The subsidy for the agriculture sector announced by the government in the budget for the current fiscal year aims at increasing farm output but does not attack rural poverty.
Though most view the subsidy on farm inputs as an official effort to please the powerful feudal lobby in an election year, they tend to agree that it will have a positive impact on the farm output and result in a better average yield per acre.
Agriculture, which forms around 21 per cent of the national Gross Domestic Production (GDP), expanded by slightly over five per cent, with major crops showing growth of 7.3 per cent in last fiscal year. The sector is expected to grow by five per cent this year.
In the budget 2007/08, the government took two major steps to reduce the growers’ cost of production: It raised the existing subsidy on DAP fertilisers to Rs470 per bag from Rs400. Second, it has given 25 per cent discount on the electricity bills of agriculture tube-wells, to be equally financed by the federal government and the provinces.
The subsidy on the DAP fertiliser is estimated at Rs17-18 billion. Similarly, the reduction in the electricity bills of tube-wells is estimated to cost Rs7.50 billion.
Though farmers have received the relief announcement well, fears persist that it will not be uniformly and fully transferred to growers, including the smaller ones, by the market as was the case with the subsidy given on the DAP fertiliser last year.
The government had announced a subsidy of Rs250 per bag on the DAP fertilisers last year before the sowing of wheat. The decision was greeted by almost all farmers’ bodies as it was hoped, and rightly so, to encourage greater use of DAP fertiliser and reduce consumption of urea. In the Rabi season alone, the use of DAP fertiliser, according to AgriForum Pakistan chairman Ibrahim Mughal, grew by 54 per cent and 20 million bags were used by farmers for wheat crop alone. Resultantly, the country obtained a record bumper crop of over 23.5 million ton this year.
He says the increased use of phosphatic fertilisers due to their subsidised rates, the usage of urea has dropped to 90 million bags from the previous 100 million bags a year. “This means the country can meet its urea requirements from local production, without any need to import it,” he says.
Farmers, nevertheless, complain that the subsidy was not passed on to them in toto as importers did not bring out their stocks in the market owing to rising DAP prices in the international (especially American) market to around $450 per ton. “The government had announced a subsidy of Rs250 on a bag of DAP fertiliser, reducing its price for the growers to Rs850. But farmers had to pay Rs900-950 for a bag due to its short supply in the market. As a result, farmers got a subsidy of Rs100-150 per bag of phosphatic fertiliser. Out of a total subsidy of Rs13 billion announced on DAP, farmers could actually receive discount of only Rs8 billion,” says Mughal.
In view of higher international DAP prices, the government increased the subsidy on it to Rs400 per bag in order to allow its availability to growers at Rs850. Yet importers were reluctant to bring out their stocks in the market as needed by the farmers. “Since the imports were being made from the United States, where the DAP prices were highest, its actual retail price rose to Rs1,500 a bag in the domestic market. Even a subsidy of Rs400 was not enough for importers to sell their imports at Rs850,” says Mughal.
He says the growers made efforts to convince the government to look towards China for DAP imports because it is available for $350 a bag in that country and to ensure that the phosphatic fertiliser is made available to growers at Rs850-900 per bag. “The government agreed to raise the subsidy by another Rs70 a bag to encourage a balanced use of nitrogenous (urea) and phosphatic (DAP) fertilisers for optimum output. The direct subsidy given on the DAP fertiliser resulted in an immediate increase in the production of wheat this year, which has surged to a record high 23.5 million tons. So if DAP is made available to growers at Rs850-900 in the coming months, and if its use rises to 35 million bags from 30 million bags a year, it will leave a very positive impact on the output of crops. But if it is not available to farmers on the subsidised rates, farmers will turn back to urea and production fall,” AgriForum chairman says.
He says the government will pay Rs17-18 billion on DAP subsidy during 2007/08 if it is made available at the subsidised rates throughout the year for Rabi and Khareef crops. “It has budgeted a sum of Rs13 billion for the subsidy on phosphatic fertilisers while Rs5 billion is the carryover from the last year,” he says.
While the subsidy on the phosphatic fertiliser is a general subsidy, the growers describe 25 per cent discount allowed on the electricity bills of the tube-wells use for irrigation as too small. In addition, it will cover only 13 per cent or 130,000 tube-wells around the country as the remaining 870,000 are run by diesel. Farmers want the government to also subsidise diesel for the agriculture usage, that is, for both tube-wells and tractors. The government says it already is providing diesel to the users at cheaper than its international rates.
Mughal says the actual size of the subsidy on electricity is not more than 15 per cent. In the past, according to him, the discount was up to 35 per cent.. “This time the federal government played a trick on us by pushing upwards the power rates for agriculture tube-wells by 10 per cent in March, and then allowing 25 per cent subsidy on it in the budget. Our electricity bill was first raised to about Rs33 billion from around Rs30 billion in March and is now reduced to Rs26-27 billion. But I’d still say that it is a good step for the agriculture production.” Furthermore, he says, it is yet not clear as to how the provincial governments will pass on their share of 12.5 per cent in the electricity subsidy.
The government claims that the primary objective of the farm subsidy is to encourage expansion of the agriculture sector, which, in turn, will bring prosperity to rural areas, create jobs, and alleviate poverty. Neither farmers nor economists agree with it.
“It is not anti-poverty subsidy because a major portion of rural population is either landless or comprises small landholders who will not be able to use it at all. A large part of rural population earns its bread by selling its labour. At best, it (subsidy) will help raise crop production. It is an effort to please the powerful aristocracy,” says economist Dr Faisal Bari. “If the government wants to target rural poverty, it will have to initiate direct pro-poor programmes that bear down upon the poor farm workers,” he says.
He agrees that the increase in the farm output helps channel greater income into the rural economy. But, he insists, the landless and small landholders do not benefit from income transfer much, and it does not guarantee reduction in the rural poverty. “Even the minimum support price fixed by the government for various crops benefits rich and big farmers with a holding capacity rather than small growers who are forced to sell their produce at lower than the minimum indicated price.”
Mughal also agrees with him, though not totally. “We cannot say that greater income transfer or subsidies on fertilisers and electricity can help in poverty reduction in the rural areas. “If the government really wants to help the small, poor farmers, it should ensure that they are given access to cheaper agriculture credit for inputs and sufficient water for their crops and are helped in marketing their produce at the minimum support price. Besides, they also need low-cost loans for the purchase of tractors and other equipment for mechanical sowing and harvesting for better yields.”
He says banks could disburse only Rs141 billion agriculture credit in 2006/07, falling short of the central bank target of Rs160 billion. “The total credit requirement of the country’s farm sector is between Rs350–500 billion. Whatever is actually disbursed goes mainly to big farmers, and the small ones are left at the mercy of middleman for meeting their credit needs at more than double the bank rates,” he says, disputing the official claims that at least Rs250 billion had flown into the rural economy due to bumper wheat crop this year.
“Unless the government takes steps for fair distribution of agriculture credit, ensures availability of water to farmers regardless of the size of their landholding or political clout, speeds up mechanisation of farming and improves markets, the rural poverty is not going away,” Mughal says.