Formal Versus Informal: Efficiency, Inclusiveness and Financing of Dairy Value Chains in Indian Punjab

Despite a growing dairy industry in India, farmers’ lack of access to organized markets and institutional credit remains one of the major hindrances in improving the scale and productivity of dairying. Using a unique set of household-level data from the Indian state of Punjab, this paper assesses performance and financing of dairy value chains at their upstream. The study finds that 62% of the sample farmers representing 69% of the total milk sales are connected with formal value chains driven by cooperatives, multinational companies and private domestic processors. The resource-rich dairy farmers prefer partnerships with private dairy processors or vice versa. The small dairy farmers are more dependent on informal buyers, i.e. local traders and consumer households, for the sale of their produce. There is no significant difference in milk yield across herd sizes and value chains, but the farmers associated with cooperative value chain earn more profit. The findings also indicate the practice of scale-based price discrimination in the formal segment, especially by the multinationals. Further, more than half of the dairy farmers finance their dairying activities borrowing from the formal as well as informal sources. But the chain-based financing is restricted to the value chains driven by the local traders and private domestic processors. The financing by commercial banks is limited to 9% of the borrowers and is often biased in favour of resource-rich dairy farmers. A value chain approach, due to its product market orientation, can serve as an entry point for financial institutions to reduce transaction costs and lending risks associated with small loans. The innovative financial products, such as ‘dairy credit card’ and ‘contract as collateral’ would enable them to adopt yield-enhancing technology and inputs and also to scale up their dairy activity.