Relief Package for farmers: success depends on commitment by provincial governments: IPR report

A report, released by the Institute of Policy Reforms, says the success of the Prime Ministers Relief Package for farmers 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.”

The report issued by the Institute on Saturday, titled “an evaluation of the Prime Minister’s Agriculture Relief Package” prepared by Institute’s Managing Director Doctor Hafiz Pasha recommended that rather than reacting, government might 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 off present stock as well as stabilise the domestic prices. The government may reduce the prices of light diesel oil, as 90 percent of all tube wells work on diesel.” The institute recommends reduction in the general sales tax on the oil from the present 29.5 percent to seven percent.

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 Rs 31 billion to the federal and provincial budgets. Overall, it would increase the fiscal deficit by half a percent of the gross domestic production.

The report welcomes the PM’s timely relief package for farmers. It finds that cash support and access to credit would have positive effect on small farmers. Other measures may 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 percent of the gross domestic product. 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 the oil prices and so on. The report says that with a year-to-year drop of 13 percent each in price of rice and cotton, cash support for small farmers was much needed. Some issues need attention.

The government has announced a 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 prices were to drop by 15 percent, support of Rs 5,000 per acre would meet 68 percent of loss for rice farmers and just 29 percent for cotton growers.

Experts estimate a price decline of 28 percent for cotton and 22 percent for rice in 2016. Even within the scale of announced compensation, the amount set aside for the purpose is inadequate. Rs 20 billion provided for rice and cotton each would fall short by 34 percent and 30 percent 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.

The report also says with fertilizer comprising 35 percent of farm variable input cost, the government is right to target reduction in its price. The estimated 15 percent reduction in price of potassium and phosphate also has the potential to improve the country’s fertilizer mix. Still there are some questions, 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 general sales tax, the revenue loss would be Rs 10 billion, similarly estimate of Rs 7 billion as the fiscal effect of tariff reduction seems incorrect. Its true impact is Rs 10 billion or 43 percent higher.

The government estimates the tax support by provinces to cost Rs 7 billion whereas it would cost Rs 11 billion, or 57 percent higher. Continued load-shedding will take away the real impact of reduction in tariff. The government has also overestimated the cost reduction by Rs 500 per bag of fertilizer.

Through a number of measures, the package attempts to correct the bias in access to credit for agriculture. However, there are questions about its viability when farm profits are falling. The Zarai Taraqiati Bank Limited the main supplier to small farmers, already has 20 percent non-performing loans. It is uncertain if it is prudent for the bank to take on higher risk. Regardless, the announced measures would likely benefit small farmers.



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