The officials raided a factory premises in Bamhor town of Morena district on Tuesday. A case of food adulteration under section 420 (fraud) of the IPC has been registered against three people.
They used to produce over 4,000 litres of spurious milk everyday by using harmful chemicals like detergent power.
"The fake unit produced around 4,000-5,000 litres of milk every day," an official was quoted as saying by the Times of India.
"Two are arrested and the hunt is on for third accused," sub-divisional officer of police Bamhor Atmaram Sharma informed.
All accused are residents of Bamhor.
"Samples of the product have been taken and we are investigating the matter. Further action will be taken on the basis of laboratory reports," the SDM said.