THE wheat harvest season is under way. Thanks to a high procurement price set by the government, a bumper crop of close to 25 million tonnes is expected.

This is considered sufficient to meet the consumption needs of Pakistan and partly of Afghanistan. Taking Afghanistan`s needs into account is prudent policy, given the difficulties of controlling the movement of goods across the porous border. The past policy of keeping wheat procurement price low led to low acreage and output, creating a supply deficit, which had to be met through costly imports. The new policy pays higher prices to Pakistani farmers than to farmers abroad.

The bumper wheat crop is, however, not likely to resolve the problems of wheat or wheat flour availability and price by itself. In fact, it is likely to generate new problems that will have to be attended to before they arise. Essentially, the wheat issue will need to be treated as part of a policy package and all elements of the package will need to be planned and executed accordingly.

The immediate problem the bumper wheat crop is likely to present is one of storage capacity. Without proper storage, there is a danger of a part of the wheat being spoilt, thus reducing supply despite the bumper harvest. Secondly, a decade of economic management under the neo-liberal paradigm has eroded the government`s administrative capacity to operate the distribution system. Even today, flour price in remoter parts of the country is about twice that in the Karachi-Lahore-Peshawar belt.

The other problem is the rise in the consumer price of wheat flour. The raise in the procurement price of wheat to Rs950 per maund will provide improved prices to producers but cost consumers more as the retail price of wheat flour is likely to rise from an average of about Rs25 per kilogram currently to Rs40 per kilogram. In remote areas, the price could rise to shocking levels. The impact on the poor will be devastating.

Continuing to benefit the producer and at the same time protecting the poor will require de-linking producer and consumer prices. Managing the conflicting interests of producers and consumer is thus of critical importance.

Governments have traditionally attempted to keep wheat flour price low through the provision of subsidised wheat to flour mills with the expectation that wheat flour ground from government-supplied wheat will be sold at lower prices. However, the policy is conceptually flawed and has led to the subsidy element being absorbed as flour mills` profit, rather than being passed on to consumers. The arrangement also has the effect of distorting the market.

Economic theory postulates that the success of an indirect input-level subsidy requires two conditions to be present for it to be passed on to consumers. One, the product must have high price elasticity of demand; two, it must be possible to segment the market. Neither of these conditions exists with respect to wheat. Wheat price elasticity is low on account of it being an essential commodity with the result that the price is largely determined by supply rather than demand factors. Moreover, since flour mills grind government-supplied as well as market-procured wheat, the necessary market segmentation does not exist. In any case, market segmentation for such a homogenous product as wheat or wheat flour is difficult.

Given that elasticity and market segmentation factors do not allow for the subsidy to be passed on to consumers, the policy of subsidising flour mills need to be discontinued forthwith and replaced with a subsidy mechanism that enables the transfer of the benefit to the consumer more directly. As with every commodity, there is a demand and a supply aspect. The supply aspect relates to the distribution network, which is available at utility stores.

Currently, however, utility stores present a host of problems. Coverage is limited, particularly in poorer areas. Procurement and financial management systems are flawed and there are pervasive complaints relating to the substandard quality of products and corruption at various levels, including the store level. All these will need to be and can be attended to. The Utility Stores Corporation is on the privatisation anvil. A traditional privatisation will see the end of the corporation, at least as far as the poor are concerned. Consideration needs to be given to retaining the corporation as a state-owned entity and privatising its management. The management technology for multi-store retail chains is fairly standard in the West and can easily be replicated. If necessary, foreign management consultants can be hired — at government expense — for the initial period.

The problem of coverage is currently being addressed by moves to increase the number of utility stores to 6,000 — at one store per union council. That number too will need to be doubled to improve outreach to consumers in all areas including those of low-population density. The cost of operating stores at uneconomic locations can be met by the government.

The utility stores can purchase all items from the market at market prices, but sell wheat flour and other specified food items, like rice, pulses, cooking oil and sugar, at separate counters at subsidised prices in specific quantities per week per ration card. The purchase-sale price differential can be paid by the government to the corporation as subsidy. Unlike in the case of subsidising the flour mills, subsidising at the retail level will not be market-distorting. The subsidy payable to the Utility Stores Corporation on both counts will be based on measurable costs and can be adequately accounted for. The necessary operational efficiency and transparency with respect to government subsidy can be achieved.

The demand aspect in this case relates to identification of the poor and their targeting. Given that over two-thirds of the population are stated to be living under $2 a day and are under economic stress, the costs of excluding the non-poor are likely to exceed the benefits of identifying the poor. It may thus be advisable to extend the provision of subsidised flour to all households, with limitations on the quantity available to each household. In other words, all households can be provided with ration cards, albeit with limited quantities of food items supplied per card. Given that the share of food expenditure for richer households is significantly low, the benefit incidence of the subsidy is likely to remain progressive.

The economic pressure facing the vast majority of the population is severe. There is the concomitant threat of a social upheaval, especially in urban centres, which can be exploited by anti-democratic forces. Managing the wheat flour regime is thus important and urgent.

The writer was formerly national coordinator of the Benazir Income Support Programme.