LAHORE: The Institute for policy reforms on Saturday welcomed prime minister’s timely relief package for farmers saying the cash support and access to credit would have a positive effect on small farmers.

In its report called “An Evaluation of the Prime Minister’s Agriculture Relief Package,” the institute said that other measures might help medium and large farmers. The report, however, also raises some questions.

A special worry is lack of consultation with all provinces, especially in view of their crucial role in execution of the package.

The report expresses fear that “once again good intentions may fail to convert to sound deeds and leave the feeling of unilateral policymaking. This is hardly advisable for strengthening the federation.”

It questions also the timing and adequacy of cash support as well as its mechanism. There are concerns about the measures to reduce input cost and to provide access to credit. Cost of the package could increase fiscal deficit by an estimated 0.4 per cent of the GDP.

It also recommends a number of additional incentives to increase effectiveness of the package like the expansion of the coverage of support prices to rice and cotton, an export subsidy on rice, reduction in price of LDO and so on.

CASH SUPPORT: With a year-to-year drop of 13pc each in price of rice and cotton, the cash support for small farmers was much needed. Some issues need attention.

The government has announced cash support even before full loss has occurred to the new crop. It is not clear how well the announced compensation reflects actual loss to farmers. Under compensation seems inevitable.

For example, if the price were to drop by 15pc, the support of Rs5,000 per acre would meet 68pc of loss for rice farmers and just 29pc for cotton growers. Experts estimate a price decline of 28pc for cotton and 22pc for rice in 2016.

Even within the scale of announced compensation, the amount set aside for the purpose is inadequate. The Rs20 billion provided for rice and cotton each would fall short by 34pc and 30pc, respectively, taking into account the number of small farmers and the acreage.

Targeting of benefits would be a challenge. It requires estimating cropping patterns at individual farm level. This could lead to leakage during disbursement and the government must do all to prevent it from happening.

REDUCTION IN INPUT COST: With fertilizer comprising 35pc of farm variable input cost, the government is right to target reduction in its price.

The estimated 15pc reduction in price of potassium and phosphate also has the potential to improve the country’s fertilizer mix. Some questions remain, especially with respect to effect on fiscal operations.

The burden of cost to be borne by each province is not clear. The package does not quantify the fiscal effect of withdrawal of price increase on urea.

If the reduction comes through reduced GST, the revenue loss would be Rs10 billion. Similarly, estimate of Rs7 billion as the fiscal effect of tariff reduction seems incorrect. Its true impact is Rs10 billion or 43pc higher.

The government estimates GST support by provinces to cost Rs7 billion whereas it would cost Rs11 billion, or 57pc higher.

Continued loadshedding will take away the real impact of reduction in tariff. The government also has overestimated the cost reduction by Rs500 per bag of fertilizer.

ACCESS TO CREDIT: Through a number of measures, the package attempts to correct the bias in access to credit for agriculture.

But, there are questions about its viability when farm profits are falling. The ZTBL, the main supplier to small farmers, already has 20pc non-performing loans.

It is uncertain if it is prudent for the ZTBL to take on higher risk. Regardless, the announced measures would likely benefit small farmers.

ASSESSMENT OF IMPACT OF PACKAGE: The package provides balanced relief to all farm sizes. Cash support and credit targets small farmers while reduced costs help large and medium sized farms.

The package seems to have underestimated by Rs31 billion its cost to the federal and provincial budgets. Overall, it would increase the fiscal deficit by a half percent of the GDP. This is entirely justified though it may need special advocacy with the IMF.

MISSING INCENTIVES: The report recommends that rather than reacting, the government may look holistically at its policy in support of agriculture.

Commodity prices would likely stay low for some time to come. In addition to measures in force already, the report recommends support price for additional products. Of these, rice and cotton need early inclusion.

The government may provide export subsidy for rice to help dispose of present stock as well as stabilize domestic price. The government may reduce price of light diesel oil, as 90pc of all tubewells work on diesel. The IPR recommends reduction in GST on LDO from the present 29.5pc to 7pc.

SUPPORT: Largely, success of this relief package depends on commitment by provincial governments. They must meet a portion of the cost and provide direct executive support.

The package does not appear to have consent of the four provincial governments as two of them have questioned its validity.

Published in Dawn, September 20th, 2015

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