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Revisiting wheat policy

September 23, 2013

AS wheat sowing season draws closer, farmers have started demanding higher support price, and rightly so.

After all, according to official estimates by the Punjab government, the cost of production has already risen to Rs1,268 for 40kg — Rs68 more than the current official price. Farmers put it at a much higher digit.

However, it is also time for the government to carry out SWOT analysis of all three elements of current wheat policy. For the last few years, wheat business, which is largely regulated by the government for political and social reasons, has stood on three main pillars: tax inputs heavily, compensate farmers with increased support price and, finally, save urban consumers through subsidy packages.

Over the last five years, the federal government has increased sales tax on agricultural inputs to 17 per cent in a bid to balance it books. This policy has increased the cost of production by over 100 per cent — from around Rs600 per maund in 2008 to Rs1,268 in 2013. In order to compensate farmers, it has, on yearly average, increased wheat support price by 15 per cent — from Rs625 in 2008 to current Rs1,200 — though it kept price constant between 2009 and 2011.

No provincial government could risk passing the entire increase on to consumers and came up with different ways to protect them. Punjab, the most populous province, increased release price by only seven per cent. It absorbed the financial impact of eight per cent difference, which translated into hundreds of billions of rupees. In order to further save the urban population from higher flour price, it has spent a staggering Rs126 billion on subsidy packages between 2008 and 2013.

It bore not only the direct cost of wheat and release, but indirect costs like increased incidental charges, which stood at Rs125 for each maund in 2008 but have risen to Rs323 for every 40kg in 2013 because the department is paying around Rs50 million a day in mark up payment on loans it got to run its procurement and storage assignments.

Despite these efforts to artificially keep flour prices down, the result has not been a desired one. Over the last five years, the flour price has gone up, on yearly average, by 19 per cent — from Rs336 (20kg) in 2008 to current Rs785. Out of it, seven per cent increase came from raised release price and the rest from rising grinding charges, which have risen by seven per cent each year — from Rs65 to Rs100 per maund.

All these factors have brought wheat and flour business to a point where no stakeholder is happy. The farmers complain of ever-escalating cost of production as taxation on inputs regime grows stringent, and unstoppable slide of rupee and weaker writ of the government provide inputs traders a chance to fleece farmers.

The industry keeps resenting its margins as, according to its claims, the government was discriminating against it: the farmers were compensated at 15 per cent each year but the industry gets only seven per cent. The consumers pay heavy financial and social cost as they have to cut expenses on essentials and spend additional amount on staple. Increasing poverty figures substantiate the point.

Each year, the current way of conducting wheat business creates problems for government and it postpones crucial decision till next season through some ad hoc policy measures. It is again at the same crucial stage, where it can take fresh look at the wheat realities and take some long term decisions. The current practice of leaving wheat policies to provinces would not help either.

The country has five province and two designated areas (Kashmir and FATA) but only one big producer (Punjab). So, a federal coordinator is necessary. Whether the newly created ministry for Food Security can fill the gap or not remains to be seen. It is time for it to re-invent itself into a federal agent that helps ensure food security for the entire country.

On the second plank, effort should be focused on bringing the cost of production down. At the heart of current cost of doing wheat business lies this escalating cost, which, in turn, necessitates increase in support price and elaborate subsidy regimes to keep flour price low. If the government can nip this evil in the bud by reducing production cost (there is long list of options to do that), pressure on other two areas (support price and subsidies) would ease automatically.