On the proposed amendments to the NDDB act; A view point

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The Government’s recent move to amend the NDDB act 37 of 1987 has drawn a lot of attention. In this article, I have attempted to analyse how the proposed amendments can be more effective by restructuring NDDB in the larger interest of the entire agricultural sector, including the dairy sector.

In the last few days, there have been numerous posts regarding the proposed amendments to the NDDB act 37 of 1987 on social media. The reactions have been mostly angry or emotional. Some see in it a covert attempt by the private sector to gain entry into the management of NDDB and thus a veiled attempt to tone down the body corporate’s principal mandate to promote dairying on cooperative lines based on the famous ‘Anand pattern’, wherein the entire value chain is owned by millions of small milk producers across the country and is successfully managed by professionals as the employees of the cooperatives.

I Before I go further, I want to remind the readers that, over the last fifty years, the dairy cooperatives spearheaded by ‘Amul’ have emerged as a force to recon with.

They have not only emerged as the ‘price-quality’ leaders, but have played a key role in disciplining the entire sub sector. Dairy cooperative are a trend setter in empowering the small farmers and an example to follow to empower farmers in other sub sectors of Indian agriculture. Dairy cooperatives have given the farmers- especially the resource poor small farmers, a sense of dignity that must not only be upheld on all counts but must also be extended to producers of other agricultural commodities.

Having said that, I would like to share my thoughts on why the amendments inthe act have been thought of? Are these amendments really necessary? Will they rob NDDB of its operational freedom? Will they position private sector against the cooperative sector? Is the government seeing in the proposed amendments an opportunity to strengthen NDDB and reposition it as an institution that can extend the application of the principles of ‘Anand pattern’ of value chains to other sub sectors of agriculture?

At this juncture it is necessary to recall some facts about NDDB’s operations during the “Kurien era”- the period during which the three phases of “Operation Flood” that made India the largest milk producer in the world, implemented.

1. Funding: The project was implemented without any direct budgetary provision from the consolidated funds of India. Whereas the first phase was implemented entirely out of monetisation of dairy commodities gifted by the European Union, second phase was implemented by a combination of gift commodities and funding by International Development Association (IDA), the soft landing affiliate of the World Bank. Funding for the third phase was with considerably reduced commodity aid and mainly from the World Bank’s main affiliate- IBRD which carried a burden of interest applicable on such loans to country governments.

This funding, especially during the first two phases gave NDDB immense flexibility to fund the action items related to the Institution building as grant to the cooperatives, and it could fund infrastructure building at interest rates substantially lower than normal landing rates of the commercial banks. NDDB could also offer its funding linked techno- professional support services to the cooperatives at nominal turn key fee rates thus considerably lowering the later’s loan repayment liabilities. By placing surplus funds in high interest paying deposits with banks and other institutions, NDDB generated adequate income to meet most of its staff costs and other overheads.

2. Subsidiaries: During this period, NDDB did create subsidiary companies like the Indian Immunologicals (IIL) and the Indian Dairy Machinery Company (IDMC) besides encouraging private investment in manufacture of equipment and machinery to meet the demand placed by a large and time bound project. The idea behind creating these subsidiaries was to make inputs available to the cooperatives at the most competitive price and thus save them from exploitative pricing by handful of established companies in the business. It must be noted here that none of the subsidiaries created by the NDDB were dealing with milk business to be in competition with the cooperatives. Even the Mother Dairies of Delhi and Kolkata managed by NDDB were sourcing their entire requirement of milk from the dairy cooperatives of other states.

3. Pilot Projects: NDDB also experimented by starting pilot projects in other sub sectors of agriculture namely, fruit and vegetables, inland fisheries, Tree growers cooperatives etc. out of its own resources. The idea was to test if the principles of the cooperative model that it is implementing for fairy sector can be applied to other sectors of agriculture and forestry.

4. Oilseeds and Edible Oil Project: On a larger scale, NDDB implemented the edible oils project by replication of the Anand pattern of cooperatives. This project too was funded entirely out of commodity aid and generated enough funds to provide liberal grants to the Oilseeds cooperatives for institutional build up.

NDDB thus was never in direct competition with the cooperatives. All its actions were fully geared to support creation of strong, commercially viable and fully farmers’ owned businesses.

But it all changed at the turn of the century. In 1998, the government of India allowed private sector entry in the dairy sector on the pretext that there are large areas not serviced by the cooperatives even in the milksheds demarcated for the cooperatives and the entry of private sector will boost milk production in these areas. Now the cooperatives had to face a private operator who could easily poach in the milkshed painstakingly developed by it over three decades.

What changed for the NDDB: 

In early years of the century, following changes took place in the national economic scene. These developments may have led NDDB to rethink on its strategy to shore up its resources.

1. Following conclusion of Operation Flood III, it did not have a plan to move forward for the fourth phase. In any case, commodity aid and loans from soft landing affiliate of the World Bank were completely ruled out. Commodity aid for the edible oil project too dried out.

2. To continue with the fourth phase, NDDB needed to generate its own resources. It did not have enough funds to continue with loan-grant pattern of project funding.

3. As the interest rates of the commercial banks and companies fell, its income from fixed deposits declined.

4. By Virtually shelving the vegetable oil project and limiting ‘Dhara’- a brand that had emerged as the price- quality leader in packaged oil segment, NDDB not only limited itself to dairy sub sector but also irretrievably lost the highly potential net revenue generating opportunity.

5. Landing rates of commercial banks became more competitive than that of NDDB and required much less paper work. Thus even the cooperativesbegan to look towards banks for funding expansion plans.

6. NDDB’s subsidiaries did not generate profits as expected to meet NDDB’s growing overheads due to implementation of the recommendations of the pay commission.

7. NDDB lost a large pool of qualified and experienced techno-professionals with many opting for VRS and joining the competing private sector.

8. NDDB lost income tax exemption granted to it vide clause 44 of the NDDB act 37 of 1987, when the provision was omitted w.e.f 1st April 2003 notified vide the Finance act 20 of 2002.

To sum it up, the external environment completely changed for NDDB to continue with the well established pattern of funding and supporting the projectsin the dairy sector on grant-loan pattern.

It is my personal judgement that, faced with this challenge, NDDB was left with no option but to think of other ways to shore up its resources. It therefore opted to create two new subsidies: 1. The Mother Dairy Fruit and Vegetables Limited in direct competition with the very cooperatives it was primarily mandated to promote and establish pan India presence of the brand ‘Mother Dairy’, 2.NDDB Dairy Services to provide a complete array of support services to the dairy sector- primarily to ‘cooperative companies’ that it had begun to promote after conclusion of Operation Flood. It banked heavily upon its already depleted and relatively inexperienced pool of techno- professionals to compete in the market to earn a surplus after meeting the overheads.

It was a gamble that failed. As the media reports (Money control and Cobraposts) suggest, nearly 400 crores have been lost since creation of these two companies.

It is in light of these facts that we need to understand the move to amend the NDDB Act.

1. Until recently- till National Dairy Project NDP-I (A six year program staring 2012-13 as a centrally sponsored scheme) was approved with World Bank-IDA/GOI funding, the government, despite its representation on the board never questioned the management of NDDB, presumably because the act provided NDDB absolute operational freedom that included creating subsidiaries, deployment of funds, recruitment and deciding the terms of employment. Now that it is public knowledge that NDDB’s losses are massive, is there a realisation that NDDB funds are after all public funds and must be in safe hands? And, that the representatives of the government on the board of directors have failed in their duty by not bringing the losses to the notice of the government?

2. Did the losses reach this magnitude because, the operational freedom got interpreted as ‘freedom to be non-transparent’? Did the freedom from CAG audit mean freedom from being non accountable?

3. Having given the private enterprises entry in the dairy sector, should the NDDB continue to serve only the cooperatives and the producer companies? It is after all “National Dairy Development Board” and NOT “National Cooperative Dairy Development Board”.

A quick look at the proposed amendments may throw some light on the intend of the government.

Following sections of the principal act (37 of 1987) are proposed to be amended: 8,9,16,43 and 48.

Let us start in the reverse order. In section 48, the clause is amended to include ‘the manner of recruitment’. Given the fact that NDDB’s techno- professional competency must always be at a higher level so that the ‘NDDB Dairy Services’ can be a net revenue earning subsidiary, this amendment is fully justified. It will effectively shut personal preferences based recruitment, placement and promotions- an area where transparency was sadly lacking.

At this juncture I would like a serious consideration of the suggestion made by BM Vyas regarding creation of an all ‘India Dairy Service’ (on the lines of IAS, IPS, IRS ETC) so that the subsidiary- National Dairy Services is primarily manned by experienced professionals drawn from the ‘Indian Dairy Service’cadre.

Amendments to section 43 provide that the provisions of the ‘Right toinformation act 2005’ and the ‘Central vigilance commission act of 2003’. Thus amendment must, in fact be welcomed in the larger public interest of transparency.

Amendment to section 16 that seeks to make the working of subsidiaries created by NDDB and hold the management of these companies accountable must also be welcomed. I feel that this amendment shall send a warning signal if and when the subsidiaries make losses or indulge in questionable transactions. Having a common board for NDDB and it’s subsidiaries will ensure smooth coordination as was the case when NDDB and the Indian Dairy Corporation (IDC) coordinated prior to their merger as new body corporate in 1987. The CEOs of the subsidiaries must be held accountable for prudence in managing the finances of the company they head.

Coming to section 9, that seeks to limit the term of the directors of NDB and its subsidiaries, age beyond which they can not serve on the board etc. is also a well thought of amendment. The existing provision gives a sitting director / CEO virtually unlimited tenure and derive financial benefit beyond legitimate retirement age so long as he/she can ‘manage’ the political dispensation in the government.

Now, section 8, the proposed amendment to which has generated most heat and angry reactions. Prima facie, this amendment seeks to provide covert entry to private sector by providing for an additional director who would be a professional from the private sector.

I am of the view that this particular amendment should result in having a management team at the helm that can take the organisation forward, have a vision and the ability to deliver on the vision to serve the larger interest of farmers. The proposed amendment falls short on this expectation.

My reading is that this amendment is not well conceived. If the government’s real intend is to re-establish the credibility of NDDB as a dynamic professional body that it was during the ‘Kurien era’, then this amendment is grossly inadequate. I am of the view that the board should consist entirely of professionals. I therefore suggest that the two proposed directors representing government should be one each from the Ministry of AH&D and the other from the Ministry of Finance, preferably from the cadre of all India Accounts and Audit service. Other two directors representing the cooperatives must also be professional CEOs of dairy cooperatives and not the chairman of cooperatives who invariably are active politicians.

The government must also keep in mind that whereas the private sector can raise funds in more than one ways, for the cooperatives the options are limited, especially for those that are not strong enough to get funding from commercial banks. Diverting NDDB funds to finance private sector in the guise of ‘startups’ will be counter productive. If the government insists on having a professional from the private sector and divert NDDB’s resources to private sector, it must provide adequate justification for it. The person representing the private sector then must be someone who has a proven record in agricultural-business management. As of now, providing a professional representing private sector doesn’t seem to make any sense.

The focus of the government must,therefore, be on re-structuring NDDB as a truly service oriented professional body. A dynamic and transparent NDDB can then be entrusted with the task of applying the principles of ‘Anand pattern’ to other sub sectors of Indian agriculture to create value chains that are fully owned and operated by the farmers organisations. It is time to rebuild NDDB around a leadership that believes in expansion- the way Dr. Kurien did rather than confine itself to one sub sector-dairying, just because it is named “National Dairy Development Board”.

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