarmer, who buys roughage and green fodder, can earn a profit of about
1/ Even in AMUL, the sale of the highest yielding buffaloes to cityproducers remains an obstacle to the Union's program for the buffaloesgenetic improvement.
ANNEX 4Page 9
20 paise/liter on purchased crossbreds. But the same farmer may have noincentive to improve the native cow and/or raise a crossbred calf byimproved feeding during a relatively long gestation period.
14. These conclusions seem to be corroborated by the experience ofBhahtalli village, under the Intensive Cattle Development Project inBangalore District (see Table below).
/aMILK STOCK HOLDING BY FARM SIZE IN BHAKTARHALLI VILLAGE-INTENSIVE CATTLE DEVELOPMENT PROJECT BANGALORE DISTRICT
% of Cows per Crossbred cows Native cowshouseholds family per family per family
Landless 21 0.57 0.57 0
0-2 acres 18 0.54 0.24 0.30
2-3 acres 17 0.64 0.30 0.34
3-5 acres 21 1.23 1.00 0.23
5-10 acres 17 1.31 1.00 0.31
10-20 acres 5 2.69 2.38 0.31
20 acres and above 1 8.50 8.50 0
100
/a Data include buffaloes and bullocks.
While landed households on the average keep one native cow (which iskept for breeding native draft animals as well as crossbreeding) thelandless keep only crossbreds. There is a higher concentration of cross-breds/household for the landless than for households up to 3 acres, indi-cating that the landless have fewer earning opportunities and have takenup dairying as a main source of cash income. There is a strong correlationbetween the size of holding and the number of crossbreds per holding, showingthat larger farmers are likely to derive higher incremental incomes fromthe project than smaller farmers. Calf raising grants and subsidizedcredit (through Small and Marginal Farmers' Agencies) should principallybenefit landless and marginal farmers to offset divergencies in costconditions that reflect land ownership rather than differences in economicscarcity.
ANNEX 4Page 10
Milk Collection
15. Milk collection will be carried out by contracted trucks andorganized by the Union's procurement officer. Village cooperatives willbe organized along truck routes covering 12 or 13 villages twice a day.A route becomes financially viable once collection exceeds 2,000 liters/route. Milk collections from newly formed ,ocieties would be too low tomeet this cost, and for two years, transporc costs will be borne by agovernment grant as part of the startup costs of the cooperative societiesThereafter, transport cost will be covered by a charge of 5 paises/litercollected by the Union.
Product Mix
16. During the gestation period of the crossbreeding program, urbanmilk shortages will persist in the project area. During this period,concentration on fluid milk sales will help the Unions increase theirmarket share of the urban milk market in the State, which should be theirprimary objective. However, as the crossbreeding program gets rolling,the seasonality of supply and the saturation of local demand call fordiversification into processed milk products. Skimmed milk powder produc-tion would start in the sixth year (see Annex 6) and would help to "store"milk, equalizing its availability between the flush and lean season. Insales projections it is assumed that about 20% of milk procurements wouldbe processed into higher profit margin products. The market study recom-mended under the Project (Terms of Reference, para 20) will recommend theproduct mix and the final phasing and composition of related investments.
Brand Differentiation and Consumer Benefits
17. By following a policy of increased product differentiation, theDairies would be in a position to satisfy different segments of the marketat different costs, earn higher profit margins, and spread the consumptionbenefits to the poorest segments of the population. The marketing strategyof the Baroda Union Dairy in Gujarat, which commands about 70% of theBaroda market, provides a case study in successful product differentiation.
t~) For the higher income segment, milk is sold in tetrapacksat about 2 Rs/lit, at vending places where refrigerationis available;
(b) for middle income groups, 3% fat-toned milk sells at 1 Rs/litat a recently irstalled bulk-vending machine. The same milksells for Rs 1.10/lit at the 200 dairy booths operated by theDairy. (The price of bottled whole-milk at vending booths isabout Rs 1.60/lit);
ANNEX 4Page 11
(c) for the poorest income segment, vegetable extended milk,fortified with soybeans, is sold at 95 paise/lit. (Thebrand name translates into "milk-whitener" taking intoaccount that the poorest mainly consume milk by mixingit with tea and coffee.)
18. The Bangalore Dairy sells almost exclusively bottled 4.5% fatmilk, (see Table 3). Because of problems in controlling adulteration,production of doubletoned milk (1.5% fat), which used to sell at adiscount of 30 paise/lit, has ceased, except for institutional clients.The Dairy produces a limited amount of a fortified milk brand ("Miltone")aimed at the poorer income segments, selling at Rs 1.10/lit.
Distribution
19. The recommended marketing study (para 20) would investigatefeasibility of increased brand differentiation, and related innovationsin packaging and distribution. Bulk vending is expected to remain thepredominant form of retailing pasteurized and chilled milk. It is,therefore, proposed that under the project, milk would be sold at unionowned booths from 40 liter aluminum cans. Bottled milk is the cheapestform of packaging and offers reasonable assurance against spoilage andadulteration. The cost of bottling is 4.5 paise per 1/2 1 bottle; prepaidor heat-sealed polybags (sackets) cost 7.1 paise/1/2. The market forbottled milk under the project has been estimated between 25 and 50% oftotal urban demand in each district. The investment projections providesufficient funds for either bottle or sacket filling equipment. A limitednumber of bulk dispensing machines of the type recommended by NDDB wouldbe financed under the project. Their wider adoption would depend uponexperience under local conditions with regard to daily maintenance andcleaning and protection against adulteration.
B. Terms of Reference for Marketing Study
20. The study's aim is to assess the demand and supply of milk andmilk products in order to formulate an investment and market strategy forUnion Dairies under the Project. The study should recommend the number,location, capacity and phasing of Union Dairies in the context of boththe State and national milk grid. The following points should be included:
Milk Supply Projections
-- should be made for each district on the basis of latestavailable information such as livestock census, yieldestimates, etc., and taking into account past recordsand trends;
ANNEX 4Page 12
should separate supplies from di:'ferent groups ofproducers such. as urban produc.r , rural commercialdairies, agents for village prodtcers, and cooperativesocieties;
on the village level, should separate consumption ofmilk by the farm household Ciucluding calf rearing),locally traded productiGnc ann marketed supply;
should project separately milk procurement of theCooperative Societies under the project, consideringthe phasing of establishment of societies and theconversion (and increase) of village herds resultingfrom the project;
The projections should be made for each year for ten yearsin order to provide a basis for the planning of plantcapacity under the project takirng into account the impactof the effects of improved maniagement practices onproduction of native cows and buffaloes and the intro-duction of cross breeding programs. In the lattercontext no significant increases can be expected forat least five years.
Demand Projections
should include a breakdown of consumption by differentincome groups, with proportion of income spent on foodand milk products;
should include a breakdovn c.f consumption by differentmilk products, taking in-tc Consideration past trends,and projected househoid ivcTroes;
should estimate the gap between effective demand andsupply in all consumption centers that may be suppliedbg t.-rel '- t-.? pricing policies likelyto prevail.
The Marketing Study should analyze:
-- the choice of consumption centers to be supplied withmilk and milk products from the project area, with ananalysis of transport and distribution requirements;
ANNEX 4Page 13
-- present and projected market shares of supplier groupssuch as urban producers, rural commercial producers,agents, etc., taking into consideration the economicconditions they are likely to face (in rural and urbanareas), and justifying the market share and segmentsthat can be captured by the Union Dairies;
-- the appropriate product mix to be produced taking intoconsideration the seasonality of supply and the patternof demand by different market segments.
Processing Facilities
21. The above studies shoulcL be used to determine the optimal locationand phasing of processing capacity, with reference to both the State andNational milk grid. The analysis should show how this objective is met interms minimizing investment and processing costs (including the costs ofoperating below capacity), as well as transport and distribution costs; andin terms of the provision of balancing facilities to cope with the season-ality of supplies. Also a plan for the construction of Union feed-plants,consistent with the phasing of Unions, should be formulated.
Feed Supply Study
22. A related study should analyze tie current situation relating tothe supply demand and distribution of concimtrate and roughage feeds andprovide forecasts for future planning for project purposes.
ANNEX 4Page 14Attachment 1
INDIA
KARNATAKA DAIRY DEVELOPMENT-PROJECT
List of Equipment and Materials to be procured on the basis ofInternational and Competitive Bidding
For Dairy Processing Plants
1. Refrigerating Equipment
2. Milk Reception and Can Washing Equipment
3. Milk Pasteurization and Chilling Equipment
4. Milk Storage Tanks
5. Cheese, Ghee and Butter Production Equipment
6. Filling Equipment
7. Milk Condensing and Spray Drying Units
8. Stainless Steel Piping and Fittings
9. Chilling Center Equipment
10. Insulated Motorized Tankers
For Feed Processing Plants
11. Raw Material Hoppers, Conveyors and Grinders
12. Ground Material Hoppers, Conveyors and Mixers
13. Mixing Bins and Bagging Scales
14. Pellet Mill and Cooler
15. Dust Collection System
For Dairy Livestock Production Farms
16. Milking Units, including Coolers
ANNEX 5Page 1
INDIA
KARNATAKA DAIRY DEVELOPMENT PROJECT
A. The Village Dairy Cooperative Society
I. Essential Features of the DCS By-Laws -
1. Objectives: Enhancement of milk production through improveddairy husbandry; increased fodder production; sale of cattle feed;profitable marketing of members' milk through the Producers' Union;assistance to banks in administration of credit to members.
2. Funds: Issue of shares, deposits from members, loans,donations and entrance fees; shares for sale or exchange or transferat par value only; maximum share holding per member 1/10th of paid-upcapital or Rs ............, whichever is less; loans and deposits not toexceed 5 times the net worth. 2/
3. Membership: Only milk producers owning cows or buffaloesand selling regularly through the cooperative; at least one Rs 5 shareper member; only one vote per member irrespective of share holdings;limited liability; DCS to affiliate with the District Cooperative Bank andthe Milk Producers' Union.
4. Management: Ultimate authority in the General Body composedof all members owning shares; elected managing committee of 9 members,suitably qualified; chairman elected by the committee; fixed term ofoffice; provision for removal from office by a decision of the GeneralBody; paid secretary and helpers; regular auditing by officers of theRegistrar of Cooperatives; Registrar of cooperatives to appoint an adminis-trator in case of mismanagement.
5. Profit Allocation: After regular expenses, 25% of net incometo the Reserve Fund (at least 80% of this invested in the Union sharesfor the first 10 years); maximum dividend at 9% p.a.; of balance, atleast 60% as bonus to members and staff; any deviations from profitallocations established under the by-laws to be approved by the GeneralBody and the Registrar.
1/ Secondary to the requirements of the State Cooperative Act.
2/ Share capital plus accumulated Reserve Fund and Building Fund lessaccumulated losses.
ANNEX 5Page 2
II. Operations
6. Herd projections for typical DCS are shown separately for upgradedcrossbreds (Table la); purchased crossbreds (Table lb) and buffaloes (Tablelc). Table ld summarizes the village herd projections, estimates milk salesand consumption, fodder requirements, and the sale of animals. Cash flowprojection for a typical DCS is given in Table 3 and is based on the milkprice structure of Table 2. A typical DCS would make a surplus of aboutRs 2,000 in year 4, rising to Rs 24,000 in year 10. The 25% portion of thissurplus assigned to reserves would be held in the form of Union shares,earning a 9% dividend as well as, and more importantly, displacing Governmentequity in the Union.
B. Karnataka State and Village Statistics
7. Annex 5, Table 4 provides a breakdown of rural population inMysore together with the results from the 1972 cattle census and the 1971land survey. The actual distribution of land by size of holding withinthe State, and the same for a "typical village", are shown in Table 5.
ANNEX5Table ia
INDIA
KARNATAKA DAIRY DEVELOPMENT PROJECT
TYPICAL VILLAGE COOPERATIVE SOCIETY
Herd Pro-ections - Crossbreeding of Local Cous
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13( ------------------------------------------- Nmb e ---------erof -ead---- - ---------
1/ per capita milk toesumption is enp-ctod to grow at 5Y from a sane of 50 grams/day. Village Populatitn is aset-ed to grow at 27.@ the growth rate of the rural populotioein Lhr lool decade.
2/ green feod at 3 poises/kg, straw at xoro, and concentrates at 95 poise/kg.
AXNEX 5Table 2
2NDIA
KARNATAKA DAIRY DEVELOPMENT PROJECT
Economic Costs and Value Added per Liter of i4ilk
Paise/Liter Paise/Liter
1 Farmer Level
Feed Costs 1/ 60Amortization of Investment 10Miscellaneous 10Profit and ieserve 42
Cooperative's Average Procurement -
Price 1.22 1.22
2. Cooperative Level
Average Retention 8 8
Union's Procurement Price 1.30
3. Union Level
Transport 5Processing and Service Charge 15
20
Ex-factor ?rize of Bulk Milk 1.5
1/ Concentrate at 95p/kg includes the operating cost of feed mills,; greenfodder at 3p/kg, the market price. See Annex L Chart I for et&ils.
I-:i)IA
KARNATAKA DAIRY DEVELOPMENT PROJECT
Consolidated Income Statement and Cash-Flow of Typical .1ilk Producers' Cooperative Society
Ij Revenues minus Expenditures after Year 4. The gross profits of the typical society would be divided at the Annual General 14eeting of members as follows:first deductions are made for (a) interest on outstanding loans; (b) audit fees; (c) contribution to staff provident fund of employees; (d) bad debts, "
losses, etc. Of the remaining net profits: (a) 25%o is kept in a reserve fund; (b) dividends in shares are paid not exceeding 9% of paid up share capital;(c) other allocations, (about 15%) for social profits may be stipulated. About 65% of the remaining balance would be distributed among the membersproportional to the milk supplied by them, and the rest would go into funds related to the Society's activities. 80% of the allocation to the reserve isinvested in Union Shares.
v Milk Testing Equipment: Ro 1,200Insemination Crate: Rs 500Veterinary First Aid Kit Rs 200Office Furniture RS 300Miscellaneous RS 300
2,500
/ Salary of Staff (secretary and two helpers in the first 6 years) rent and chemicals.
INDIA
KARNATAKA DAIRY DEVELOPMENT PRO.TECT
Village Statistics
Population Rural Cattle(Source: 1971 Census) (Source 1972 Cattle Census)
1/ Soarce: State Agricu'tural Census Commissioner, Bangalore, 1973. About 88% of holdings and area under
cultivation is wholly owned and self-operated.
2/ Based on the actual distribution of holdings up to 10 acres, as in upper part of the table. On average
each household has one native cow, see Annex 5, Table 4, and Annex 4, para. 14.
3/ Fron census figures, see Annex 5, Table 4.
/ sowrn and Fallow Land, see Annex 5, Table 4.
ANNEX 6Page 1
INDIA
KARNATAKA DAIRY DEVELOPMENT PROJECT
Milk Prolucers' Union
A. Essential Features of the Union By-Laws
1. Objectives: Purchase, process, distribute or sell milk andmilk products, cattle feed, fodder, AI and Veterinary Services, cattleinsurance, etc.; organize new DCS and supervise them; take over theirmanagement if appointed administrator by the Registrar.
2. Funds: Entrance fees, shares, deposits, loans, Governmentand international grants and foreign collaboration; share transactionsat par value only; maximum share holding for a member 1/10th of paid-upcapital or Rs . ...., whichever is less; loans and deposits not toexceed 5 times the net worth; 2/ union could require DCSs to invest theirReserve Fund in Union shares.
3. Membership: Only DCS or milk producers' cells in othercooperative institutions; limited liability- at least one Rs 100 shareper member society.
4. Management: Ultimate authority in the General Body composedof the chairmen of the affiliated DCS; a 15 member (at least 8 electedfarmers) Board of Directors to include representatives from bankinginstitutions, Registrar, KDDC, Department of Animal Husbandry (GOK);Chairman elected by Board members, annually. Board to appoint theGeneral Manager and other staff and fix their renumeration; GeneralManager could be removed by a vote of the General Body.
5. Profit Allocation: After meeting expenses, at least 25% to theReserve Fund; maximum dividend 9% p.a. on paid up capital; dividendpayable but not distributed on DCS joint equity contributed by Govern-ment until actually purchased anid owned by DCS; such undistributeddividend used for buying out GOK equity to increase DCS joint equity;up to 80% of balance as bonus to members in proportion to milk procurement;at least 3% to research and extension fund.
1/ Secondary to the requirements of the State Cooperative Act.
2/ Share capital plus accumulated Reserve Fund and building fund lessaccumulated losses.
ANNEX 6Page 2
B. Invescments and Operations
6. Investments under the project for the expansion of the existingmilk processing plants at Bangalore and Mysore and for the new plants atllassan and Tumkur as well as the feed mills are in Tables 1 to 4. Table 5summarizes the other fixed investments for a Union. Consolidated invest-ment projections for the 4 Unions are in Tables 6-9. Income and operatingcost projections for the processing plants and the feed mills are inTables 12-16. Financial rates of return range from 15% for the new plantsto 28% for the expansion at Bangalore. For the feed mills the rates ofreturn range from 13% to 17%. Cash flow projections are shown iin Tables18-20. Repurchase of Government equity by the DCS is shown under "Transfers"in Tables 18-20. The DCS apply 25% of their own surplus to a reserve fundto be invested in Union shares. Buying out of Government equity, as wellas, repayment of equity assigned by Government, begins in year 11, GOKequity is expected to be 35%.
Total Fixed Investment 7,230 7,820 21,590 24,770 61,410 34.6
/I The existing plant of 10,000 Its/day capacity would undergo expansion in year 1, 3, 4 and 5 shile continsing operations.T2 Cost of machinery and equipment includes crating, insurance and freight to site./3 15% of total equipeent cost.74 50% of the transportoticn of milk free societies wo-ld be contracted.7; 1% on total project cost./6 On civil works, utilities and macbinery and equipment costs./ Assumed 70%, resulting fram 220% on stainlesn steel, 70% on components and refrigerating equipment and 40% on itema not eansfactered locally.
7 Physical contingencies 5%.Price oetingencie opoli ed as civil wrks., equipment and other in accordance with Bank revised interim guidelines.
/1 Ite-s considered for ICR subject to import duties,
ANNEX 6Table 3
INDIA
KARiNAlAKA )AIRY DEVELOPMENT PROJECT
Milk Processing Facilities: Tumkur, Hassan
Investment Pro-e-tions('000 Re)
Year 1/2 Year 2 /2 Year 4 L2 Year 5/2 Total Foreign Exchoege
atal Fioed Investment 5,910 14,440 6,050 9,680 36,080
/I Hassac and T-ak-r plants will be identical, all data corresponds to one plant./2 Plant wosld be built daring years 1 and 2, commence operating in year 3 and andergo expansion in years 4 and 5 while continuing operation./3 Cost oEf machinery and equipment includes crating, insurance and freight to site./4 153 of total equipment cost./5 507. of the transportetion of milk from societies would be contr-cted./6 1% on total project costs./7 On civil works, utilities and machinery and equipment costs./8 A.s.med 70%, resulting from 220% on stainless steel, 70% on camponents and refrigerating equipment and 40% on items not manufactured locally./9 Price contingencies applied as civil works, equipment and other in accordance with Bank revised interim guidelines.
/10 Iteem considered for ICB sabject to import duties.
ANbT8X 6Table 4
INDIA
KARNATARA DAIRY DEVELOFPIENT PROJECT
Feed Mill: Bangalore. Mysore, Has.as, Toskur /1
Investment Projections
Bangalore. Mysore Hasse. . TeedkurForeign Foreign
Year 1 /2 Year 2 12 Year 5 /2 Total Exchange Year 1 /2 Year 2 /2 Year 5 /2 Total EnChange--------- '0 s--_---------- -. b0 -------- ----------- '000 Rs ----------- ~-~S- %INvESTMENT ITEMS
/1 Bangalore and Mysora plants will be identical, a11 data carresponde to one plant, this also applies to Hassan and Tukur./2 Plants would be built in years I and 2, commence operating in year 3 and undergn expansion in year 5 while continuing operations./3 Cant of machinery and eqeiptent includes crating, insurance and freight to site./4 15% of total equipment cest,/5 For distribution of feed to village societies./6 On total project oost./7 on civil works, utilities and nanhinery and nqsipnent costs.T8 Assuned 60% as most of this eauipmnat is eurrently .ansfactured lncally.T! Price contingenties applied as civil workss, equipeeent and other in accordance with Bank revised interim guidelines.
/10 Iteen cnssidered for ICB and subject to teepert duty.
KARNATAKA DAIRY DEVELOPMENT PROJECTFixed Investments in Administration and Services: Projections for Ilassan and Tunkur r7ilk Producers' Unions, 400 Societies 1/
9 1 VI, TA I o, 7~~~~~~7) 5 1~~~7,7, ~~Fl '-~7<TI(2'lTOTAL 2(22< °JIll *~T7p ('<hy 1n,°r < 2<27"
UPrANI TOTAL 1<2351(2231 11(2(2 1'<P2 222 9 r7r<<
1/ See Annex 6, Table 1.2/ See Annex 6, Table 4.3/ See Annex 6, Table 5, but with 107 added in view of larger scale of operations.[/ Establishment Cost - derived from projected cash flow Annex 6, Table 18.5/ Working Capital for: milk processing Rs 390,00(1 in year 1, based on I month's turnover,
equivalent to 1/12 operating cost in year 3; fee-d mills Rs 580,000 in year 2, based on 1month's turnover equivalent to 1112 operating cost in year 1; and services Rs 220,000in year 1 as lump sum allocation.
ANNEX 6INDIA Table 7
KARNATAKA DAIRY DEVEIOPMENT PROJECT
Investment Projections, Myso Dair lilk Producers' Union - Sumary
1 n 2.n 3.' 17 ..' 7; q 7 ;r 1 77 I", I 7' 1 ^ 1
T"TT l
1'771 -~~~~~~In '7 I ~~~~I'7T 77. rn .- 1 1 1n F r' (1 r,r1_
T,T 1 1 , 1 1r __-,_
Fr- ff r ,- / {> 'T1177 , 7) ql 3117 7
CIC~1'1'T ~ 117 )Lr,1 3`C U! C )
) ITrTp,l '~~~~~Ev T .eo~In r) r -n 1r r,
T(1TA) 77?i" ,rn>( 17 11r 21 rnn C 11 C1 1I7
Tr nA 17 2/ -!7 r) r n C r l^1 11 rin
11) tVC r3T 7, 7 117 - n1 2
!YI,'T17TA CC1 771 b 27 ,P~ Cr 7
L 211 7117T 7 '7')lI 24 ' 1 Cr 111rnl7"'fY T(T7 )'r'T ^1 rr IT l17 C 11)) !) - 7Sr TOT- 3/ 1- 2n hirn'_T^O
n IIY -nrltT 7?1 4: q 0 ° )
InTC11 Cr''T7 7111 ', 7 2C1rSOQT
1)TAI 1r 117 C C C 7
Tn7TAI. 17 1734 )147 C 93
,q.n,l c,.,, 5/?n 7 t7< 0 n r! n ^o
7'))S CONET Cl '! 1 n ?1
nnI CF C r rofT 1'51 ? 44 14 C C n C 12SI'Tir)T'WT COl!T CCiCl 27? 7 C7 r1 C 01 7
T 0I 7n T1 A J l° t
T-- TAL 11 7-'n CC?y 0 11 97 C 1/17n
T?TII -In Cr)NIT 1)!rCT3n1 C. r1 nFmiyrF cnN'T 7) 1 ?4 nC T nn 11 ?7r`
"fl1C7 170)7T )i'3C 01137 -171 On n n 5Fl
To)71 117717 7r 1177 7C7 I 1171 17211 117 1n1
J L TOTAL n1 TA C°?n cOr 111 1771 7 2.-~ n7 17^
rPAr ~ ~ ~ ~ l( .)T),f ,r O s.n I-)n I. )(PP r < r r
1/ See Annex 6, Table 2.2/ See Annex 6, Table 4.3/ See Annex 6, Table 5, with 10 added in view of the larger scale of operation.
/r Establishment Cost derived from projected cash flow, Annex 6, Table 19.5/ Working Capital for: milk processing Rs 540,000 in year 1, based on 1 month's
turnover, equivalent to 1/12 operating cost in year 3; feed mills Rs 580,000 in year 2,based on 1 month's turnover, equivalent to 1/12 operating cost in year 1; and servicesRs 220,000 in year 1, as lump sum allocation.
GRAtND TOTAL 11772 235f5 -?Or) 6.? 2P 12t)52 ni <7;) 4
so.5c Ann" 6, a?lble 3.
gSa Annex 6, Table 5.J 20tablibhment Cost - derived from projected cash flow, Anne 6, Table 20./ Working Capital for: milk processing lo 1,320,000 in year 2, baed an 1 moth's turnover
equivalent to 1/12 operating coaot i year 3; feed .iLl1 Re 470,000 il year 2, based on1 mth' turnover equilvatent to 1/12 operatint cost in year 3; eVd services Rs 200,000in Year 1, as lump s? allocation.
le9INDIA
KARNATAIA DAIRY DEVELOVIENT PROJECT
eouolidated Investmnt ProdectionuZ Inilore, uIfcr. and two other Unions -
1.n 2.0 R n I. n r10 .n k.5jrt l975r0 177 V 72 in79 lIT n P
TOTI, I-
PITIK DRPOcFl;STNr 1450 1(24n -1 In 2n9rr pS7 n r 2 0173'1DHYS COtN 72' 9f'? ( 122 127 , 5-7
rRC. OtT 510 350 rqr ~ 00 l75 275 0 r'5pII' TnTAI- COMT r ThO 1 R 27P,rn n f2ll7
TOT"I_ 2npR, 2OP 1R W22 1'0?2 51(I,) n 1 711177
cFFr fl1iL 145Pn 1 0 (O n n n4rn n 2f n12HYS COrNT --- 1 r9n -1 n '0? r"1 7
It To obtain net incremental volume deduct 25.6 million liters yearly.2/ Based on the following product mix: Bottled Milk 60%; Products 20% and UnbotLled milk 20% to year 5, and then onwards, 45%, 257. and 30% respectively;
and the following prices: Bottled Milk Rs 1.5/1; Products - Butter Rs 14/kg, Ghee Rs 14/kg, Yogurt Rs 1.4/kg; and unbottled milk Rs 1.4/1.3/ Based on NDDB and Bangalore Dairy cost data.
INDIA
KARNATAKA DAIRY DEVELOPMENT PROJECT
Milk Processing Plant: Mysore
Income and Operating Cost Projections
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Years 8-20-- - - - - - - - - - - - - - - - - - - - - - - - million Its - - - - - - - - - - - - - - - - - - - - - - - - - -
NET SURPLUS (3.45) (0.43) 1.14 3.06 3.35 5.30 8.31 8.39
Rate of Return: 19%7
/1 To obtain net incremental volume deduct 1.8 million liters yearly.Li Based on the following product mix: Bottled milk 25%; Products 20% and unbottled milk 55% for years 1-4 and 15%, 20% and 65% respectively for years 5-20;
and on the following prices: Bottled Milk Rs 1.5/1; Products - Butter Rs 14/kg, Ghee Rs 14/kg, Yogurt Rs 1.4/kg; and unbottled milk Rs 1.4/1./3 Based on NDDB and Bangalore Dairy cost data.
INDIA
KARNATAKA DAIkY DEVELOPMENT ?AOJECT
Milk Processing Plants: Hassan, Tumkur /1
Income and Operating Cost Projections
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Years 7-20-… --------------------------------------- million Its ----------------------
TOTAL OPERATING COST . 18.23 35.76 63.56 99.34 112.07
NET SURPLUS 0.41 3.32 3.31 5.88 6.87
Rate of Return: 15% a z
/1 Hassan and Tumkur plants will be identical, all data corresponds to one plant. D x
/2 It is assumed that plant construction will take place during years I and 2. r
/3 Based on the following product mix: Bottled milk 15%, products 25% and unbottled milk 60% for years 1-4 and 10%, 30%, 60% respectively for year 5 onwards;and on the following prices: Bottled Milk Rs 1.5/1; Products - Butter Rs 14/kg, Ghee Rs 14/kg, Yogurt Rs 1.4/kg; and unbottled milk Rs 1.4/1.
1/ Bangalore and Mysore plants will be identical, all data corresponds to one plant. '
2/ It is assumed that plant construction will take place during years 1 and 2.3/ Based on the following typical mix of a variety of balanced formulaes,
Fend Mill Constr-cti-on bchediala Construction IEranslnn
/1 Each anion is approximately identifIed with the distrist bearinS the s-ne ns./a baned on Model oE typicel nillage coope-atine saiety, Annex 5./3 RDeic ot milk supply bhtwean fln6h and lean .easans has been assased tn decrease fram 1.4 in years 1-4 tn 1.35 in yars 5-7 and 1.3 in year 8 and aonwrds doe to introduction
of crnsskreoln and inputs.14 Preanct eilk supply to the B isting nagal-e and Mys-e plants i- aesnied tn fall geadeelly coder the central of the -i.sns in 5 and 2 yearn. -especti-ely./5 Dectrnined en basin of daily velo"es dueing flesh snth.I6 Yearly tiroughput bnc-en constant after yeat 7 as prajeet dose nnt provide far farther plansnt spnnione afte- year 5.75 Coeputed en bais of Ikg feed/2 Its nilk./8 BO-h c nions are a-ss-ed siil-r, data shown co-rrspands to one .nian.
,A A _AKA DAIT ' [)f'EIJ)P>TX F 'R1JEI I
Sources and Uses of funds, i rojections, for t e asaisre lo i1Kroducers' Union
to sa mers 2,500 2,500 2,500 2,500Government Seed Suisidies 14/ 10 40 60 100 130 130Transport Grants, / 340 1,100 1,650 2,120 1,000 670
/ See Annex 6, Table 12.3/ see Amnex 6, Table 15. 11/ for 80% of the Bangalsce Dairy, valued at Rs 14.266 tillion. Icterert nompounded3/ at 3 paises/liter of milk, at 9?7.; repayable over years 6-10.i see Amnex 6, Table 10; with 10% added to take into accoont the larger scale of operations. 12/ fcc plant expansion and distribution of dividends and bonuses to DCSs, see Anne. 6,5/ the deficit of the first four years will te financed by State Government Bylaws.&I 307 in Year 1, then at 757 compounded to Year 6 - the final project cost year, and subsequently 13/ total outstanding Stats equity at the end of ysqr 5, (R '000):
at 5% compounded. Equity contribution: 20% of fixed as etsp 10,880j/ 80o nf Fixed Investments, financed cy participating Denks and refi..nmed by ARC and IDA. 20h of DaBgnloce Dairy's
20Y of Fixed Investments; financed by State Government as equity. asets- 4 490s/ ee Amnex 6, Table 6 : comprises Milk Processing, Feed Mill, and Establishmmn. cost c/ 12 690Administratlon and Services 28,060
39/ see footnote 7 above; at 9j9i and with a 5 year grace period during which interest is a! see footnote 8capitalized, repayable over yearn 6-15. b/ see footnote 11
o/ Establishment cot inclades working capital - see Ane 6, b 6, nrdee lo nt-erestThe reserve fcnd ce the DCS's (25% of operating s-rplu., see Annex 5, Table 3) vouldbe applied to the purchase of Union shares, The averags DCS purchase commitment isestinated at Rs 2,500 in years 6-8 and Rs 5,000 thereafter. On this assumption 0(7Kwould have divested itself of its equity by year 20 (as shown above). However, Uniondividends paid to DCl's would also be used te buy oct GOK equity.
14/ the Union's share, see Asses 9, Table 1.
15/ see Annes 6, Table 6.
__~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~b 'N
INDIA
KARNATAKA DAIRY DEVELOPMENT PROJECT
Sources and Uses of PFnda. Projections for the MYore Milk Producers' Union
Transport Grants to Coop.Societies / 340 1,100 1,650 2,120 1,000 670
s/ see Annex 6, Table 13 11/ for 80% of the Mysore Dairy, valued at Rs 2.7 million. Interest compounded at
/see Annex 6, Table 15 95j%, repayable over years 6-10.
3/ at 3 paises/liter of milk. 12/ for plant expansion and distribution of dividends and bonuses to DCSs, see Annex 6,
see Annex 6, Table 10, with lO,% added to take into account the largest scale of operations. Bylaws.the deficit of the first three years will be financed b[ State Governmet 13/ total outstanding State equity at the end of yeay 5, -(Rs '000):
30% in Year 1, then at 7k7, compounded to Year 6 - the final project cost year, and subsequently Equity contribution: 207 of fixed assets- 15,550
at 5% compounded. 20% of Mysgye Dairy's
I./ 80% Fixed Investments, financed by participating Banks and refinanced by ARC and IDA. assets c/ 850
20% of Fixed Investments, financed by the State Government. Establishment Goat- 11740
5// see Annex 6, Table 7 co 9 wrises Milk Processing, Feed Mill, and Adninietration and ervfr.ea./ sbe foutnoje 7 above; at no and with a 5 year grace period during which interest is capitalized, a see footnote 8.
bi see footnote 11.ci Establishment coat includes working capital - see Amnex 6, Table 7and is an irterest..ihe reserve fund of the DCS's (25% of operating surplus, see Annex 5, Table 3) reewould be applied to the purchase of Onion shares. The average DCS purchasecommitment is estimated at Rs 2,500 in years 6-8 and Rs 5.000 thereafter. Onthis assumption GOX would have divested itself of its equity by year 20 (as shownabove). Rowever, Union dividends paid to DCS's would also be used to buy out GOKequity.
14/ the Union's shares, see Annex 9, Table 1.15/ see Annex 6, Table 7.
INDIA
KARNATAKA UAIRY DEVELOPMEST PROJECT
Sources and Uses of Fnda rMPrcjections for Ujasoa nd Tuakur Milk Producers' Unions
---------------------------------------- ----- (conetant 1973 prices, 000 Rs)…------------------------------------------1 2 7 _ i 6 8 i 10 11 12 1 14 16-20
/ see Annex 6, Table 14. 12/ for plant expansion and distribution of dividends and bonuses2/ at an operating surplus of 5 paise/liter of milk; based on the individual societies' supply projections, to DCSs, see Annex 6, Bylaws.Annex 5, Table 3. 13/ total outstanding State equity at the end of year 5, (RN '000):3/ see Annex 6, Table 16 Equity contribution: 20% of fixed assetsa 9,7705/ at 3 paisee/liter of milk. Establishment costb/ 7,910 H5/ see Annex 6, Table 10 17,680 , x5/ deficit in first three years will be financed by Government a/ see footnote 9
7/ 30% in Year 1, then at 7M% compounded to Year 6 - the final project cost year, and subsequently at 5% bI Establishment cost includes working c-pital - see Annex 6, ,., acompounded, Table 8 snd is an interest free Ioan5/ 80% of Fixed Investments, financed by psrticipeting Banks and refinanced by ARC snd IDA. The reserve fund of the DCS's (25% of operating surplus, see Annex 5,J 20% in Fixed Investments, financed by State Government as an equity contribution. Table 3) would be applied to the purchase of Union shares. The10/ see Annex 6, Table 8 : Milk Processing, Feed Mill, and Administration and Services. average DCS purchase corrmitment is estimated at Rs 2,500 in years 6-8Di see footnote 8 above, at 9j% and with a 5 year grace period during which interest is capitaliced. and Rs 5,000 thereafter. On this assumption GOK would have divested
itself of its equity by year 15 (as shown above). however, Uniondividends paid to DCS's would also be used to buy out GOK equity.
14/ the Union's share, see Annex 9, Table 1.15/ see Annex 6, Table 8.
INDIAKARNATAKA DAIRY DEVELOPMENT PROJECT
ORGANIZATION CHART-COOPERATIVE MILK PRODUCERS UNION
Board of Directo
General Manager
2/
M ilk Product Processing Plants Technical Promoting of AdministrationL Marketing Milk Feed Services Cooperatives
Animal Health Spearhead Teams Personnel
Supervision Supervision Al and Bull Farm Milk Procurement Accounting
Engineering Procurement Calf Rearing Program Feed Supply Audit
Quality Control Mixing Seed Production Program Training Finance
Spearhead Teams Publications Budget
- Marketing would be done initially by the Dairy Development Corporation C
2 Cooperative Promotion essential during starting period. Later would be phased into other departments.
Source: IDA MISSION World Bank-8247(R)
ANNEX 7Page 1
INDIA
KARNATAKA DAIRY DEVELCPMENT PROJECT
Karnataka Dairy Development Corporation
Responsibilities and Functions
1. Although the core of the Project would be the village dairycooperatives and the milk producers' Unions, a central body to coordinateand implement the several Project components is needed and would beobtained by establishing the KCarnataka Dairy Development Corporation (KDDC).The formation of corporations to coordinate development in industry andagriculture is common practice in India. They are formed under theCompanies Act of 1956. The KDDC would have multiple responsibilitiesand functions, but principally:
(a) promotion of and technical assistance to 1,800 villagemilk producers' cooperatives and four milk producers'unions that would participate in the Project;
(b) taking over and management of six farms from KarnatakaState, comprising about 5,000 ha, that would beiperated for dairying, breeding, forage and seedproduction, and applied research in forage programs,animal nutrition, and small farm management systems; and
(c) ancillary activities including: (i) procurement ofgoods financed by the Project, (ii) acting as a channelfor advancing IDA funds granted by GOI to support enlargedprograms for animal health, applied research on animalnutrition and forage production, and training for tech-nicians and farmers, and (iii) holding certain Stateproperties in trust for the milk unions, namely: theBangalore dairy plant and the new facilities to beconstructed under KDDC supervision, until the unionsare formed and evidence viability.
Further details on the Corporation's responsibilities and functions aregiven in Appendix 1.
Board of Directors
2. The powers and control of the corporation would be vested ina Board of Directors representing the several Project participants. GOIequity in KDDC would be represented by one representative each from: GOIDepartment of Animal Husbandry, NDDB, 3 Lead Banks in Karnataka, IndianInstitute of Management, University of Agricultural Sciences, Bangalore,
ANNEX 7Page 2
and 4 representatives of the Unions. GOK's equity would be representedby one representative each from: GOM Department of Animal Husbandry,Karnataka State Land Development Bank, Karnataka State Cooperative Apex Bank,Registrar of Cooperatives and 4 representatives of the Unions. The Unionswould together elect 2 representatives to the Board. As the Unions buy outGovernments' equity, elected Union representatives would replace Unionrepresentatives appointed by GOI ani GOK. Because the Board would meetonly about four times a year, and have up to 19 members, a five memberExecutive Committee could be appointed with appropriate power.
Management
3. The Corporation would be managed by a general manager andabout six assistants or deputy managers. About six divisions on aline of functions would be needed, namely: (a) Development of Corpora-tion Farms, (b) Promotion of Cooperatives, (c) Marketing and Studies,(d) Engineering, (d) Controller, and (f) Administrative. The managementlevel would be assisted by the Registrar of Cooperatives through aworking arrangement and by NDDB through a ccntract arrangement. TheRegistrar of Cooperatives would assist in the promotion, organizationand supervision of the cooperatives and would issue the Charter tolegalize them. NDDB would assist in several ways: (a) trainingspearhead teams employed by the corporation to develop cooperativesand supplying consultants to work with the teams in the field duringthe first year, (b) carrying out the feasibility studies on locationand plant design of the Unions' milk and feed processing facilitiesand supervision of construction, (c) carrying out milk supply/demandstudies and coordinating at state and national milk grid levels, and(d) conducting animal feed resource surveys. See Chart I for organizationstructure of the Corporation.
4. The Corporation's principal assets would consist of thesix State farms, excluding land which would be leased, fixed improvements,livestock and machinery to be transferred to it. The Government would con-tribute enough equity capital to give the corporation adequate borrowingpower. Lending banks require that 25% of the cost of fixed assets befinanced as equity. GOI proposed that the allocation of share capital be50. Central Government, 40% State Government and 10% cooperative milkproducers' Unions. The Bank concurs, as it is desirable that the Unionshave a share interest in the Corporation, and that provision be made toi-2crease their ownership.
Financial Operations
5. The Corporation's principal revenue would be derived fromconiercial operations of its six farms and a levy of the milk through-put of the unions. Three farms would be operated with a purebred dairyherds, the fourth with a crossbred dairy herd, and the fifth and sixthas crossbred bull rearing farms. Income would come from sales of milk,surplus heifers, bulls, seed, fodder, and AI services. The Corporationwould apply cost accounting practices to each of its farms. Financialprojections are shown in Tables 2-4.
ANNEX 7Appendix IPage 1
INDIA
KARNATAKA DAIRY DEVELOPMENT PROJECT
Functions and Responsibilities of the KarnatakaDairy Development Corpcration
The Corporation established under the Companies Act of 1956,would assist Central and State Governments in increasing the nationalsupply of dairy products. The Corporation would be empowered, but notlimited to deal with the following functions and responsibilities:
1. Overall coordination and execution of the KarnatakaState Integrated Dairy Development Project.
2. Recipient of Central and State Government equityfund, grants and other assets channeled to theProject.
3. Develop and operate six farms within the followinggeneral concept:
(a) three purebred dairy farms stocked with exoticdairy breeds; and one crossbred dairy farm;
(b) two bull breeding farms together with storagebanks for artificial insemination (AI) services;
(c) storage banks for fodder for use during acuteperiod of feed shortages in the villages:
(d) seed production schemes making the seed availablefor village farmers;
(e) applied research programs on pasture and foragemixtures, and animal nutrition;
(f) about 50 small (2.5 ha) demonstration farms(farmed by villagers) to test the economicviability of various farm management systemsincluding trials on high yielding greed feedand dry storage systems and water harvestingsystems adaptable to local farming systems; and
(g) engage consultants in tropical pasture agronomyand pasture management/utilization to assist indevelopment of the pasture programs on the MDDCfarms and to provide technical supervision of the
ANNEX 7Appendix IPage 2
program outlined in section (g) above. Terms ofreference for these consultants are attachedin Appendix II.
4. Designate milkshed areas and the location of milk producers'cooperative unions to secvice the areas.
5. Carry out feasibility, design, specifications and super-vision, and construction of new milk and feed processingfacilities and expansion of existing facilities inconsultation with NDDB.
6. Central procurement agent for goods financed by theProject.
7. Coordinate the marketing of dairy products produced underthe Project and formulation of a price policy that wouldensure an adequate return on investments at the producerlevel until the unions become incependent and can assumethis function.
8. Conduct studies to determine among other things, supply/demandsituation for milk products and for animal feed includingroughage, green fodder and concentrates, to formulate devel-opment planning and future investment strategy of the Statedairy industry.
9. Employ about four spearhead teams to assist in promoting,organizing and operating village milk producers' coopera-tives and milk producers' unions.
10. Train administrative and technical staff for the milkcooperatives and the Unions.
11. Administer Central/State Government grants needed forstart-up costs of the milk cooperatives and Unions aswell as for the calf rearing programs.
12. Oversee and pass on certain IDA funds to Instituteof Veterinary Biological Production and VeterinaryCollege Crossbred Animal Health Program.
13. Organize and guide in-service training programs forfarmers and technical personnel concerned withvillage animal husbandry and management.
14. Maintain appropriate accounts and records, applycost accounting procedures to each Corporation farm,monitor the impact of the Project on rural development,and make such reports as required by IDA.
ANNEX 7Appendix IIPage 1
INDIA
KARNATAKA DAIRC DEVELOPMENT PROJECT
Qualifications and Terms of Reference for Specialists inPasture/Forage Development and Farm Systems Studies
1. Tropical Pasture/Forage Specialist:
Qualifications: Degree in agriculture or related field with at leastfive years' experience in tropical pasture/forage agronomy. Should alsobe experienced in the design and implementation of production orientedresearch programs.
Duties and Responsibilities:
(a) He would be responsible for the pasture improvementprogram on all the Karnataka Dairy Development Corpora-tion's (KDDC) farms (which total area of about13,000 acres). The program will include irrigationand dryland pastures with particular emphasis ontropical legume establishment.
(b) Pasture conservation fodder bank/programs on all farms.
(c) Seed production and distribution.
(d) Training and demonstration programs related to theproposed milk unions technical staffs and villagecooperative farmers.
(e) In collaboration with the pasture/animal productionspecialist and the University of Agricultural Sciences,Bangalore, design and supervise milk production orientedstudies on traditional small farming systems. 1/
1/ The objective of these studies will be to quantify the effects ofchanging the small village farmer traditional land use pattern,now geared basically to subsistence cropping to a system aimedtowards use of increasing proportions of land for commercial dairyproduction through introduction of permanent pastures and cropsgrown exclusively for forage. These studies would also includeinvestigations on water harvesting to determine the feasibilityof including small farm ponds on individual farms.
ANNEX 7Appendix IIPage 2
2. Tropical Pasture/Animal Production Specialist:
Qualifications: A degree in agriculture or related field with at leastfive years' experience in animal production in the tropics with emphasison pasture management and utilization.
Duties:
He will be responsible for:
(a) Developing management programs to maximize productionfrom the Corporation's pasture and forage program andminimize reliance on purchased concentrate feed formilk production.
(b) Training and demonstration programs related to theproposed milk unions' technical staffs and villagecooperative farmers.
(c) In collaboration with the Tropical Pasture/Foragespecialist design and supervise milk productionoriented studies on traditional farming systems.
3. Duration of both the positions would be about six years, startingabout September 1974.
VIII. NET INCOME (4250) (1760) 640 370 1490 3200 4430 4870 5270 5700 6190 6660 7700 8760 9430
j' Tables 6, 9. 12, 15 and 18,
2/ Milk levy is set so as to caner the cast of technical services to Unions.
/ All items below "III operating income" are in current prices: 30% in Year 1, than at 71: compoonded to Year 6 and sobseqocotly at 1. co-poonded; all sbove are i conastant 1973 prices.
4/ Depreciation aver the project period:of i-vestments, inclading management vehicles and furniture (Rs 720,000) and R. 3.3 M for livestock and equipment.
5/ Terms of loans are: 91b p.a. interest, 3 years grace, 3 years interest only and 9 years repayment; Tomes (at 40%) are appromimate since amortioatio- of capitalized interest and management andtechnical services is not imcloded here--see Table 3.
INDIA
KARNATAKA DAIRY DEVELOIPENT PROJECT
cDnt; Pro1ected Cash Flo 1/(Rs '000)
Year 1 2 3 4. 5 6 7 8 9 10 11 12 13 14 IS
I. Sources of Funds-!
A. Equity
GOI and GOK Initial 3,300Subscription
G01 and GM0 for Fixed 1.610 1.590 530 110Inwestent 2
Sub-total 4,910 1,590 530 110
B. Loans
Fixad Irustnt 6,480 9,320 2,140 450Working Capital 460 210
Sub-total 6,940 9,530 2,140 450
C. Operating Surplus it (3,300) 100 2,720 4,720 5,840 7,550 8.780 9,050 9,270 9,500 9,700 10,000 9,830 9,680 9,820
Total Sources of Funds 8,550 11,220 5,390 5,280 5,840 7,550 8,780 9,050 9,270 9,500 9,700 10,000 9,830 9,680 9,820
11. Application of Funds!/
A. Inva.t_nt'c
Corporation Farms4/ 8,090 10,910 2,670 560Working Capital 460 210
i ln current prices.2/ Excluding Managesent and Services except as in footnote 4.3/ 2ul on all items except for bulls and semen at 10%.4/ Including vehicles and furniture from management and services.5/ Terms of loans are: 9k1% p.a. interest capitalized for 3 years, then interest payment for 3 years with loan repayment over 9 years subsequently.6/ Net of taxes.
INDI A
KAiNATAKA DATLhY DEVELOPMENT PROJECT
KDDC: Projected Balance Sheet, End of Year 1(Rs '000)
ASSETS LIABILITIES
A. CASH & CURRENT V 460 A. LOANS
B. FIXED ASSETS 1. For Fixed Investment 6,o8o1. Livestock and Equipment 3,300 2. For working capital 4602. Project Investments 7,370 6,9403. Vehicles and Equipment 720
for management service B. EQUITY
4. Loess Depreciation (950) 1. GOI and GOK initial capital-GoodwilI1Y3,300
Sub-total 10, 440 * GOK equipment and livestock 3,300GOI(/GOK capital contribution 1,610
C. Capitalized Startup Costs 3,30014. Less Depreciation (950)
D. TOTIAL ASSETS 114,200 -Sub-total 7,260
. TOTAL LIABILITIES 1L.,200
l/ Indicative figure only.
2/ These Tunds will have been spent to cover operating deficits of the first year--see Annex 7, Table 2.
CDJIg
ANNEX 7Table5
INDIA
KAATAKA DAIRY DIVELOPJNIT PROJECT
Corporation Hessarghatta Purebred Freisen Dairy Farm 1950 ac
On-Farm Investments
No of Unit Total Year aInvestments Items Unit Units Cost Cost 1 2 3 4
(s) (---------------Rs '000---------------)
Pasture Establishment ac 1,000 250 250 75 75 50 50
Imported seed for initialpasture establishment ac 300 160 48 48 - - -
1/ Total of about 1,000 ac available f'or both/farms, 1 cut per yr, 2/t ac._/ Concentrate consumption 1 k/hd/day at fRs 1,000/t.3/ lilk f-or calf rearin- 200 l/hd at cs 1/1.T/ Pasture re-establishment 200 ac/yr at Rs 21-0/ac.
-/ ]achinery and equipment maintenance at 10,0 of cost.~/ Building maintenance at 2V of cost.7/ Teterinary supplies at Ks 20/hd.~/ Calves boug-ht from 3anLalore city private dairies at Rs 100/hd, initial number
of 1,200 calves would be financed by the Project, thereafter fcram Corporation'soperatin_ income beginning year 3.
INDIA
KABRNATAKA DAIRY DEVELOPMENT PROJECT
Mlysore Dairy Corporation Habbanaghatta and Birur Bull Rearing Farms
Herd Projection
1 2 3 4 5 6
HA3BBNAAGHATTA
CALVES (<1 yr)Purchased 600 600 600 600 600 600Less deaths 60 60 48 30 30 30On hand at end 540 540 552 570 570 570
MALES (1-2 yr)On hand - 540 540 552 570 570Less deaths - 16 16 16 17 17Less sales - 534 534 536 553 553On hand at end
MALES (1-2 yr)On hand - 540 540 552 570 570Less deaths - 16 16 16 17 17Less sales - 534 534 536 553 553On hand at end - - - - - -
Mortality:< 1 yr 10 10 8 5 5 51-2 yr 3 3 3 3 3 3
'IO
INDIAKARNATAKA DAIRY DEVELOPMENT PROJECT
PROJECT ORGANIZATION CHART
KARNATAKA DAIRYDEVELOPMENT CORPORATION _ _ _ _ _
BOARD OF DIRECTORS l
Biological
-. jVeterinarian Vac.|Vaccine Institute
Uniersty ofIm i Agricultural
I I Sciences
Registrar of General National Dairy L National DairyCooperatives Manager r DvBoardpien Research Insti
romot Marketing Development of~ ~ ~ ~ ~~~~~~~~~~~~~~~~Am s aivCooperatie and Corporation Engineering Controller Administrative1. SPea redStudies .Farmns Se rvice
PROJECT COSTS 77 500 107 610 71 710 93 08 " 171 770 pA -5 50 q5n 21 I
I/ Or the assouption thbt in eath sotiety, 6 nros-bred tows are porchased is year 1 and 2 cows in year 2-6. Crossbred cowe are -osted ot Rs 3,000 ea-h.2t See Aarn 5, Table 3. Capital T-oost-ent.3/ Sre Annex 5 Table 3. Paid-op capital and fCos pod -nngen.t re-nt.4/ See Annex6, Tabl: 9.5/ See A.er 7, Table 1.6/ See Annex 8 fo- details.7t Govnrnnent financing of feed subsidies in kind. The foods scold be produced by union feednills *nd distributed at subsidized r-eis neng nerdy farners who are roaring
crossbred talvns.8/ 307 Government s-bsidy of fodder seeds, Rs 250/Soc-ety/Year.
I N D I AKARNATAKA DAIRY DEVELOPMENT PROJECT
Project Costs by Disbursement Categories - including taxes
I. D. A. Financing1 2 3 4 5 6 Total 7. of Total Rs '000 $Million
( R s ' 0 0 )
A. On Farm Investment 4,240 10,580 14,680 24,500 26,310 20,200 100,510 1/ 61,490 7.69
F. Total Prolect Costs 77,590 107,610 71,210 93,960 122,770 36,810 509,950 240,000 30.00
1/ Equivalent to 90% of ARC refinancing.
-/ Derived from Annex 6, Tables 1-5. The sub-total corresponds to the total of milk processing, feed mills and technical services - see Annex 6, Table 9.
3/ Estimated net of tax expenditure.
See Annex 6, Table 9.
5/ Derived from Annex 7, Tables 5, 8, 11, 14 and 17 with vehicles and furniture and equipment from Annex 7, Table I included.
6/ See Annex 7, Table 1.
7/ See Annex 8 and Annex 9, Table 1.
I N D I A
KARNATAKA DAIRY DEVELOPMENT PROJECT
Project Financing
(Rs Million)
Parti-Governm t Grants cipating IDA IDA
Farmers Equity - GOI GOK Banks ARC Through ARC Direct Total
Processing Plants and Technical Service 45.5 18.4 25.3 138.1 1' 227.3
----------------------------------- ---------------------------- -- ----- -------- ------------------ -- --I----------------- r I n t 7- --------------------------------------------------------------------------------------------------- ____ -__.
Total Benefits - 5400 21330 68330 165540 308100 517650
D. NET BENEFITS (49865) (69880) (49995) (55290) (23259) 86610 207140
E. ECONOMIC RATE OF RETURN 6/ = 33b
1/ Milk collection and nrocessing are critical to stimulate year round Production. Investments under the project are adequate to meet needstill year 7 and additional investments would be required in year 8 if the full potential milk production (footnote 5) is to be exploited.Only the level of production reached by year 7 is charged as a project benefit.
21 Net of taxes and duties. See Annex 7 for K(DDC Annex 6 for the Unions and Annex 5 for the DCS in,est.,,nts.
3/ Labor for plants and mills is costed at market rates; Labor costs for fodder production are included in the 3p/kg price at which it ,, Wsells in the market. Concentrate cost of 95p/kg includes the operating cost of the feed mills. Incremental labor requirements formilking crossbreds as opposed to native cows are minimal (10 min/day) and will not affect alternative employment opportunities. c:
4/ Potential milk production from project DCSs is estimated at I million tons/year in year 10 given adequate milk procurement, processingand marketing facilities. Further investments in these would be required in year 8. Milk is valued at Rs 1.50/liter (see Annex 5, Table 2).
5/ Surplus heifers from project DOCSs are valued at Rs 300/head, the projected market price.
6/ If the cost of the existing plants at Bangalore and Mysore is charged to the project, the rate of return is estimated at 30%.7/ Replacement of equipment.
ANNEX 10Table 2
INDIA
KARNATAKA DAIRY DEVELOPMENT PROJECT
Economic Rate of Return: Sensitivity Analysis
Economic Rate of Return Assuming that ....
COSTS ARE .... BENEFITS ARE
Standard -10% -15%
Standard 32.8 25.6 21.5
+ 10% 26.3 18.6 14.0
+ 15% 23.3 15.0 10.0
March 22, 1974
70' J ;¢ S3
AFGHANISTANINDIA
JAMMIU eoSKASHMIRJ YS R(. nog'2JaM(rnd H MYSORE DAIRY DEVELOPMENT PROJECT
NATIONAL MILK GRID PROGRAM UNDER THE 5th. 5 YEAR PLAN
'-I
HIMACHA 100 200 300
5 - ,< PRADESH 0 L~ MILES
00 PAKISTAN r k kndi9gy--l °l 100 200 300 400 500
300 ~ .- -o C \ ,
PAKISTANShKLOMETEI e o GA A
NEW JJ pRAd IsVD8RA \ t =
Muzzafurpu GaEarmarked for Development Under OperaFon Flood
0'; J g 0 W kMrdrgb E l ~~~~~~~~~~~Irtegroted Deny Development Programs Being Prepared for IBRD Submisoion
.uRegAonol Grd
--- S-oelremted Grij ods
TriwndrumOp~~~~~~~ ~ ~~~~~~ FSdRIalnco PlAnKA Unde OperionFloo
-R Malnorie Coy DLqid ilkPlns Underhe fopr Detl^petUne per Flood
