Nov 30 - Dec 06, 2009

At present the global economy is enveloped by recessionary fire that covers the entire world in dark clouds of skyrocketing food prices, stagnant incomes, growing unemployment and a continuously rising Consumer Price Index (CPI).

Pakistan being one of the hardest hit countries needs to gear up on all fronts in order to emerge unaffected from the high food inflation and the fast approaching hunger crisis.

Pakistan's challenged dairy sector coupled with inefficient taxation policies have served to cripple the economy which depends on its agricultural and dairy output for a major percentage of its GDP.

According to 2008 data from the World Food Program, 77 million Pakistanis, nearly half the country's total population, are food insecure, while 95 of Pakistan's 121 districts face problems such as hunger and malnutrition-related diseases. Last year, a UNICEF report concluded that half of all child deaths in Pakistan could be attributed to poor nutrition.

Pakistan is the 5th largest milk producing country in the world with annual milk production of 30 35 billion liters, of which a significant portion can be potentially exported. However, only 1.2 - 1.5 billion liters of total milk production is processed for drinking purposes and the rest goes for indirect consumption used for various purposes such as confectionary goods, sweetmeat, milk shops, and other informal channels. This is to say that the dairy sector is still not operating at its maximal and there is an immense growth potential. Optimal capacity utilization can significantly reduce the supply and demand gap, increase exports, and benefit the dairy farmers and the industry in general.

A deeper look into some of the driving forces responsible for the food inflation witnessed in recent years reveal that low productivity, high general sales tax, import duties and various other taxes levied on locally produced goods have played a major role in making the situation worse.

The government's decision to levy Value Added Tax (government is in the process of applying 16% VAT on packaged foods) will only serve to intensify the superficial inflation which in turn will worsen the situation. Such steps will only hamper the growth of the formalized dairy sector and will in turn drive up the price of packaged milk by 16%, directly affecting the consumers' pockets and reducing the demand for hygienic packaged milk. In most cases people will turn to buying loose milk which is unhygienic and may adversely affect the health of the consumers while others may reduce their milk consumption altogether. Under such conditions, the informal sector may flourish which will lead to a decline in documented income and affect the employment of farmers. Such a tax can prove to be destructive as it may have some very negative connotations for the formal dairy sector's value chain, which contributes greatly to GDP of the country.

Currently, only 3% of the total milk produced in Pakistan is being processed and further investment in this sector will spur economic activity, boost production, increase sales and exports, and help decrease prices by way of economies of scale.

The dairy industry needs the government's support right now to reach its true potential and to pave the way to food security. More investment in infrastructure and a greater focus on corporate dairy farming with better dairy farming practices are the need of the hour as it is through the formal channel that productivity and yield per cow can be increased and rural development can take place.

It is advised that the dairy industry should be exempted from the VAT so that we may see an increase in documented income of the formal dairy sector and encourage economic activity as well as attract foreign direct investment, all of which will lead to an increased tax base and more food security as far as this important household item is concerned.

It is of paramount importance that we turn to other countries in order to gain insight into the various models of growth they follow for different sectors. It is common knowledge that EU, UK, USA, and Canada all operate under a zero rating tax regime for dairy under VAT.

Milk and milk products are an essential dietary requirement and account for 22.2% of kitchen expenses. It is thus important that the dairy sector be developed so that supply may increase and prices register a corresponding decrease. This will help solve the two major concerns of productivity and generation of wage jobs to enhance real income.

With a growing section of the population at the brink of malnutrition and hunger as food insecurity continues to reach colossal proportions, it is important for the government to eliminate counterproductive policies, develop safety nets, and work towards sustainability in order to protect the vulnerable majority from the negative impact of high food prices and insufficient household incomes.

The reasons for food insecurity are varied. However, we must continue to combat this menace with full might despite deteriorating land conditions, water scarcity, and increasingly evident impact of climate change.