In a report issued on Saturday, the Institute for Policy Reforms welcomed the prime minister’s timely relief package for farmers.
Dr Hafiz Pasha, Managing Director IPR, author of the report titled ‘An Evaluation of the Prime Minister’s Agriculture Relief Package”, said 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 GDP. 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 price of LDO and so on.
With a year-to-year drop of 13 per cent each in price of rice and cotton, cash support for small farmers was much needed. Some issues need attention. The government has announced 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 price were to drop by 15 per cent, support of Rs 5,000 per acre would meet 68 per cent of loss for rice farmers and just 29 per cent for cotton growers.
Experts estimate a price decline of 28 per cent for cotton and 22 per cent for rice in 2016.
Even within the scale of announced compensation, the amount set aside for the purpose is inadequate. The 20 billion rupees provided for rice and cotton each would fall short by 34 per cent and 30 per cent 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 government must do all to prevent it from happening.
REDUCTION IN INPUT COST:
With fertilizer comprising 35 per cent of farm variable input cost, the government is right to target reduction in its price. The estimated 15 per cent reduction in price of potassium and phosphate also has the potential to improve the country’s fertilizer mix. Some questions remain, 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 GST, 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 per cent higher. The government estimates GST support by provinces to cost Rs 7 billion whereas it would cost Rs 11 billion, or 57 per cent higher. Continued load-shedding will take away the real impact of reduction in tariff. The government also has 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 ZTBL, main supplier to small farmers, already has 20 per cent non-performing loans.
It is uncertain if it is prudent for ZTBL to take on higher risk. Regardless, the announced measures would likely benefit small farmers.
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 its cost to the federal and provincial budgets. Overall, it would increase the fiscal deficit by a half percent of GDP. This is entirely justified though may need special advocacy with the IMF.
