IN AN article, “Flawed wheat policy,” recently published by EBR Weekly, the writer has raised some interesting points, which one would do well to paraphrase, before commenting on them.

* Determination of support price (which the writer has used inter-changeably with procurement price) is quixotic, as the free market is only good for industry but not for agriculture. The wheat trade cannot be left to free market, which is ideal (only) for industrial goods. * Food and consumer prices move in tandem affecting general price level (and therefore the state must control them). * India produces 40 per cent more wheat per acre, “because it subsides fertilizer,” and Pakistan on the other hand charges 15 per cent GST. Only if fertilizer was made cheaper, we would have a higher yield. * The government should fix procurement price according to CPI of the previous year or in tandem with increase in the price of non-farm inputs. * ‘On principle’ (great reluctance in conceding that) there should be no objection to private sector procurement in competition with government agencies, but the former should not be allowed to buy wheat with only 10 per cent cash margin (terms should be made more onerous for the private sector). * The private sector has indulged in speculative increase in prices, and is guilty of capturing the wheat market completely, hoarding the commodity and manipulating its price. * There was justification for the time-honoured ban on inter-provincial movement of wheat, “because wheat going to NWFP and Balochistan ended up being smuggled to Afghanistan and beyond.” Over a million tons has, as a result, been smuggled this year (with the dense presence of troops on either side of the border). * The government should bear the storage and financial cost of the commodity and not pass it on to the consumers. * The government decision to cascade the issue price is an anti-poor policy dictated by donors and armchair economists, based on free market fundamentalism.

The incentive to the grower to produce more would be higher if there was no state intervention to his determent. One would agree with the writer that determination of support price is quixotic and the wheat policy is flawed, but not for the reasons he has marshalled to prove his point. It is flawed for precisely the opposite reasons.

Contrary to the argument in the article, full liberalization has not been allowed to take place and therefore the policy remains flawed. Government intervention reinforces market imperfections, although it should be striving to remove them to facilitate free flow of goods and bring about a balance in demand and supply.

The state, as a part of the flawed policy, interferes too much, distorts the market, stifles competition, impedes development of free trade and worst of all neglects its primary duty of regulation.

As to the question that wheat price, particularly the support price (which should be called by some other name because it punishes the grower by forcing him to sell to the government at a price generally lower than in the market) affects the CPI or general inflation.

The connection between the two is weak at best. The weight assigned to wheat in CPI is only 12.5 per cent. There was no increase in wheat price in September 2004, although the CPI increased by 0.38 per cent. In October, the increase in wheat price was 2.1 per cent and in CPI only 1.19 per cent and in the following month, the two figures were 6.62 and 1.12 respectively. In January 2005, wheat prices fell by 1.5 per cent whereas CPI increased by almost one per cent.

Inflation is measured by the rise in average price levels. In case demand exceeds supply, the average price level rises to create a new balance. Demand for goods may increase because of growth in income. The general price level may also go up due to increase in money supply, which has been the case in Pakistan.

Restrictions on movement by the government, except mercifully the last year, depresses prices in regions from where its exports are disallowed and to rise in regions to which its export has been banned. Such restrictions work to the detriment of the grower and distort the market.

This deliberate policy to depress prices for the grower has caused the production not to rise but to cause shortages, resulting in fiscal pressures and higher prices. The support price of Rs415 has no relation with the economic price of the commodity. The grower is short-changed in the process.

The relevant price for procurement should be the import parity price. Wheat price should be related to the world’s price, because we frequently import the commodity. In the year 2004-05 parity price was Rs560/40 kgs (Karachi) and Rs550 (Lahore).

We could match Indian productivity, the writer argues only if GST on fertilizer was removed. Fertilizer alone does not constitute the inputs. Cheaper fertilizer may encourage the farmer to use it more than optimally warranted. Higher productivity among other things has close nexus with an equitable distribution of land. India is ahead of us in this respect.

The government should not fix prices unless it wishes to help the grower. In that case, the price should follow the world trend and not the previous year’s CPI as suggested by the writer. The government may wish to help the grower by buying wheat from him at the time of the crop but it should be buying at a price not lower than he would otherwise get. That is the only way to help more wheat to grow.

No amount of disclaimer can detract from the useful role the private sector plays. As the survey report of the Agricultural Prices Commission would show, public sector is limited to only 30 per cent or less of wheat trading. The government should encourage the private sector to grow and assume responsibility for the commodity. Pricing policy of the government and administrative restrictions on movement of wheat are the main reasons discouraging growth. Forces of demand and supply determine actual price in the market. Low production means higher price.

We are in a paradoxical position where we end up losing both in case of good or a bad crop. We pay subsidy irrespective of whether we have a surplus or a shortage. Total subsidies on supporting the quixotic policy in 2001-02, 2002-03 and 2003-04 were Rs9 billion, Rs12 billion and Rs11 billion respectively. That is not counting the direct expenditure on maintaining four Provincial Food Departments and a huge monolith of Passco.

During 2003-04, 1.5 millions tons of wheat were imported on which a subsidy Rs13 billion was paid. This was an indirect subsidy to the grower in the exporting countries. We are prepared to subsidize the grower of Australia or the US or Russia but not our own. The government is not prepared to buy wheat in India either, where the element of subsidy would have been much lower. We tend to treat Indian grower wholly unworthy of our commercial consideration even if we hurt ourselves in the process by buying dear elsewhere. The growers thousands of miles away are supported, rather than the farmers in the neighbourhood.

Interestingly, subsidy was paid in 2001-02 and 2002-03 on exports. This was because the private sector was not allowed to export to Afghanistan because it constituted ‘smuggling’. When the state finally decided to do it, the stocks had deteriorated and the prices had come down. That is how the public sector works.

What the writer calls ‘smuggling’ is only a non-recorded trade. Any trade with Afghanistan including export of wheat can be to the mutual benefit of both the countries. If handled sensibly and in an above board manner, Pakistan would stand to gain if it allows legitimate export to Afghanistan even by importing wheat, if necessary, rather than allow everyone on the borders responsible for controlling “this smuggling” to earn rent for colluding with the smuggler.

Entrusting trading to the whims of public sector where decisions are taken by one single individual, say Director Food Punjab, who holds the interests of the consumer and grower closest to his heart, is a dangerous strategy. It would be much safer to leave the commodity to the competitive forces of the market.

The article’s conclusion is right for different reason. The flawed policy is far from being pro-poor as claimed. There is no connection in the price the urban consumer pays and the price at which the Food Department sells to the flourmills.

Since flourmills buy some of the wheat, and at times, most of it in the market at a higher price, they are not going to sell the finished product at the price at which they obtained some of the wheat from the department. Public distribution system is weak and relies only on the ‘hope’ that the floor mills will pass on the subsidy to the consumers.

In the event the flourmills reap higher profits and the food departments earn the rent and they both earn the gratitude of the consumer and the taxpayer for doing all this in their name.

The misplaced concern for the consumer who have not benefited from the existing policy could better be addressed by launching substantially targeted food subsidy schemes. The poor deserve an efficient public support programme where he benefits directly flow from the subsidy.

Unfortunately, the present system put in place and continued indefinitely in the name of the poor only helps the vested interests. The only people in support of the archaic support price mechanism are the flourmills and the provincial food departments and Passco.

The writer emphasized the continued involvement of the state in wheat trading as a guarantee for fair returns to the growers and stable prices for the consumers. One would respectfully disagree with the honourable writer of that article because the state is best left to regulate rather than indulge in commercial activities.

Government involvement in trading is a practice contrary to market economic principles, and is unique to the farming sector only. Manufacturing and trading fortunately do not involve taxpayers’ money in subsidizing their profits, except occasionally like the purchase of unsold sugar, which the manufactures cannot dispose of because of a very high production cost. There are sound economic reasons to allow private sector to assert its role and for the government to restrict itself to the role of facilitator as well as regulator.