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Issues in
agricultural pricing
AGRICULTURAL pricing is a subject of lively debate. It has
evoked divergent views, ranging from a forceful advocacy of
support prices for key agricultural commodities and subsidies
for major inputs to complete liberalisation of prices and
reliance upon the market mechanism to achieve efficiency and
competitiveness.
Successful integration with the international economy has also
been considered an important factor.
An objective analysis of the issues involved in this debate is
necessary so that appropriate policy prescriptions can be
adopted.
Agriculture is critical to economic growth and poverty
reduction. It accounts for close to a quarter of the GDP and
employs over 44 per cent of the workforce. The average annual
growth of agricultural output at more than four per cent has
been quite impressive.
Future growth will, however, largely depend upon increasing
productivity which in turn requires major changes in systems,
policies and institutions for agriculture. One of the key
government policies, which directly impact upon agricultural
growth, relates to pricing.
Agricultural price policy refers to government’s role in
influencing prices of agricultural inputs and outputs. Output
pricing includes fixation of support or procurement prices of
various agricultural crops, while input pricing refers to
subsidies on seeds, fertilisers, pesticides, machinery, water,
electricity, fuels, and farm credit. These two aspects of
pricing are inter-related as cost of production is an
important element in the determination of output prices.
Agricultural price policy, being a sub-set of the overall
macroeconomic policy, impacts upon the allocation of
resources, income distribution, industrial productivity and
exports.
The rationale of input pricing policy is to provide production
incentives to encourage adoption of new technology and greater
investment by farmers. It is argued that high output prices
may be diverted to consumption rather than investment
expenditure. This policy continued throughout the 1960s and
1970s.
Subsidies on fertiliser, pesticides, seeds and farm
mechanisation have been phased out since the mid-1980s. A
significant subsidy on canal water, however, remains, together
with some subsidy on electricity used by tube-wells in
Balochistan.
Evidence suggests that the benefits of the subsidies are
mostly availed by big farmers as they make larger use of
modern inputs than small and medium farmers who face numerous
constraints. This has led to a realisation about the
inadequacy of subsidies as a policy instrument and a greater
focus on augmenting timely supplies of inputs.
It is in this context that output pricing policy is considered
a more feasible option. The concept of a minimum guaranteed
price, known as support price, has been introduced since the
early 1980s to protect the farmer from price fluctuations and
ensure a minimum return in view of post harvest glut,
fragmented commodity markets, and poor holding capacity of the
farmer.
Advocates of price support system argue in terms of farmer
protection against price fluctuations of agricultural
commodities due to (a) low price elasticity of demand; (b)
biological cycle of production in that production cannot be
adjusted to price changes owing to time lag; (c) seasonal
nature of output in that prices are depressed at a time of
glut and rise off-season when farmers due to lack of holding
capacity had sold off the crop; (d) distress sale by small
farmers, who account for 80 per cent of total farms, to meet
their consumption and investment needs; (e) fragmented
commodity markets dominated by middlemen and processor
cartels; and (f) uncertainty on account of the weather factor.
The support price programme primarily aims at providing a
floor to market prices in the post-harvest season and
initially covered eight crops, namely wheat, rice, cotton,
sugar cane, potato, onion, gram, sunflower, safflower, soybean
and canola. The implementation of support prices of various
crops has evolved over time and undergone policy and
institutional changes. There was a strong implementation of
the programme during the 1980s.
The importance of agricultural price policy has dwindled with
the onset of market and price liberalisation as an integral
part of the economic reforms since the early 1990s. Since
2001, support price for only four crops i.e. wheat, rice,
cotton and gram is being notified. The policy of selective
intervention on need basis to protect the farmer against
extreme price volatility is being followed and market forces
generally allowed a free play.
The relative efficacy of input subsidies and output pricing
has been debated by experts. The role of output support price
in enabling producers to use inputs flexibly has been
underscored, while input subsidies encourage the adoption of
certain technology and higher use level of inputs. Output
prices at the same time are relevant only for those having a
marketable surplus, while input subsidies benefit all those
using the technology.
It would be worthwhile to dwell on the rationale and
implications of the policy of price liberalisation of outputs
and inputs being followed as part of economic liberalisation
since the early 1990s, and the policy recommendations that
flow from it. The support price policy is considered
inadequate in terms of a) its contradictory objectives of
providing incentive to the producer and subsidising the urban
consumer; b) leading to allocative inefficiency in resource
use and giving rise to trade distortions; and c) mismanagement
by public sector procurement agencies and fiscal cost.
Empirical studies of nominal protection coefficients – ratio
of domestic to international prices – prior to price
liberalisation have shown an implicit tax on wheat, cotton,
and basmati rice, a subsidy on sugar cane and no tax on IRRI
rice. Since the early 1990s, however, relative prices of
wheat, cotton, and basmati rice have improved and subsidy on
sugar cane reduced.
As a result, transfer of surplus from agriculture sector has
reduced since the 1990s due to price, trade and exchange rate
liberalisation. There is a shift from implicit taxation
towards improved prices of outputs. It may, however, be stated
that productivity impact of policies is not easy to determine
as complex interactions are involved.
As we press ahead with the policy of price liberalisation of
both agricultural outputs and inputs as part of our overall
economic reform strategy to improve efficiency and to
facilitate integration with the world economy, we should not
lose sight of the ground realities faced by the farmer. One,
farmers in the developed world are still benefiting from huge
subsidies. Second, agricultural market structures are far from
competitive and marred by glaring imperfections. Third, the
peculiar nature of agricultural production, price volatility
of agricultural commodities, and lack of vital storage and
marketing infrastructure are serious constraints in effecting
a full transition towards market based policies.
A host of policy measures need to be effectively implemented
to realise the positive outcomes of price and market
liberalisation and to lessen the pain of adjustment. First,
market and storage development is critical. The government
should provide incentives to the private sector for storage
development which is critical to price stability. Adequate
support to develop private marketing channels for greater
competition should be provided.
Second, small farmers should be provided greater access to
credit to improve their productivity. Third, periodic
government intervention to hedge against extreme price
volatility should continue. Fourth, the prevalent system of
general subsidies, which leads to leakage of benefits to the
non-deserving, should be replaced by targeted subsidies to
poor and indigent consumers.
Finally, effective policies for income redistribution should
be pursued to ensuring that the long-term benefits of
structural adjustment reach the lower segments of society.
The Dawn
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Pakissan.com;
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