Formal versus informal: Efficiency, inclusiveness and financing of dairy value chains in Indian Punjab

Abstract

Using a unique set of household-level data from the Indian state of Punjab, this paper assesses the performance and financing of dairy value chains at their upstream. We find co-existence of formal value chains driven by dairy cooperatives and private processors including multinationals and informal value chains driven by vendors or local traders and consumer-households. The resource-rich dairy farmers prefer partnerships with private dairy processors or vice versa. The small dairy farmers are more dependent on informal channels for the sale of their produce. Although, there is no significant difference in milk yield across herd sizes and value chains, 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. 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 and is biased in favour of resource-rich dairy farmers.