Amid calls to reduce deficit, agri package will increase it

Institute of Policy Reforms highlights flaws in PM’s latest relief

LAHORE: The recent agriculture package announced by the premier will increase the country’s fiscal deficit by an estimated 0.4% of GDP, said a report issued by the Institute of Policy Reforms (IPR) on Saturday.

Prime Minister Nawaz Sharif this week announced a Rs341-billion package for farmers, which included cash subsidies and loans and is aimed at small farmers with holdings of up to 12.5 acres.

While farmers’ associations broadly said the package missed out on a number of issues, including support price announcement for major crops, the IPR raised questions over the adequacy of cash support as well as its mechanism.

IPR Managing Director Dr Hafeez Pasha, a former finance minister, said the good intention may fail to convert into sound deeds.

“Once again good intentions may fail to convert to sound deeds and leave the feeling of unilateral policymaking,” stated the report.

Cash support

With a year-to-year drop of 13% in price of rice and cotton, cash support for small farmers was much needed. However, under compensation seems inevitable. For example, if the price were to drop by 15%, support of Rs5,000 per acre would meet 68% of loss for rice farmers and just 29% for cotton growers.

Experts estimate a price decline of 28% for cotton and 22% for rice in 2016.

Targeting of benefits would be a challenge. It requires estimating cropping patterns at individual farm level, which could lead to leakage of funds.

Reduction in input cost

With fertiliser making up 35% of farm variable input cost, the government is right to target reduction in its price, added the report. The estimated 15% reduction in price of potassium and phosphate also has the potential to improve the country’s fertiliser mix. However, 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 (GST), the revenue loss would be Rs10 billion. Similarly, estimate of Rs7 billion as the fiscal effect of tariff reduction seems incorrect. Its true impact is Rs10 billion or 43% higher. Continued load-shedding will take away the real impact of reduction in tariff. The government also has overestimated the cost reduction by Rs500 per bag of fertiliser, added IPR.

Access to credit

Through a number of measures, the package attempts to correct the bias of access to credit. However, Zarai Taraqiati Bank Limited (ZTBL), the main supplier to small farmers, already has 20% non-performing loans. It is uncertain if it is prudent for ZTBL to take on higher risk.

Published in The Express Tribune, September 20^th, 2015.

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