PAKISTAN’S economic growth has been faltering for many years. In this environment, recent gains reaped by the economy due to a turnaround in agricultural production have gone unnoticed. Last year, the farm sector harvested the largest wheat crop of the decade, produced one and a half million additional cotton bales and exceeded the national rice production target.

These times of plenty, however, have not benefited farmers whose monetary losses have been phenomenal due to the crash of commodity prices in local and international markets. The situation of small farmers in Punjab’s cotton and rice belts is particularly precarious. They have no resources to buy inputs for raising the next crop.

There are also no ready takers in the international market for our surplus produce. Our farm sector has been failing to compete because its production costs are higher than that of our competitors in the global market.

Costly produce has ravaged the rural economy.

While agriculture inputs are heavily subsidised by most countries including India, we provide marginal relief to local farmers in the shape of subsidy on canal water, urea and electricity bills. On the other hand, the cost of seed, fertiliser, pesticide and diesel has increased sharply in the past few years in Pakistan and policymakers have imposed GST on agricultural inputs.

The glut of costly produce and low commodity prices have ravaged the rural economy, forcing farmers to agitate. The government can revive the rural economy and its export competitiveness by revisiting the cost structure of agricultural inputs.

The most effective policy intervention seems to be the abolition (or zero rating) of GST, which adds 17pc to input costs. A corresponding reduction in commodity prices will benefit stakeholders:

The government will be able to fix lower procurement prices for wheat, sugarcane and other crops. Food inflation will take a downward plunge, directly benefiting urban consumers. Industry, particularly textiles, will gain from lower raw material prices, restoring its competitive edge. Farmers will be happy to see the government act in their interest, and benefit from higher yields due to improved use of cheaper inputs.

The national economy will reap productivity gains and will not be haemorrhaged by persistent demands for crop subsidies and export rebates. It will break free from the vicious structural trap of high input costs, high commodity prices, high inflation and low competitiveness.

According to estimates, the revenue shortfall resulting from removal of GST on fertilisers, pesticides and agricultural machinery will be around Rs55 billion. The question is who will bell the cat, and how, when containing fiscal deficit within limits agreed with the IMF is a priority of the government.

It is not as if the government has not been providing financial relief to the farm sector. It has been doing so but in a piecemeal manner, responding to urgent pressures of different lobbies. For instance, billions have been spent or earmarked this year for export rebates, phosphate fertiliser and electricity subsidies and other purposes. Had GST been abolished and cost of production reduced, the need for these outlays would probably have not arisen in the first place. It is a matter of prioritisation of policy reforms and their timely implementation.

Revenue shortfall can also be bridged through deregulation of urea import, costing the national exchequer billions in subsidy every year. Previously, this was a useful intervention as price of locally manufactured urea was almost half the price of imported urea. The government imported a small portion of the product to fill the gap between local production and demand and subsidised the price differential. In this period of low urea prices, benefits of low cost gas feedstock supplied by the government for local urea production and that of subsidy on urea imports were being largely passed on to the farmers.

Since 2010, local manufacturers have substantially increased urea price, citing gas feedstock shortages and enhanced production costs as the main reason. Consequently, the gap between international and local urea price has narrowed and the benefits of supply of low-cost gas feedstock, meant for the farm sector, are being collected by fertiliser manufacturers.

The government cannot contain the urea price hike in a virtually deregulated fertiliser market. It should sell feedstock gas to local urea manufacturers at the market rate and deregulate urea imports. This would save subsidy costs and generate additional revenues to contain the fiscal deficit. It is time to revisit the urea policy as it is no longer serving its intended objectives.

These policy reforms have the potential to plug the immediate hole in government revenues due to GST removal. They also seem like a ‘convincing sell’ for the Fund due to their market orientation. The government should bell the cat if the rural economy is to be saved and enticed.

The writer is a civil servant and has worked in the agriculture sector.

Published in Dawn, May 27th, 2015

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