As the early consignments of imported wheat arrived, the Competition Commission of Pakistan (CCP) issued a policy note that suggested some “policy measures that may contribute in enhancing economic efficiency and eliminating distortions in the wheat sector.”
According to the note, the statutory mandate of the Commission, under clause (b) of Section 29 of the Competition Act charges it with reviewing laws and policy frameworks, make recommendations to the federal or provincial governments to make new or amend the existing laws to foster competition. Hence, the policy note.
The CCP note came in the wake of the government’s decision to liberalise wheat trade, allowing the private sector to import wheat — a role traditionally played by Trading Corporation of Pakistan. Under the decision (statutory regulatory order 633(I)/2020 dated July 21, 2020) it abolished 60 per cent duty on the import. This was in addition to the recently abolished 11pc custom duty, 17pc sales tax and withholding tax of 6pc on one time import of 1.5 million tonnes.
In the 15-page policy note, the commission dilates upon the problems bedevilling the wheat market and suggests the withdrawal of “support price regulation.” Typically, a support price mechanism is applied at the farm level to avoid a shortfall in commodities considered essential or for import substitution. However, countries that are self-sufficient in essential commodities may find themselves at a disadvantage when a support price mechanism remains in place for the long run.
At the farmer’s end, subjecting him to the pre-season support price may at the time of actual procurement deprive him of gains that could be made when the price is higher in the open market. This may go against one of the main objectives of setting the support price in the first place i.e. to protect the farmer’s interest.
The allocation for the wheat support price is better spent on research and development to increase not only yield and productivity but also variety
Quoting a recent policy paper, the note says the top 40pc of wheat farmers produce 79pc of wheat in Punjab. They sell 84pc of the total production in the province to the government or the market. The bottom 40pc of the farmers produce 11pc of the wheat in Punjab and sell only 6.4pc to the government or the middlemen.
Similarly in Sindh, the top 40pc of farmers account for 88pc of the total wheat production in the province. As a result, it is the large landowners who are the main beneficiaries of the current system. The middlemen (arhtis) also bargain with the farmers based on the support price. Needless to say, the support price fixation is contrary to the principle of free market or laissez-faire.
The government’s role should essentially be reduced to ensuring food security through strategic reserves, maintaining fair and transparent competition, and helping to raise agricultural productivity through research-based interventions. The concept of support prices should be used only when necessary and only for those commodities where production shortfalls are forecasted. The budget allocation for support prices is better spent on research and development not only to increase yield and productivity but also variety.
The CCP also pleads for a level playing field between flour mills and chakkis. Again, quoting a study sponsored by the UK Department for International Development, it maintains the share of chakkis, earlier considered to be serving around 60pc of the population, is on the rise and now caters for two-thirds of consumers — but only get 5pc of the official quota. They must be provided with a fair share in the quota (until the governments persist with the current system).
This may be done gradually based on the grinding capacity of the registered chakki mills. It is also because their entire grinding is turned into flour against only 65pc for the flour mills. Referring to the Punjab Food Department Wheat Release Policy (2020), flour mills are required to produce 65pc wheat flour, 13pc bran, and 22pc maida and fine flour. This ratio slightly differs in other provinces.
The CCP also requests the government to take steps for the removal of the regulatory roadblock to synergise quality control and enforce adequate labelling and proper disclosure of packaging. Subject to constitutional limitations, the issue of overlap in regulatory regime should be addressed mutually by federal and provincial governments by removing ambiguities in the role and responsibilities of regulators.
A comprehensive review of the regulatory regime is vital in this regard. In each of the provinces, only one government entity must be given a clear mandate of enforcing quality parameters and ensuring adequate labelling and packaging.
To ensure quality, the Pakistan Standard and Quality Control Authority (PSQCA) prescribed standards for wheat flour, whole wheat flour, fortified wheat flour and maida. The standards for wheat itself have not been updated since 1996. The PSQCA must update the standards for wheat to provide parameters to provincial governments to monitor its quality.
Finally, the CCP advises making its subsidy regime targeted and also create a foolproof, possibly third-party mechanism, to ensure that subsidy reaches its intended target: ordinary end consumers. At present, almost 75pc of the total subsidy cost — the differential between procurement costs minus the release price — is paid to banks for retiring outstanding wheat procurement loans and the benefit is spread to all segments of society regardless of income group. This needs to revise and made targeted.
Published in Dawn, The Business and Finance Weekly, September 28th, 2020