About Us: UltraSpectra is a full-service online company dedicated to providing the services of internet marketing and IT solutions to professionals and businesses looking to fully leverage the internet. http://www.ultraspectra.com http://www.ultraspectra.net Join Our Network: facebook.com/ultraspectra twitter.com/ultraspectra youtube.com/user/ultraspecra

1. Agricultural Pricing Policy of
Pakistan

2. Critical Analysis
“It requires a very unusual mind to undertake
the analysis of the obvious”
Alfred North Whitehead

3. Sequence of Presentation
Introduction of agriculture sector of Pakistan
Agricultural Policy of Pakistan
Pricing policy mechanisms
History of Pricing policy
Impact of Pricing policy
Critical Analysis
Conclusion and suggestions

4. Agricultural Sector of Pakistan
Population depends 70%
Labor force employment 44%
Share in GDP 26%
Total area 79.6 million hectares
Total cultivated land area 22 million hectares
Country’s exports 80%

5. Contd…
Agriculture as back bone of economy
Provides foods and nutrition
Provides raw material
Provides base for foreign trade and exchange
Provides market for industrial outputs

6. MAJOR CROPS OF PAKISTAN
Wheat Rice Maize
Grams Pulses Cotton
Sugarcane Tobacco Mustard
6

7. WHEAT
It is a major crop
It contributes 14.4% of the value added
in the agriculture sector of the economy
It accounts for nearly 38% of the total
cropped area
76% of the total production of food grain
7

8. Contd…
Pakistan stands within the top
10 wheat producing countries
in the world
It is grown on an area of 8494
million hectares with an
average yield of 2769 kg/ha
8

9. RICE
It the 2nd most important crop
It occupies 11% of the country’s cropped
area
It contributes about 17% to food grain
production
It is cultivated over an area of 2581 million
hectares with production of 5.4 million tons
9

10. Contd…
Punjab • 48%
Sindh • 41%
Balochistan • 8%
KPK • 3%
1

11. COTTON
It is important cash crop
It contributes over 60% of Pakistan’s foreign exchange
earnings
It yields 3.4 to 3.6 million tons of cotton seeds which
contributes over 64% of the local edible oil production
( Federal Bureau of Statistics)
1

12. Agricultural Policy of Pakistan
• an easy source of generating
Agricultural revenues from agriculture sector
• providing cheap food for politically
sector more active urban consumers
became • Government often impose polices
to correct for market failures e.g.
supporting provision of the public goods,
sector correction for imperfect markets
like rural credit and externalities

13. Agricultural Policy of Pakistan
Pakistan has always followed interventionist and
low domestic price policy since independence to
help consumers, textiles and cotton industry
Government also carried out domestic price
stabilization in response to global fluctuating
prices of these commodities
Major rational behind the policy was to transfer
income from low saving sector to high saving
sectors like manufacturing

14. Price Policy mechanisms
• income distribution and price
Government stabilization.
can exert its • Commodity policies (taxes,
subsidies etc), macro price
control policies
through • (wage rate, interest rate, land
various rental rate etc)
mechanisms • macroeconomic policies(fiscal
and monetary management)

15. Timeline(1947-1950’s)
Pakistani side produced raw materials for the rest of
subcontinent and imported manufacturing goods
Agricultural products subject to compulsory procurement at
less the international prices level
Inter district movement and export of major crops banned
Both procured and imported quantities of sugar and wheat
subsidized for urban consumers
Overvaluation of rupee to encourage industrial imports but
adverse effect on agricultural exports

16. Timeline(1960’s)
Policy
considerably
relaxed
• Tractors
Policy of liberal
• Tube wells
subsidies
• Improved seeds
Compulsory
procurement
replaced by
Voluntary sales

17. Timeline(1970’s)
Devaluation of rupee wasn’t transferred
to agricultural sector in form of higher
prices which was hampered by export
duties and government monopolies
Nationalisation program of government
kept production and distribution of key
products to itself

18. Timeline(1980-90’s)
New agricultural policy was introduced which aimed at bringing
domestic prices at par with the international prices.
Agricultural price commission was formed in 1981 to help
government with support prices
World Banks Structural adjustment program-bringing inputs
and outputs prices close to world prices
Phased removal of subsidies from fertilizers was done
Rupee further devaluated and government shifted to floating
exchange rates

21. Impacts of Pricing Policy
• Effects on consumption of
agricultural products
• Effects on exports of agricultural
products
• Effects on Foreign Exchange of
Agricultural the country
Pricing has • Political Impacts and on budget
• Effects on resource transfers
between agriculture and rest of
the sectors of the economy.
(Agriculture Policy)

22. Impacts (A case study of 1950-
90’s)*
• Severe controls of pricing in 1950’s and 1960’s led to
the stagnation of production and decrease in the per
capita food availability
• Such price controls had significant impact on
determining the general profitability of agriculture
and in influencing agricultural production in 1950s
and early 1960s
* The Political Economy of Agricultural Pricing Policy
Trade, Exchange Rate, and Agricultural Pricing
Policies in Pakistan
Naved Hamid, Ijaz Nabi, and Anjum Nasim, 1990

23. Contd…
As a consequence the
deteriorating food supplies (wheat
in particular) led to substantial
gaps between the supply and
demand, which were met by the
easily available food aid under PL-
480. Clear links have been found
between PL-480 imports and
stagnating wheat production.

24. Timeline(2000’s)
The federal spending on agriculture has increased
by almost 1% a year during the 2001-02 to 2007-
08. Government has spent a very small amount of
their revenue on the agricultural sector,suggesting
that agriculture sector is under funded
According to the Organization for Economic Co-
operation Development 2009, high oil and energy
costs and erratic weather conditions are among
major reasons for volatility in agriculture prices of
developing countries like Pakistan

25. Total Output Effects (1963-87)*

26. Output Effects*
Table in above slide shows that
for all crops, with only one
exception, actual (at
intervention prices) output was
lower than potential( at non-
intervention prices) output for
each year of the study

27. Contd …
It is evident that the agricultural output in 25 years (from 1963 - 87) has
been below potential because of government price intervention, both
direct and indirect
It is also seen that the loss in output tended to increase in the 1970s and
reached its peak in 1975-76 when it ranged from 17% for wheat to 50% for
cotton
Since then it has declined in the case of all crops, except basmati rice, and
in 1986-87 it ranged from 13 % for sugarcane to 40% for basmati rice
Based on these figures one can make a rough estimate that the aggregate
loss of agricultural output during the 1970s was around 25 % of actual
output and though it declined since 70’s it was still around 15% of the
output in 90’s

28. Total Consumption Effects(1960-
87)*

29. Consumption Effects*
Consumption of all crops except sugar
was, in most years, higher than it
would have been in the absence of
(total) price intervention.
In the case of cotton and wheat
actual consumption exceeded
consumption in case of non-
intervention in all years

30. Political Impacts
Thus it seems that price intervention
allowed per capita consumption of food and
clothing to be higher than what it would
have been in the absence of intervention
There is no doubt that in urban areas
consumption would have been lower under
the non-intervention scenario and that
could have resulted in political problems for
the government

31. Contd …
In this context, it is important to
mention that the public
demonstrations in 1968, that
led to the fall of Ayub Khan's
Government, were triggered by
protests in urban centers over a
sharp increase in sugar prices

32. Total Export Effects(1963-87)*

33. Total Foreign Exchange
Effects(1963-87)*

34. Contd …
For basmati and Irri rice, foreign exchange
earnings foregone as a proportion of non
intervention earnings are, on average,
27% and 13 % respectively.
For cotton they are substantially larger
(94%)

35. Analysis of Case Study (1963-87)*
Given the short and long run supply
elasticity, distortions in producer prices due
to government intervention impose
significant costs on the economy in terms of
foregone output
This ranged, on average, between 5 % for
wheat and 23 % for basmati rice over the 24
year period under study

36. Contd …
The corresponding long term output loss
due to intervention ranged from 12% for
wheat to 44% for cotton
We observe significant trade effects also.
On average, long run export losses due
to price intervention, are 27% (basmati)
13% (Irri) and 94% (cotton)

37. Contd …
foreign exchange earning foregone of all crops taken together,
are substantial ranging from 17 % for short run direct to 148 %
for long run total
these effects have to be interpreted with caution, since infinite
export elasticities and substantial acreage response especially
in the long run has been assumed which is not feasible.
in calculating these effects, the political consequences of
passing on higher prices to consumers has been ignored.
The feasibility of passing on the high prices to consumers,
particularly for wheat, is questionable

38. Input Subsidies (1961-87)*

39. Resource Distribution Effects (1961-
87)*
Table in following slide presents the sum
of transfers resulting from input and
output price intervention.
It can be seen that the direct transfers
range between -2 per cent and 7 per cent
of the G.D.P.
While the total transfers range between 2
per cent and 12 per cent

40. Contd …

41. Contd …
The situation was reversed in the first half of the 1970s,
when total price related transfers increased three fold and
there was a net transfer out of agriculture equal to 5 per
cent of GDP (15 per cent of agricultural value added)
This was the period when the Bhutto government used
export taxes and export monopolies to generate revenue
for the government
It was the only time when government revenues from price
policies exceeded government expenditure on agricultural
input subsidies

42. Distorted income Distributions
• both the policy of
subsidizing agricultural
Against inputs and imposition
of hidden tax
welfare implemented through
objectives pricing policies have
adverse implications on
income distribution

43. Taxation System improvement
direct and indirect interventions be
gradually reduced through agricultural
income tax
Closure of all the loopholes in the existing
taxation structure for the tax evaders
Just output price for agricultural products is
vital and the time has come to re-schedule
the system of pricing of agriculture

44. Individual versus overall price
policy
The • mainly due to shift of
response of resources from one crop to
individual the other
crops • overall agricultural
production can increase only
differs from if a technical change takes
the overall place or more resources are
response of devoted to the agriculture
sector
agricultural
output

45. Rationale behind the policy?
Due to lower output prices the overall magnitude
of consumption is much higher then it would have
been in the absence of these distortions
different social and psychological reasons behind
such a policy, which cannot in any way be justified
by economic rationale
Adverse terms of trade for agriculture reflect that
prices of agricultural products were not allowed to
rise as rapidly as prices of consumer goods

46. Justifications for price distortions?
• subsidized inputs are mostly used
lower or by middle and upper class farmers
due to their access to institutional
subsidized credit (at lower interest rate) or
due to the abundance of their
input own self-generated funds
prices for • The small farmers usually lack in
time credit facilities.
the • Even if they succeed in obtaining
farmers credit they pay high rates of
interest on it.

47. Output selling price distortions
both the small as well as large farmers sell their outputs
at equally distorted prices
by taking advantage of subsidized inputs large farmers
make up their losses on account of lower output prices
“distorted input and output prices contribute in
transferring incomes from small farmers to medium and
large farmers and from agricultural producers to
consumers and the government”

49. Prices of various crops
for the period 1961 to 1987 the average
procurement/support price of wheat was about 30
percent lower than the inflation adjusted border price
the price to producers of basmati rice was less than half
of the border price
the producer price of cotton gradually increased
throughout this period but always remained below the
border price

50. Prices of various crops(Contd…)
The government has favored
sugarcane production and prices
more than any other crop
On account of sharp fluctuations in
border price of sugarcane its
producer price has remained higher
than the border price on occasions

51. Conclusions
Due to direct and indirect controls, the producer prices
remain well below the border prices
Negative effects on production, consumption, income
distribution and economic welfare
Medium and large land owners reap the benefits and small
farmers remain at loss
We have never been able to achieve delicate balance to the
benefit of producers and consumers at the same time

52. Comparison with India
Not only demand and supply but production side is also
taken into account
In accordance with the needs, they assign particular
area for different crops taking into account many
relevant factors and then place a pricing mechanism in
place
Result: no shortages as agriculture products being
perishable cannot be imported in time

53. Recommendations
Production side shall also be taken into account through
facilitation
Minimization of interventions
Instead of giving indirect subsidies through fertilizers and support
price, direct facilities of loans should be encouraged
Minimum base prices should be enforced in order to protect the
farmers and reduce exploitation at the hands of middlemen but
maximum price should be left to the market forces

54. In accordance with
the domestic needs,
export of agricultural
commodities should
also be regulated

55. Connect With Us
ULTRASPECTRA OPEN Academy
Facebook.com/Ultraspectra Facebook.com/openacademy.isb
Twitter.com/Ultraspectra Twitter.com/openacademyisb
YouTube.com/user/ultraspectra YouTube.com/user/openacademy
LinkedIn.com/in/Ultraspectra LinkedIn.com/in/openacademy
Forum.ultraspectra.com