A good part of the country’s economic future depends on its ability to work its well endowed agricultural sector towards achieving its potential.

As discussed in my article last week, there is a paradigm shift in international agricultural prices that opens new opportunities for Pakistan’s agriculture.

It could become the leading sector of the economy. It should be able to meet not only the growing demand for agricultural products for its large population but also significantly increase the country’s export earnings.

It could contribute significantly to reducing the incidence of poverty and narrow the inter-personal income gap.

Agriculture could also reduce the growing disparities among the country’s regions, increasing incomes for the more backward parts. Since women participate more actively in the agricultural workforce, increasing the sector’s productivity would help to bring them out of poverty. However, for all that to happen the direction of public policy needs to be changed.

There are a number of areas of reform concerning public policy. Agriculture prices are one aspect of policy that needs to be carefully reviewed. When I refer to prices, I mean not only the prices of agricultural output but also of various inputs vital for agricultural producers.

Pricing of water is important; water is scare; its prices should reflect its opportunity cost. Made to pay the scarcity value of water, the farmers will change their cropping pattern towards less water-intensive crops. Another area crying for reform is marketing which remains antiquated and is an important reason for the relatively poor performance of the sector. Why that is the case is the subject of today’s article.

The Agricultural Produce Markets Act of 1939 regulates agricultural marketing even seven decades after its promulgation by the British rulers of that day. The Act had an all-encompassing purpose. It was “to provide for the better regulation of the purchase and sale of agricultural produce and the establishment of markets for agricultural produce”. The Act has been amended from time to time to meet the different environments of the provinces — in particular in the Punjab and Sindh. That notwithstanding, the basic purpose of the Act and the rules framed under it have not been changed. By virtue of this piece of legislation, the state continues to play an important — in fact the dominating role — in agricultural marketing. This is the case even though the purpose for which the Act was originally framed no longer exists.

In the first part of the 20th century when the Punjab and Sindh began to produce large marketable surpluses of agriculture produce, marketing came to be handled mostly by the Hindu bania class — merchants who belonged to one particular cast of the highly variegated Hindu religion. While marketing was controlled by the Hindus, most of the farming community — those who owned the land as well as those who cultivated it — were Muslims. This was particularly the case in Sindh. The Punjab had a large number of Sikh peasants but Sikhs did not own much land. If they were proprietors, they were mostly small landholders. They too depended on informal credit markets.

This division of these two aspects of the agricultural economy by religion was bound to be problematic. Problems developed quickly as agriculture in this part of British India came to be commercialised. Farmers needed credit during the planting and harvesting seasons and in the absence of formal banking and credit systems began to rely increasingly on the Hindu money lenders who were mostly shop owners. Overtime, the Muslim peasant became highly indebted to the Hindu money lender. This was the subject of Malclm Darling’s seminal work, Punjab Peasant in Debt and Prosperity which profoundly influenced the making of public policy in what is Pakistan today.

The situation deteriorated as the amount of money owned by the peasants increased. The moneylenders used the increasing economic power they had over the peasantry by demanding significant price concessions from the peasants when they came to the market to sell their surplus produce. In the Punjab, another act — The Land Alienation Act of 1901 — had made it illegal for the money lenders to foreclose landed property. Price, therefore, was the only mechanism available to the money lenders to get back the money they had lent and make a profit on these deals. The rates of interest the money lenders charged were exorbitant and they were unforgiving in collecting their dues. The farmers took out new loans to pay back the old ones. Their indebtedness increased exponentially.

For the British this was an awkward development particularly in 1939 as they prepared for war against the Germans. These areas, in particular the Punjab, were important recruiting grounds for the British Indian Army. The government reacted by essentially nationalising agricultural marketing. The 1939 Act put the government in charge of this activity and that is how it has remained for almost seven decades. This can’t be allowed to continue since the state’s heavy hand on marketing seriously retards the development of agriculture, in particular its commercialisation.

The partition of the Indian sub-continent and the mass exchange of population that accompanied it has eliminated the original purpose of the Act. Hindu money lenders are gone; their place has been taken up by a new breed of Muslim shopkeepers.

The peasants and small farmers continue to remain in debt but there is no communal dimension to the problem any more. Given that why has the Act been allowed to remain on the statute books? One reason it has continued is that it affects small and medium-sized producers more than the large landlords and the former don’t have the political clout or the economic muscle to bring about a change.

Another reason why governments have been reluctant to do away with the Act is that it supposedly protects the poor consumers, particularly in the urban areas. By strictly controlling agricultural marketing, the state, at least in theory, is able to keep the prices of agricultural commodities and animal products within the range of the purchasing power of the poor.

However, it does not work that way. Most of the products that reach the market other than food grains are not important items of consumption by the poor. By keeping their prices low, there is in actual fact a transfer of incomes from the poor farmers to the middle class consumers in the urban areas; from the countryside to the urban areas.

This has always been the orientation of public policy, one reason why the incidence of poverty is so much larger in the rural areas compared to its level in towns and cities. This is also the reason why income differences between rural and urban areas continue to widen.

My recommendation to the policymakers is to repeal the Agriculture Markets Act of 1939 altogether and open the marketing of all agricultural products to competition. With one stroke, the government would help to commercialise agriculture. The markets that are the property of the state should be privatised through auctions. The only role for the state should be to regulate the safety of the products being sold in the market.

There is a fear that such a move would create marketing monopolies and thus hurt the consumers. That will not happen since the agriculture sector is far too large, dispersed and involved in the production of large number of products for the purchasers to overwhelm the suppliers. The reverse will happen; competition will lower the price for the poor consumers. Every one would benefit including the overall economy.