Financial Times

Last month the government announced a ban on advertising of branded powdered milk products aimed at encouraging local production of fresh milk. A top government official was quoted as saying the amount spent on advertising of milk powder surpasses Rs 240million per annum and most of this advertising is for imported brands mainly Anchor and Nespray.

Statistics show only 15%-20% of local milk demand is sourced locally and the balance imported primarily by private entities.

The challenge would be to supply locally sourced milk for at least 70% of demand. For this the government would have to tackle the public myth of ‘superior imported powder’ and boost local production. Last year 67,000 metric tones of milk was consumed totaling Rs 12 billion in foreign exchange. On average a Sri Lankan spends 37.9% of income on food and beverages and 2.7% of total income on milk and dairy products. Moreover, in general the price of a 400g milk powder packet was inflated at least 15% from 2003 to 2004, thus, proving the magnitude of it in our socio economic life.

To boost local production the Ministry of Agriculture and Livestock has formulated a six-year national plan to develop dairy farmer villages and has reserved financial allocations for the project with the objective being to produce nearly 50% of the country's dairy output locally within the next six years. Also the government could impose taxes on imports of milk powder and divert those funds to local entities to boost production. Three local private and state-run players are to be developed by the government to cater to the competitive market driven by strong multinationals. Also the government would have to shift the perception of consumers from imported to local goods.

This is where the government print and electronic media networks should play a pivotal role with a continuous public education campaign.

Heavy advertising by global giants are not helping to drive the price downhill, in fact it indirectly contributes to inflate prices as advertising costs are also incorporated in their pricing formulas as experts say companies normally spend around 2% of their total revenues for advertising. The government can use its regulators’ pressure to curb such non-value adding activity for such an essential commodity, as essential commodities require the least advertising.

Last year the government slapped a tax allowing only 50 percent of a company's advertising expenditure, the balance added back to income to be taxed at the applicable prevailing rate. Under previous classifications the total cost was considered a tax deductible expense. It is envisaged that the proposed ban on milk powder ads would reduce the price of milk powder products and shift consumer loyalty to local products.

However, if local products are inferior, highly priced, not properly distributed the plan to develop the local industry would collapse, therefore the consumers interest should be in mind.

However, in implementing proposals the government should not directly interfere with the laws of demand and supply nor the free market policies.

For this the government should not create unnecessary barriers to entry/operation and the consumers’ interest should also be safeguarded whilst promoting the local industry.

Even without protectionist policies imposed by the government, the Sri Lankan success story of ‘Lucky’ dairy products should be inspirational to the local players who are willing to take up this challenge.