agriculture pricing policy and agriculture credit

Syed Karim Bux ShahSyed Karim Bux Shah 11

Chapter 05Chapter 05

Agriculture: Critical Issues

APP refers to pricing of inputs i.e. seeds, water, APP refers to pricing of inputs i.e. seeds, water, fertilizers, technologies, and credit etc- and fertilizers, technologies, and credit etc- and

outputs i.e. agricultural produce.outputs i.e. agricultural produce.

APP has important impacts APP has important impacts on: on:

1.1. Income distribution (specially small farmers)Income distribution (specially small farmers)2.2. Industrial productivity.Industrial productivity.3.3. Urban sector wages.Urban sector wages.4.4. Exports.Exports.5.5. Cost of living.Cost of living.6.6. Linkage between agriculture and non-Linkage between agriculture and non-agriculture agriculture sectors.sectors.


A good pricing policy works as an incentive to A good pricing policy works as an incentive to produce certain goods (crops) at required quantities produce certain goods (crops) at required quantities during a certain period.during a certain period.

Main objectives of APP:Main objectives of APP:1.1. Balanced growth of agriculture sector.Balanced growth of agriculture sector.2.2. Meeting domestic consumption requirements.Meeting domestic consumption requirements.3.3. Forex earning sources (exports).Forex earning sources (exports).4.4. Forex saving sources (avoid food items Forex saving sources (avoid food items import).import).5.5. Equitable income distribution.Equitable income distribution.66 Stability in food prices for consumers.Stability in food prices for consumers.7.7. Maintain industrial competitiveness.Maintain industrial competitiveness.8.8. Encourage investment in agriculture sector.Encourage investment in agriculture sector.9.9. Reduce production costs by switching over to Reduce production costs by switching over to cost cost effective technologies.effective technologies.


Managerial and governance issues Managerial and governance issues are also important in uplifting are also important in uplifting agriculture sector. For example:agriculture sector. For example:

11.. Timely equitable/fair availability of seeds, Timely equitable/fair availability of seeds, fertilizers, pesticides etc.fertilizers, pesticides etc.

2.2. Lesser reliance on subsidies.Lesser reliance on subsidies.

3.3. Enhancing managerial efficiency of Enhancing managerial efficiency of agriculture of agriculture of agriculture sector to minimize agriculture sector to minimize costs.costs.

4.4. Accessible institutional/formal/bank credit.Accessible institutional/formal/bank credit.


TWO METHODS ARE COMMON:TWO METHODS ARE COMMON:

1.1. COST OF PRODUCTION METHOD.COST OF PRODUCTION METHOD.

2.2. PARITY APPROACH/METHOD.PARITY APPROACH/METHOD.


1.COST OF PRODUCTION METHOD:1.COST OF PRODUCTION METHOD:

This approach guarantees fair return of certain This approach guarantees fair return of certain crops to farmers /producers , with maintaining crops to farmers /producers , with maintaining balance b/w competing crops.balance b/w competing crops.

This method serves as a better option when the This method serves as a better option when the objective is to provide productive incentives for objective is to provide productive incentives for particular crops and crop combination.particular crops and crop combination.


Disadvantages of cost of production Disadvantages of cost of production approach:approach:

1.1. Problem of valuation of certain inputs Problem of valuation of certain inputs whose market whose market is not well developed –such as is not well developed –such as labor ,management, labor ,management, and land rent.and land rent.

2.2. Problem of using different technologies by Problem of using different technologies by farmers. farmers. Farmers using older (expensive) Farmers using older (expensive) technologies loses, technologies loses, whereas those using new whereas those using new (cheaper) technologies (cheaper) technologies are benefited.are benefited.

3.3. large/big landlords are more benefited , due large/big landlords are more benefited , due to to economies of scale.economies of scale.


2.Parity pricing approach:2.Parity pricing approach:

““focuses on correcting imbalance in terms of focuses on correcting imbalance in terms of trade b/w agriculture and non agriculture trade b/w agriculture and non agriculture sectors”sectors”

Attempt is made to bring balance b/w the Attempt is made to bring balance b/w the pricing of commodities sold by farmers and the pricing of commodities sold by farmers and the commodities which they purchase.commodities which they purchase.

Calculated through comparative index of Calculated through comparative index of agriculture and non agriculture products for a agriculture and non agriculture products for a selected year and a base year . Inflation is selected year and a base year . Inflation is taken into account.taken into account.

Works to serve objective of long run equity b/w Works to serve objective of long run equity b/w urban (industrial) and rural (agriculture) urban (industrial) and rural (agriculture) sectors.sectors.


1.Open market prices: demand–supply 1.Open market prices: demand–supply forcesforces

2.World prices/international prices.2.World prices/international prices.


(D) ISSUESS IN PRICING POLICY(50’s & 60’s)(D) ISSUESS IN PRICING POLICY(50’s & 60’s)SOURCE: National Commission A 1988 SOURCE: National Commission A 1988

REPORTREPORT

THE NCA IDENTIFIES THE MAIN CONCERN IN APP THE NCA IDENTIFIES THE MAIN CONCERN IN APP OF 50’s & 60’s:OF 50’s & 60’s:

To Keep cost of food lowTo Keep cost of food low

TO KEEP INDUSTRIAL RAW MATERIAL CHEAPER,TO KEEP INDUSTRIAL RAW MATERIAL CHEAPER,

To KEEP URBAN WAGES LOW IN INDUSTRIAL SECTOR.To KEEP URBAN WAGES LOW IN INDUSTRIAL SECTOR.


MAIN FEATURES OF APP IN 50’S AND 60’S:MAIN FEATURES OF APP IN 50’S AND 60’S:

1.1. Fixing of low retail prices of food grains even Fixing of low retail prices of food grains even below below international parity prices.international parity prices.

2.2. Heavy export duties on cotton in favor of Heavy export duties on cotton in favor of local local textile industry.textile industry.

3.3. Ban on inter-district and inter-province Ban on inter-district and inter-province movement which resulted in movement which resulted in

depressed prices indepressed prices in areas of surplus areas of surplus production.production.

4.4. Over-valued exchange rate (rupee) caused Over-valued exchange rate (rupee) caused losses to agriculture sector and agri losses to agriculture sector and agri

exports exports proceed were converted at over-proceed were converted at over-valued valued rupee which reduced rupee which reduced agriculture sector agriculture sector earnings.earnings.


5.5. Over valued exchange rate benefited Over valued exchange rate benefited industrial sector in terms of cheaper imports industrial sector in terms of cheaper imports of industrial machinery.of industrial machinery.

6.6. Losses from industrial exports due to over Losses from industrial exports due to over valued rupee, were offset by bonuses and valued rupee, were offset by bonuses and subsidies given to industrial sector.subsidies given to industrial sector.

7.7. Barter deals in which agriculture products Barter deals in which agriculture products exchanged for industrial machinery and exchanged for industrial machinery and inputs to the advantages of industrial sector.inputs to the advantages of industrial sector.

8.8. Overall, Agriculture remained a neglected Overall, Agriculture remained a neglected sector.sector.

MAIN FEATURES OF APP IN 50’S AND MAIN FEATURES OF APP IN 50’S AND 60’S:60’S:


((E)MEASURES TO UPLIFT AGRICULTUREE)MEASURES TO UPLIFT AGRICULTURE

1.1. SUBSIDIES GIVEN TO AGRICULTURE SUBSIDIES GIVEN TO AGRICULTURE INPUTS- FERTILIZERS ,SEEDS, INPUTS- FERTILIZERS ,SEEDS,

TUBEWELLS. TUBEWELLS.

2.2. IN 1981, AGRICULTURE PRICES IN 1981, AGRICULTURE PRICES COMMISION COMMISION WAS ESTABLISHED.WAS ESTABLISHED.

3.3. MINIMIUM SUPPORT PRICE PROGRAM MINIMIUM SUPPORT PRICE PROGRAM INITIATED TO SAVE FARMERS INITIATED TO SAVE FARMERS

FROM FROM MARKET STOCKS AND MARKET STOCKS AND EXCHANGE EXCHANGE INVESTMENT ,AND REDUCE INVESTMENT ,AND REDUCE RISK. RISK.


(F) STRUCTURAL ADJUSTMENT (F) STRUCTURAL ADJUSTMENT PRIGRAM(SAP)PRIGRAM(SAP)

BY IMF AND WB IN1988BY IMF AND WB IN1988

1.1. ELIMINATE FERTILIZER SUBSUIDIES.ELIMINATE FERTILIZER SUBSUIDIES.

2.2. REDUCE WHEAT SUBSIDIES.REDUCE WHEAT SUBSIDIES.

3.3. ABANDON EDIBLE OIL SUBSIDIES.ABANDON EDIBLE OIL SUBSIDIES.

4.4. MANY OTHER SUBSIDIES ELIMINTED MANY OTHER SUBSIDIES ELIMINTED GRADUALLY.GRADUALLY.


TYPED BY: TYPED BY: RAJARAJA (BBA HONS P 2 ROLL (BBA HONS P 2 ROLL NO:120 2K9)NO:120 2K9)


Agriculture CreditAgriculture Credit

Main Findings of some surveys:Main Findings of some surveys:YearYear % of Informal Credit % of Informal Credit

to to Agri SectorAgri Sector

19851985 68%68%

72-7372-73 90%90%

8585 85%85%


1995 WB Report Conclusions 1995 WB Report Conclusions on Agri Credit: on Agri Credit:

Key to ProductivityKey to Productivity Only 32% of rural take loansOnly 32% of rural take loans 10% borrow from former sources10% borrow from former sources ZTBL 76% Commercial Banks 17%, Cooperatives 6%ZTBL 76% Commercial Banks 17%, Cooperatives 6% 90% of farmers rely on informal sources90% of farmers rely on informal sources Informal sources dominate rural creditInformal sources dominate rural credit Both Sources are short run Both Sources are short run 94% of formal credit is for production and 94% of formal credit is for production and

investmentinvestment Rich Get cheaper credit, poor get expensive creditRich Get cheaper credit, poor get expensive credit Formal sources are complex and lengthyFormal sources are complex and lengthy


Informal Credit SourcesInformal Credit Sources

According to surveys in Punjab only 15% of According to surveys in Punjab only 15% of small farmers and in Sindh only 8% have access small farmers and in Sindh only 8% have access to formal creditto formal credit

Problem of getting credit in time is also thereProblem of getting credit in time is also there Farmers prefer informal credit due to Farmers prefer informal credit due to

1.1. Easy accessEasy access2.2. No red-tapismNo red-tapism3.3. Timely AvailabilityTimely Availability4.4. Consumptions & Emergency loansConsumptions & Emergency loans5.5. Deferment of Payment OptionsDeferment of Payment Options6.6. No or nominal CollateralNo or nominal Collateral7.7. High transaction cost of formal creditHigh transaction cost of formal credit


ArgumentsArguments

AgainstAgainst ForFor

ExploitativeExploitative Suitable to Small Suitable to Small borrowersborrowers

High ratesHigh rates More Efficient More Efficient AccessibilityAccessibility

Perpetual In-debtnessPerpetual In-debtness Emergency LoansEmergency Loans

Imperfect & Imperfect & Monopoly MarketsMonopoly Markets

Consumptions LoansConsumptions Loans


Statistics of Formal & Informal Statistics of Formal & Informal SourcesSources

Figure 5.5 (Disbursement of Figure 5.5 (Disbursement of Agriculture Credit by formal Agriculture Credit by formal Institutions 1955-2000)Institutions 1955-2000)

Table 5.8 (Sources of Loans by Asset Table 5.8 (Sources of Loans by Asset quintile)quintile)

Table 5.10 (Agriculture Credit Table 5.10 (Agriculture Credit disbursed in Pakistan by Agencies)disbursed in Pakistan by Agencies)

Table 5.11 (Agriculture Credit Table 5.11 (Agriculture Credit Advanced by ZTBLAdvanced by ZTBL


Agriculture TaxationAgriculture Taxation

Arguments in favorArguments in favor Justice, Equity and Justice, Equity and

EquitabilityEquitability IllogicalIllogical Exemption to small Exemption to small

farmersfarmers Encourage ax evasion Encourage ax evasion Income elasticityIncome elasticity

Arguments againstArguments against Collection Problems due Collection Problems due

to:to: Lack of standard Lack of standard

accounting recordsaccounting records Difficult to assess actual Difficult to assess actual

incomeincome Scattered and Large Scattered and Large

number of farmers.number of farmers. Costly to collect taxesCostly to collect taxes Uncertainty in agri incomeUncertainty in agri income Difficult for record Difficult for record

keepingkeeping


Others Issues: Is Agriculture Others Issues: Is Agriculture sector over-taxedsector over-taxed

Lion’s share of indirect taxes in Govt’s tax Lion’s share of indirect taxes in Govt’s tax revenue is paid by therevenue is paid by the

Lower procurement prices for agri. Produce Lower procurement prices for agri. Produce (Hidden Taxes)(Hidden Taxes)

Export duties on agriculture commoditiesExport duties on agriculture commodities Increase in agricultural income offset by increase Increase in agricultural income offset by increase

in populationin population And higher expenditure on inputs and equipmentsAnd higher expenditure on inputs and equipments Taxing agri-sector barrier to saving and Taxing agri-sector barrier to saving and

investment in the sector.investment in the sector. Taxing would discourage addition the cultivable Taxing would discourage addition the cultivable

landland


Taxation- Economic and Taxation- Economic and Political PerspectivePolitical Perspective

National Commission on Agriculture (NCA) National Commission on Agriculture (NCA) 1988 Report arguments against Agri-tax1988 Report arguments against Agri-tax Lack of sustainability in agri-incomeLack of sustainability in agri-income Majority of the small landholders unable to Majority of the small landholders unable to

produce taxable surplus.produce taxable surplus. Nature-dependent income, highly Nature-dependent income, highly

unpredictable to rely.unpredictable to rely. Uninsurable income due to greater uncertainty.Uninsurable income due to greater uncertainty. Farmer act as their own insurer.Farmer act as their own insurer. Incidence of indirect taxation on agri-Incidence of indirect taxation on agri-

population. population.


Taxation- Economic and Taxation- Economic and Political PerspectivePolitical Perspective

National Taxation Reforms Commission National Taxation Reforms Commission (NTRSC) (1986) favor agri-tax on the following (NTRSC) (1986) favor agri-tax on the following grounds: grounds: The presence of large landholders which can be The presence of large landholders which can be

brought under the tax net.brought under the tax net. Increase in agri-income resulting from green revolution.Increase in agri-income resulting from green revolution. Encourages and a loophole to tax evasion: Nonagri-Encourages and a loophole to tax evasion: Nonagri-

income is claimed as agri-income and taxes are income is claimed as agri-income and taxes are evaded.evaded.

Creates feeling of jealousy/injustice among non-Creates feeling of jealousy/injustice among non-agri sectors.agri sectors.


5.6: Water Crisis5.6: Water Crisis

Of 22.15mh cultivable land, 18.04 mh Of 22.15mh cultivable land, 18.04 mh (81%) land depends on irrigation through (81%) land depends on irrigation through canals and tube wells.canals and tube wells.

During 1960’s Govt. main focus was on During 1960’s Govt. main focus was on investment on irrigation system.investment on irrigation system.

Later no serious effort made in that Later no serious effort made in that direction, which resulted in water crisis in direction, which resulted in water crisis in 1980’s onwards. 1980’s onwards.


Main Problems Main Problems Poor maintenance.Poor maintenance. Lack of regular desilting.Lack of regular desilting. Crumbling canal banks.Crumbling canal banks. High seepage and water losses. (35-40% delivery High seepage and water losses. (35-40% delivery

from head to tail. (WB study 1994).from head to tail. (WB study 1994). Tail-enders sufferingsTail-enders sufferings Water logging.Water logging. Salinity (Sindh the main victim)Salinity (Sindh the main victim) Inadequate reservoir capacity.Inadequate reservoir capacity. Uneven water flow pattern (85% water flow in Uneven water flow pattern (85% water flow in

summer).summer). Inadequate drainage system.Inadequate drainage system. Loss of land due to water logging and salinity.Loss of land due to water logging and salinity. Corruption in water distribution. Corruption in water distribution.

agriculture pricing policy and agriculture credit

Business

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agriculture sector earnings

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agriculture products

agriculture prices commision