ISLAMABAD: The federal government’s decision to withdraw customs duty and sales tax of 5% each on the import of cotton in view of the falling domestic output of the commodity, which underpins the country’s industrial and export performance, is understandable.
The decision, however, does not address the twin problems responsible for the drop in cotton production - the decreasing area under cultivation and the falling yield.
In FY15, the country produced 13.96 million bales of cotton. In FY16, however, cotton output dropped sharply to 9.91 million bales. The following two years saw an increase in output to 10.7 million bales and 11.9 million bales respectively.
In FY19, however, cotton production slipped to 9.9 million bales. Cotton output for the current financial year is projected at 10.20 million bales against the target of 15 million bales. Thus, between FY15 and FY19, cotton output dropped 29%. On average, during FY15-19, annual cotton output of 11.27 million bales was recorded compared with average annual consumption of 14 million bales.
Cotton output is a function of two variables – the area under cultivation and the yield. In FY15, cotton was grown over an area of 2.96 million hectares, which in FY19 decreased nearly 20% to 2.37 million hectares. Cotton’s share in total crop area came down from 12.72% in FY15 to 10.47% in FY19.
Likewise, FY15 saw cotton yield of 802 kg per hectare, which by FY19 had fallen 11.8% to 707 kg per hectare. Thus, the two key variables combined to push down cotton output. In terms of area under cultivation, cotton is Pakistan’s third largest crop behind wheat and rice. The decrease in the area under cultivation of cotton, inter alia, signifies that farmers are using their land to grow another crop.
Being a Kharif crop, cotton competes with two other major crops, namely rice and sugarcane, for the growers’ land. The annual production of rice, which is another export crop, has been around 7 million tons over the past five years.
On the other hand, the output of sugarcane went up from 62.82 million tons in FY15 to 83.3 million tons in FY18 before falling to 67.17 million tons in FY19.
Sugarcane has registered an increase in terms of both the area under cultivation and yield. In FY15, sugarcane was grown over an area of 1.14 million hectares, which increased to 1.34 million hectares by FY18 before falling to 1.10 million hectares in FY19.
The commodity’s yield increased from 55,062 kg per hectare in FY15 to 59,587 kg per hectare in FY19.
Why is sugarcane being grown over an increasing area at the expense of cotton? To answer this question, let’s enter into the realm of political economy.
Sugarcane is used to make sugar, which is produced by Pakistan’s most powerful cartel. Top leaders of all the major political parties – the PTI, PML-N, PPP and PML-Q – have stakes in the sugar industry.
The sugar supply chain is a textbook example of political patronage. Every year, the government fixes the support price for sugarcane, which is higher than the price growers would get under competitive market conditions. The greater the sugarcane output, the more benefit the growers derive. This means the subsidy is calculated to benefit big growers, who are politically very influential.
The support price induces farmers to grow sugarcane over a larger area at the expense of cotton.
High sugarcane production, undergirded by higher prices, results in high sugar output. In FY18, the total sugar production was 6.6 million tons, while its consumption was 5.1 million tons. Therefore, the surplus sugar was exported.
Owing to distortions in the sugar supply chain, the domestic price of sugar tends to be much higher than its international price. As a result, the government subsidises export of sugar, which costs the public exchequer a pretty penny. Export subsidy, in turn, induces the millers to produce more sugar.
The low yield of cotton is due to other factors. Cotton cultivation requires moderate rainfall and a large amount of fertiliser and pesticides. Growers by and large use poor-quality seeds and pesticides, which adversely affect cotton yield.
There is a need to develop new varieties of cotton seeds, which are temperature and pest-resistant. At times, heavy rainfall, as happened last year, destroys the crop. In the absence of an effective crop insurance system, growers are reluctant to grow cotton or use high-quality pesticides.
Average consumption of cotton generally exceeds its production. In the last five years, the average annual production of cotton was 1.91 million tons, while its average consumption was 2.41 million tons.
As a result, every year, cotton has to be imported. For instance, during FY19, 0.414 million tons of cotton valuing $986 million was imported. A modest quantity of cotton is also exported.
Not only is cotton production significantly less than its consumption, the cotton produced is not of high quality. This is corroborated by the difference between per unit price of cotton that is exported and that of imported cotton.
For instance, in FY18, the average price of cotton that was exported was $1,651.3 per ton, while that of imported cotton was $1,806.3 per ton. Likewise, in FY19, the price of exported and imported cotton was $1,609.9 and $1,850 per ton respectively. Thus, not only are we net importers of cotton, we have negative terms of trade for the commodity as well.
A greater investment in research and development in the cotton sector is needed to improve both the yield and quality of the commodity. At the same time, the policy of support prices for sugarcane, which results in surplus sugar and contributes to lower cotton output, needs to be reviewed. Merely playing on customs duty and taxes on the import of cotton doesn’t provide a long-term solution to the problem of shrinking cotton output.
The writer is an Islamabad-based columnist
Published in The Express Tribune, January 6th, 2020.
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