Way forward from Operation Flood-I to III: newer challenges and Responses

R K Nagar

Former General Manager

National Dairy Development Board

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Completion of OF-I took nearly ten years against planned 7 (including 2 pre-project years). There were too many unknowns that needed to be dealt with. Midway through the project, for example an action item- ‘Resettlement of city kept cattle’ had to be dropped and funds reallocated among other action items to create the desired impact. Despite the delay, the project was able to create a visible impact as early as by 1974.

By this time Operation Flood had demonstrated that sound planning, well coordinated focused  implementation and openness to mid course correction is the way to rapid transformation in food and agriculture sector. This achievement of Operation Flood was globally recognised and in 1974 the International Dairy Congress was organised in New Delhi. It was for the first time that the International Dairy congress was hosted by a country  that had just begun to take concrete steps to develop its dairy sector on modern lines.

As a consequence, by 1974 there was a clamour for expansion of OF not only in the states where OF-I was under implementation but also in other states. Three of them-Rajasthan, Madhya Pradesh and Karnataka sought World Bank funding to undertake dairy development projects on the lines of Operation Flood and were brought under the fold for the second phase- ‘Operation Flood-II’. Now NDDB was suddenly required to extend the project to 100 milksheds covering 212 revenue districts and prepare itself to meet the challenges of this ‘Quantum jump’. It completely changed the focus of negotiations with the states- from hard sell under phase I to selecting milksheds in each state that offered the best potential.

Negotiations with the states:

There were two critical issues that needed to be expeditiously sorted out with the states- one- selection of milksheds; two- creating an apex state level cooperative institution.

Selection of Milksheds:

As the Operation Flood-I progressed, participant States wanted more milksheds included in the program, NDDB was flooded with requests to conduct feasibility studies in many more districts. Some states even demanded inclusion of the entire state under OF-II. ‘Either the entire state will be under OF-II or there will be NO Operation Flood in this state’, stated a senior state official of one state to the visiting NDDB team on the negotiating table. Some wanted NDDB to spell out state wise fund allocations and wanted NDDB to commit funding- something that NDDB was unwilling to do since a commitment would have given the states a handle to arm-twist NDDB. It could also delay or even derail projects in some states.

Unwilling to risk implementation delays, NDDB asserted its position that there were no fixed state wise allocations. The states that move faster with implementation would naturally get more funds. The onus of getting more out of the project therefore shifted on the participating states.

The need for a third tier: State level federation of milkshed unions:

With more milksheds coming under the ambit of the project in major states, it became necessary to have a third tier introduced in the cooperative’s  hierarchy- a federation of milkshed unions.

There were two compelling reasons for having the federation at the apex level:

• First, NDDB’s experience of dealing with bureaucracies in the states.

There were inordinate delays in getting approvals from various departments of the state governments for infrastructure projects. Getting project sites, power, water connections and other statutory clearances needed multiple follow ups. It took away a lot of time of the NDDB teams deployed in the field. With the number of projects multiplying in states, a central point of contact and coordination was needed. A federation was viewed as an answer.

• Sometime in 1973-74, two Gujarat dairies- Amul and Mehsana came face to face as competitors in the table butter market. The leadership of these two cooperative unions soon realised that competition is  counter productive and is against the interest of its members. They also realised that as their business grows, they would need a professional marketing set up of their own for the entire range of products that the member unions produce. They can emerge as price-quality leaders only if they joined hands. That is how the Gujarat Cooperative Milk Marketing Federation (GCMMF) came into existence as the apex dairy cooperative in the state.

NDDB realised that over time similar situation will develop in other states too. It was therefore best to have the third tier at the early stage itself so that the federation acts as the facilitator for project implementation and also undertakes marketing of milk and milk products produced by member unions.

But, in many states where the governments had established “Dairy Development Corporations” as government undertakings headed by a bureaucrat, the suggestion to have a federation as the apex body didn’t go well. They argued that a parallel institution wasn’t needed and that the corporation could handle marketing and inter-union coordination as well as the federation.

Whereas most states were debating the need for the third tier, one state went the other way. It demanded that the NDDB agrees to an additional tier between the village level society and the district union. Since this additional tier didn’t add any value, NDDB didn’t agree to it.

The argument put forth by state governments to not to have the apex cooperative was further bolstered by a condition stipulated by the World Bank (as part financiers of the project) that the government of a state that receives funding under OF-II must stand guarantee for repayment of loans to projects in case they (projects) failed to repay.

The way out from this complex situation was found by accepting conversion of a state Dairy Development Corporation into a federation with a provision to initially have a government nominated board and progressively turn it into a fully farmer controlled and professionally managed marketing organisation. The federations were also made responsible for owning and managing assets and services common to member unions.

NDDB’s priority in light of Operation Flood-III

Operation Flood-II was successfully implemented over the five year period between 1981-85. During this period, it became clear that the focus of OF-III should be on expansion and consolidation, strengthening the cooperative institutions and increasing farmers participation in decision making and  management.

All three phases of OF were funded on 70% loan and 30% grant basis. The institution development (organising primary village level societies and milkshed unions), technical inputs support, training and education of farmers and cooperative’s staff were covered under the grant while infrastructure building was on loan basis.

Operation Flood in a nutshell

Operation Flood-III was a more challenging phase as NDDB  and States had conflicting perspectives. Whereas NDDB insisted that the states honour  specific funding conditions stipulated by the World Bank and accepted by them- elections for all three tiers of the cooperatives, elected management committees/boards as per accepted bye laws and professional  management of the federation,  many states only partly complied with them by the time OF-III officially ended.

An important point that needs special mention is the contribution of food aid that peaked during phase II  and then declined rapidly during phase III- a clear demonstration that the food aid, if wisely used can be a powerful tool to self reliance. By this time, India not only became self sufficient in dairy commodities but also began some modest exports.

Operation Flood-IV:

Following successful implementation of OF-III that saw India emerge as the world’s largest milk producer in 1996, there was a question if there will be a forth phase of the project and, if yes how would it be funded. Food aid from EC was completely ruled out thus eliminating the possibility of 30% grant funding to dairy cooperatives under the forth phase. The World Bank too abruptly ended the project from its side in 1995. Obviously therefore, there was no OF-IV. What had started as a very promising partnership between the NDDB and the Work Bank following the then president of the bank Robert McNamara’s visit to Anand in 1975 had a sudden and unceremonious end.

The Government of India too in 1991 delicensed the dairy sector and allowed private corporate investment in the dairy sector. It attracted huge investment in milk processing in a very short time in OF milksheds riding on the foundation laid by Operation Flood to dramatically increase milk production. Although the government did try to redeem the situation later, the damage was done as observed by Goswami:

 “All this changed in the early nineties when major financial and trade policy reforms were initiated in all sectors of the Indian economy including the dairy sector. The first step was to encourage private participation and the dairy industry was de-licensed in 1991. That dairy is a lucrative business became obvious when within a year of de-licensing, more than 100 privately-owned milk processing plants came up in the major milk producing states. Despite their numerical strength, the cooperative sector did not have the capacity to compete against these private players flush with capital and fortified with modern technology.

Realising this, the government had to step in again and the Milk and Milk Products Order (MMPO) was issued in 1992 under the Essential Commodities Act (ECA) to regulate production of milk and dairy products. The MMPO reintroduced licensing and also required private players to set up their own zones of procurement (milk-sheds) that were beyond the existing milk-sheds of cooperatives. This was done to check private players from poaching on milk-sheds of the cooperative sector. However, swept by the wave of liberalisation, the government again amended the MMPO in 2001 and allowed State governments to grant a one-time license to the private sector, and also abolished renewal of license. In 2003, restrictions on setting

up milk processing and milk product manufacturing plants and also the concept of milk-sheds were eliminated.” (Source: Bhaskar Goswami, WTO public forum, Geneva, 4-5^th October, 2007).

One just needs to read between the lines to know why there wasn’t any extension to phase-IV and the role that the government of India played in it.

 Operation Flood-IV: what else went wrong? 

Towards the closing years of OF-III, there were differences in perception of NDDB and the world bank about the project costs, benefits and role of cooperatives vs. private sector in Indian dairying. Whereas NDDB viewed cooperatives as small holder owned private enterprise (since no government share holding is involved),  the world bank viewed only the corporates as the private sector.

Wilfred Candler considered it as a lost opportunity in following words: 

“Curiously, within the Bank the success of the Operation Flood lending is underestimated, and OED’s findings run counter to the tide of opinion on this project. One source of the problem is an overestimation of the project’s cost. According to OED, the total Bank investment in five Operation Flood projects over 25 years was about $700 million (1996 dollars). The total project cost, including food aid and central government contributions was about $2.7 billion (1996 dollars). This works out to a cost of about $433 per beneficiary, or about $40 per beneficiary per year. Other Bank estimates put the total cost at $5.1 billion, a figure that included double counting, incorrect deflation, and other errors. The other area where OED parts with the accepted view on Operation Flood is on the project’s promotion of farmer-owned cooperatives. The Bank has recommended that development rely on the private corporate sector. In fact, cooperatives are characteristic of dairies everywhere in the world. Furthermore, the National Dairy Development Board, which oversees Operation Flood, has the financial independence, and the talented leadership of Dr. Kurien, that allow it to operate on a wide canvas more decisively and independently than most parastatals. This combination is rare in the public sector and uncommon even among nongovernmental organizations. Partly because of the erroneous calculation of project cost and partly because it was counter to the trend toward private sector investment, the Bank turned down an extension of the final project in 1995. The end of the Bank’s involvement was abrupt, disorderly, and created ill feelings. 

About two years ago Dr. Kurien expressed in a letter to President Wolfensohn his gratitude for the Bank’s support of Operation Flood. This letter has never been acknowledged, 

– Wilfred Candler,  Operations Evaluation Department , Fast track brief 29444.

 Conclusion and takeaways:

Even though there wasn’t the fourth phase, the growth of the Indian dairy sector has continued unabated in the following years. Operation Flood put India’s dairy sector- dominated by small resource constrained milk producers on a growth trajectory that finds no parallel anywhere in the world.

Operation Flood also demonstrated that:

*Food aid, if used imaginatively is a powerful tool to alleviate poverty and hunger in small holder agricultural systems.

*Sustained growth in agricultural sector can be a reality when the decision making rests with the producers themselves.

*Vertical integration coupled with backward linkages is the best way to increase production and agricultural income.

*The benefits of a single commodity based integrated professionally managed cooperative extend beyond the primary producers as it generates employment in other associated sectors.

       *Agricultural development on this model comes without any

      appreciable  cost to the governments.

*It brings the best out of farmers themselves in terms of entrepreneurship as it empowers them to decide the right course for the growth of their business.

But a word of caution- In a developing economy, the government’s policy support is vital for the growth of cooperatives. A policy shift, under external pressure  can undo years of hard work of the farmers organisations and stagnate their growth. Indian dairy sector too hasn’t come out fully unscathed out of this policy shift. Whereas some states like Gujarat weathered it, some seem to have surrendered the fortunes of the cooperatives to the whims of politicians.

Be it as it may, overall the Indian dairy sector has continued to grow satisfactorily.

And in conclusion we can boldly state that, in food and agriculture sector a development project based on sound principles executed with equally strong strategic interest transcends all the barriers of cultural, linguistic and religious diversity as is the case in India. An agricultural commodity is just a vehicle to empower the farmers with a common objective- their own betterment.

 

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