The government needs to realize that free markets work very well in industry but not in agriculture. The government did not intervene when it was required to and when it intervened, it proceeded in a thoughtless manner, discouraging wheat production, encouraging speculation in wheat prices and its smuggling. The end result was poor consumers paying higher prices for their staple food.
WHEAT is the staple food of the vast majority of Pakistanis as a very small percentage consumes rice in place of wheat. It is the bellwether of the price level as the food and consumer price indices move in tandem with wheat prices. It is observed by laymen and concluded by economists after detailed research that there is a high correlation between the general price level and the price of wheat.
Poor families consume roti/nan in all three meals whereas affluent Pakistanis substitute bread in the breakfast. The government policy must therefore encourage higher production of wheat while allowing very small increase in its price so that the people living below the poverty line do not get more malnourished by not being able to afford adequate wheat flour for their family.
The wheat trade cannot be left to free markets which are ideal for industrial goods. The government has different policy measures for influencing wheat output and prices.
The first relates to pricing of non-farm inputs i.e. those inputs which the farmers buys from the market mainly fertilizer and diesel. Fertilizer is subsidized in almost all developing countries. India whose per acre yield of wheat is about forty per cent higher than Pakistan subsidizes fertilizer to the extent of one-fourth of its market price.
Pakistan, on the other hand, charges a GST of 15 per cent on fertilizer and it is the only country in the world to charge such a high rate of GST on an agricultural input which has direct and immediate impact on agricultural output.
This disincentive for use of fertilizer has been pointed out for last many years but the government is adamant although the tax yield on this account is only Rs1 billion. The prices of urea and DAP have increased by about 10 per cent during the last year.
If the GST was removed both on domestic production and imports, the prices of urea and DAP would fall allowing small and big farmers to use more fertilizer and increase output. The output impact would be about Rs15 billion if the government foregoes Rs1 billion of tax revenue.
The second policy measure is the procurement price and procedure. The procurement price is announced at the time of harvesting assuring farmers that their output would be bought at the stated price and therefore reducing the risk of price uncertainty.
Normally, the price should be raised according to CPI of the previous year or the increase in the index of the non-farm inputs in the previous year. The government increased the support price of wheat from Rs300 to Rs400 per 40 kg from Rabi 2003 to Rabi 2005, an increase of one-third or thirty three per cent.
The support price for Rabi 2006 has been fixed at Rs415 per 40 kg — an increase of less than four per cent. The determination of support price is rather quixotic as the annual inflation rate during the preceding two years when the price was hiked by one-third was less than four percent whereas in the current preceding year when the price was increased by less than four percent, the annual inflation was almost nine percent. Hence, no consistent price support policy for wheat is being followed in Pakistan.
Previously, the procurement was confined to PASCO, a federal government procurement corporation and provincial food departments. Now, the government has allowed the private sector to procure wheat at harvesting time. On principle, there should be no objection to private sector procurement in competition with government agencies but the private sector has been allowed to buy wheat with 10 per cent cash margin and concessional interest rate.
Two years ago, government allowed private sector to buy first and it led to complete capture of the wheat market by private sector and sharp escalation in wheat prices. Private sector hoarded the commodity and manipulated the market of the most essential food items whereas the government was claiming credit for freeing the market at the cost of poor consumers. The procurement target in 2005 for provincial governments was 4.7 million tons but governments could only procure 3.9 million tons.
Hence, there was a shortfall of about one million tons and the provincial governments do not have adequate stocks till May 2006 when the fresh crop comes into the market.
The price of wheat has already increased from Rs10.2 to Rs11.8 showing an increase of 15 per cent. The prices will go up further before the arrival of the next crop. The opening up of procurement for the private sector, on soft terms, has led to speculative increases in wheat prices and the government has lost control over the price of this essential commodity.
The time honoured inter-provincial movement, especially before completion of procurement by government agencies, was not allowed because wheat going to NWFP and Balochistan ended up being smuggled to Afghanistan and beyond. The inter-provincial movement of atta was allowed so that there is harmony in atta prices among all provinces.As atta has a shelf life of less than four weeks, it can not easily be smuggled. This year the government allowed inter-provincial movement before the start of the procurement season and it is estimated that over a million tons of wheat has been smuggled to Afghanistan and beyond.
Unless the government policy was to facilitate this smuggling, the logic behind this decision is difficult to appreciate. This amount was from the private sector procurement of wheat. If private sector has not been encouraged to procure wheat on easy terms and smuggle it across borders, the provincial procurement target could have been met and the wheat prices would be much lower.
Wheat like other agricultural products has a peculiarity as it is harvested in April and May and consumed uniformly throughout the year. There is a financial and storage cost for supplying wheat at even rate during the year. The question arises as to whether the government or the consumers should bear this storage or financial cost. So far, the decision has been that this cost should be borne by the government.
The private sector used to release wheat from its stocks in early season i.e. from May to October and then the government would release wheat at a uniform price till April. Now the Government has decided on a cascaded formula. The price of wheat will keep on increasing from October to April according to rising cost. This is the most anti-poor measure adopted by the government because the salary of a soldier or a clerk does not increase in winter months to buy more expensive wheat especially when in cold months food requirements increase.
The government’s policies dictated by donors and arm chair economists are based on free market fundamentalism, whereas fundamentalism in all fields whether religion or economics should be derided. The latest World Development Report 2006 with excellent exposition of ‘equity’ and ‘development’ points to market imperfections and failures stemming from weak institutions and powerful vested interest.
The government needs to realize that free markets with non-governmental intervention work very well in industry but not in agriculture. The government did not intervene when it was required to and when it intervened, it proceeded in a thoughtless manner, discouraging wheat production, encouraging speculation in wheat prices and its smuggling. The end result was poor consumers paying higher prices for their staple food.
(The author is a former Secretary, Planning)