The economics behind India’s refusal to open its dairy market to US, New Zealand

Whenever India enters trade negotiations with countries such as the United States or New Zealand, one sector repeatedly brings talks to a halt is - dairy. To an outside observer, India’s stance may appear rigid or culturally driven. But a closer examination reveals something far more structural. Dairy sits at the core of India’s rural economy, its food security framework and the livelihoods of millions. This is why, whether the pressure comes in the form of higher US tariffs or diplomatic unease in Wellington, New Delhi shows little appetite for compromise on dairy.

According to Food and Agriculture Organization data, around 70% of India’s milk production comes from small and marginal farmers and landless labourers who own, on average, just one or two milch animals. For them, milk is not an additional source of income but the foundation of daily survival. In contrast, in countries such as the US and New Zealand, dairy is a trade-driven business.

Agricultural economist Vijay Sardana puts it bluntly, "Dairy is a business for the US and New Zealand, but for India it is a livelihood sector. There are only a few thousand dairy farmers, operating a limited number of large farms. In India, nearly 80 million rural households depend on dairy for their income.”

India is the world’s largest milk producer. Government data shows that in 2023–24, India produced around 239 million tonnes of milk, accounting for roughly 24–25% of global output.

The US produces around 102 million tonnes of milk, largely through large, highly mechanised farms. American dairy farmers also receive significant government support. Under schemes such as the Dairy Margin Coverage programme, an average dairy farm can receive annual support of around $60,000–70,000.

New Zealand’s milk production is far lower than India’s, but nearly 95% of its dairy output is exported. In 2024–25, New Zealand’s dairy exports were valued at about $14 billion, accounting for roughly 30% of the country’s total exports.

Ashwini Mahajan, national co-convenor of the Swadeshi Jagran Manch, explains the structural gap, "Dairy in New Zealand and Australia is based on a large-scale corporate model. In India, a farmer owns one or two animals. When production structures are fundamentally different, free trade cannot be on equal terms.”

This basic difference shapes India’s position. For India, dairy is about farmers’ incomes and rural stability. For the US and New Zealand, it is about opening new markets.

In India, 'ghee' is considered the most premium and expensive dairy product, with deep religious, cultural and nutritional significance. In countries like New Zealand, ghee is known as butter oil and is treated largely as a by-product with limited domestic consumption.

Vijay Sardana explains the danger in practical terms, "What is premium in India is a by-product in New Zealand. Butter oil is cheap there. In India, a kilogram of ghee costs around ₹600–650, while butter oil sells for barely ₹300. If butter oil enters the Indian market, there will be no dairy product left that cannot be made from butter oil instead of fresh milk, whether ice cream, curd or even liquid milk.”

This is where the trade gap emerges, which experts see as the biggest threat to India’s dairy sector. If cheap butter oil and milk powder are imported, processing companies will no longer need to buy milk from Indian farmers.

India’s concerns are not hypothetical. Sri Lanka offers a real-world example. After the entry of cheap New Zealand dairy products, Sri Lanka’s domestic dairy sector gradually collapsed. As prices fell, farmers began exiting dairy altogether.

Sardana says, "The way New Zealand dumped dairy products in Sri Lanka destroyed the local sector. Conditions became so bad that Sri Lanka had to seek India’s help to revive dairy development. But once a market collapses and becomes import-dependent, rebuilding domestic production is extremely difficult.”

Indian policymakers fear a similar trajectory. Even if the market is opened for just two or three years on the back of cheap imports, Indian farmers may exit the sector permanently. Once that happens, the country could become dependent on external supply.

This risk is considered real because New Zealand dairy products have already faced an anti-dumping case in India. Sardana states, "New Zealand has consistently engaged in unfair trade practices. It attempted the same in India, which is why I filed an anti-dumping case. Their dumping strategy is simple, sell at a loss for a few years, destroy the local sector, then take control of the entire market.”

Ashwini Mahajan adds that India cannot take such a risk in a sector that supports nearly 80 million households.

In negotiations with the US, one of the major disputes around dairy has been the issue of ‘non-veg milk’. This is often framed as a cultural or religious issue, but apart from that, it is far more technical and regulatory.

In 1986, Mad Cow Disease (BSE) devastated the British dairy industry. A key suspicion was that animals had been fed protein supplements derived from slaughterhouse waste.

Sardana explains, "There is still no complete scientific certainty about the causes and transmission of this disease. In such cases, international food law follows the ‘Precautionary Principle’. If there is a risk of serious harm, even without full conclusive evidence, prevention is the safer course.”

Based on this principle, India amended the Livestock Importation Act to restrict the import of dairy and livestock products from countries where animals are fed slaughterhouse-based feed. The decision is not just religious in nature, but also linked to food security and public health.

Another fault line lies in production costs. In the US, dairy farmers benefit from generous subsidies. In New Zealand, vast open pastures allow cows to graze freely, keeping feed costs extremely low.

India operates under far more constrained conditions. Grazing land has shrunk, farmers keep animals tied, and fodder has to be purchased. There is also no direct dairy subsidy. As a result, Indian farmers face naturally higher production costs.

As Ashwini Mahajan puts it, "How can a small Indian farmer compete with subsidies provided by the US government? This is not an equal contest.”

Politics inevitably shapes the debate, though in different ways across countries. In India, farmers constitute a large and influential voting bloc, making it politically risky for any government to ignore their concerns.

In the US, farmers represent a much smaller share of the population, but their lobby is extremely powerful. Agricultural policy there is shaped more by corporate and trade lobbying than by voter numbers. US officials have also hinted that tariff relief could be considered if India alters its position on Russian oil. At the same time, American farmers continue to press for access to India’s agricultural market, offering concessions in textiles and engineering goods in return.

Similarly, while the India–New Zealand FTA has been approved after the fifth round of talks, it still awaits parliamentary approval. New Zealand’s Foreign Minister Winston Peters, who also heads the NZ First Party, has opposed the deal, stating, "This will be our first trade deal that excludes major dairy products such as milk, cheese and butter. This trade makes no sense, and our party will oppose it in Parliament.”

These products accounted for nearly $24 billion, or about 30% of New Zealand’s exports last year.In New Zealand, dairy is the backbone of the economy, contributing over 5% to GDP.

India, with a population exceeding 1.3 billion, represents an enormous potential market. This is why governments there face strong pressure to secure market access.

However, Mahajan notes, "For the US and New Zealand, it is relatively easy to find alternative markets if India does not open up. For India, this issue is far more sensitive.

Taken together, the picture is clear. Dairy is not just another tradable sector for India. It underpins rural employment, nutrition, food security and social stability.

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As Vijay Sardana and Ashwini Mahajan both argue, no matter how intense the pressure, India should not open its dairy sector. This decision is not about short-term gains or losses, but about protecting future generations.

That is why, despite pressure from Washington and Wellington alike, India has drawn a firm red line on dairy, and for now, there are no signs of it being erased.