Thursday, February 26, 2015

Aavin Scam - The indelible imprints of socialism on Milk cooperatives

Socialism is so deep rooted in Indian polity that its imprints are far reaching and pervasive. If one carefully studies the cause of many of the socio-political scams in India, their origins can easily be traced back to the failed philosophy of socialism. The pattern is usually the same; a noble social goal, misplaced socialistic implementation, opportunistic behaviour of all and concerned leading to massive corruption or cronyism. Although this pattern is commonplace, what baffles is the continued obsession of socialists to “fix” problems with the same set of tools. The kneejerk reaction of media analysts and policy makers to such scams is to either introduce more stringent laws or new bodies with extra policing responsibilities; both lead to more problems than solutions in the long run. It is this extraordinary obsession to address failed social goals with useless socialist tools that we hope to lay threadbare as a part of this article.

Tamilnadu is witness to a huge scam in Aavin (the government controlled cooperative milk dairy) involving siphoning of milk, adulteration and windfall profits to unscrupulous private agents. The scam broke out on Sep 19th 2014, 8 people have been arrested and since then regional media has gone hammer and tongs about this scam. For media clippings of this scam (in Tamil) click here. CB-CID of state police estimates the magnitude of theft to be 1500 to 2000 litres of milk per day per lorry. That is conservatively about 2 Lakhs litres of milk stolen every day, leading to a loss of 10 Crore per day to Aavin. The numbers aren’t quite in the order of national scams to make national headlines; but nevertheless the scam highlights what is wrong with our socialistic polity. Police have arrested the kingpin of this racket called Vaidyanathan; who owned & operated a fleet of container lorries that deliver milk collected from villages to the aavin processing centres. The modus-operandi of this scam is as follows. Farmers in villages supply the milk to the local aavin collection centres; where it is tested for quality and accepted. The collected milk is then loaded into container lorries with sealed tanks; and shipped to centralized processing centres. Quality Inspection of the milk offloaded from sealed containers in processing centres follows a less rigorous process. Vaidyanathan and his associates (who own the truck fleet that supplies logistics to aavin) have been alleged to have siphoned-off 20% of the milk enroute and instead replaced it with water or worse other chemical compounds. Their craft was unnoticed because they had the knack of replacing back the seal. The stolen milk was sold to private players and private dairies to earn windfall profits. The accused have been supplying logistics to aavin for more than 10 years, and hence the scam must have been in vogue for several years before these arrests were made. Media reports suggest that several aavin staffs and officials were in the know of this scam, but chose to ignore in exchange for pecuniary benefits. The story is no different from similar scams reported from Milk cooperatives and PSUs in other states. But what baffles is the set of tools proposed by policy analysts and policymakers to resolve this issue and prevent its recurrence.

So what do the experts say?
As usual opposition parties have called for a CBI inquiry; as if that is a panacea for curing such social ills. Media analysts have called for suspension and arrest of aavin officials who looked the other way when this scam was in the making. Some parties friendly to the government have predictably asked for an inquiry commission headed by an ex-judge. Some media experts have called for introduction of an expensive “sealing” technology to prevent siphoning-off stuff enroute. The more stupid ones have called for introduction of a thorough inspection and additional quality check at the factory gate to catch such abuses. The more ridiculous socialists have called for arrest and ban on private dairies and private processors that benefited from getting cheaper access to milk supplies. However not one analyst is willing to look at the root cause of the issue; the procurement price distortion in the factor market of milk consequent to the policies followed by aavin.

So what really is the scam?
The real scam is the price distortion in the factor markets for milk due to the practices of Aavin. A news report (Kumudam Reporter, dated 03/Aug/14) states that aavin procures milk from farmers for Rs. 21.50 per litre (was only Rs. 18.50 until Feb, 2014) in Vellore district, while the private dairies mostly operating out of the bordering Chitoor district of Andhra pay about Rs. 32 per litre. Estimates suggest that only 30% of the daily production of 10 Lakh litres of milk in Vellore district is sourced to aavin. About 50% of the milk is smuggled across the border and sourced to private dairies in Andhra. The remaining 20% of milk is procured by private dairies of Tamilnadu who are paying significantly more than aavin. Aavin retails processed milk to consumers at Rs. 27 to 31 per litre. It incurs a processing cost of about Rs.8 per litre. Hence estimates suggest that Vellore district aavin alone incurs a net loss of Rs. 80 Lakhs per month. At the state level, the loss to Aavin is about 5 Crores per month. Whereas private players in Tamilnadu procure milk at Rs. 32 from farmers and retail processed milk at Rs. 42 to 46 to make a decent profit. Does it need a PhD in management to realize that the root cause of all these distortionary practices is the uncompetitive procurement prices paid by aavin?

So why really do farmers sell milk to Aavin in the first place?
The first reason is availability of aavin procurement booths in every village; because private booths have limited penetration. Under-development of the procurement market, forces farmers living in these remote villages to sell their produce at uncompetitive rates to the monopsony of aavin. The second reason is the differences in the rigor of quality checks followed by aavin with that of private players. This is a classic case of “market of lemons”. Anyone with a quality produce can sell to private dairies and make higher profit, while the ones who need to “manage” the officials for pushing their low quality produce have to settle for aavin. The third reason is contractual. Government gives loans to farmers at subsidised interest rates for purchase of cows and cattle feed. This loan is disbursed by cooperative societies. As a part of this loan contract, farmers are expected to sell their entire produce to aavin. However this contract is difficult to enforce, because there is no way of determining what the entire produce is. Hence most farmers work around this contract, by selling 20 to 30% of their produce to aavin to remain compliant; while selling the balance to private players. Aren’t these opportunistic behaviours the natural course of players reacting to the market distortion?

So why can’t Aavin truly fix the scam?
So why can’t aavin truly fix this once for all, by bringing its procurement prices in-line with the prevalent prices in the factor market? The first obvious reason is the push back from consumers for any hike in retail prices. More than consumer protests or public antipathy, the ruling party fears that such a hike would hand over a political brownie point to the opposition. The second reason is the unwillingness of aavin officials to adopt any such market-oriented model. The current model suits them because they can hide their uncompetitiveness in processing costs under the garb of low retail prices. It also gives them the discretionary right to fix prices and fudge quality norms. Moving to a market model also denies them the opportunity to earn rents. Hence under the garb of public welfare, their unions are capable of stopping this essential service using dharnas and strikes. The third reason is the push back from cooperative societies whose sole existence is justified by the disbursement and collection of cattle loans. If milk is procured at market prices from farmers, then it makes no sense to dish out commercial loans at subsidised interest rates. Asking such cooperatives to compete in an open financial market exposes their inefficiency in operations and denies them the ability to earn influence rents in selection of borrowers. So the three pillars of socialist legacy in the cooperative milk market; consumers, aavin officials and cooperative societies are ALL unwilling to address the real root cause of the problem.

So where do we go from here?
We go nowhere is the answer! The arrested suspects may be punished. Some aavin officials may be suspended for some duration. An expert committee may recommend an expensive sealing technology, verification of antecedents of logistics providers etc. Already two private processors who make milk halwa (milk guava) out of the stolen milk have been arrested. An inquiry will be launched against private dairies that purchased the milk. This tool of harassment will then need to be ‘managed’ by the private dairies to get certified hat they were unaware of the antecedents of the milk they sourced. The public will be happy that the government has taken prompt action against adulterers; that too without raising retail prices. And then everything will be forgotten; until the next socialist policy pothole will blow right under our nose! And never mind, our policy experts will bring the same set of tools to fix those potholes; only for it to open up elsewhere.

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