The government has finally announced a relief package for farmers. The announcement of Rs341 billion package announced by the Prime Minister appears like God sent relief for the country’s agriculture sector. It sounds too good to be true; and that’s exactly what it is.
Rs194 billion out of the package is in the form of additional credit which the government has envisioned for the sector. That’s not really a relief package.
Of the remaining Rs147 billion, many of the announced measures are comprised of projects that have already been unveiled in the past. Others shall be passed on to other stakeholders, besides farmers. It is pertinent to mention here that some of the numbers are inflated and may be substantially lower at the time of disbursement.
The core of the package is Rs40 billion in direct cash support to small farmers (those have less than 12.5 acres) who grow cotton and rice. The subsidy shall be Rs5,000 per acre. This is a welcome step and shall lend some breathing room to the growers in tough times of low commodity prices. Whether the quantum of the direct support is high enough to make a significant difference for such farmers; is a separate debate.
But there are also doubts over the mechanism for the dissemination of cash to small farmers. There is nothing mentioned in the relief package on the way the money will be transferred. Knowing the history, chances are that part of the subsidy will be drained in the process. Experts suspect that middlemen (arthi) may pocket a sizeable chunk of the cash disbursements.
Rs65 billion is to be passed on to farmers through reduction in the prices of fertilizer. This number too, seems inflated. Plus, a chunk of it was already announced in the budget and a significant portion will be off-set by the most recent hike in Urea prices. The amount of Rs25 billion was earlier budgeted for subsidy on fertilizer imports, so nothing new has been added there.
Also, the actual number is likely to be much lower. Urea import is expected to be around 0.7 million tons. With domestic urea price at Rs1,750 per bag; is Rs350 less than the price of imported urea. Assuming that international urea prices remain depressed (chances are high); the subsidy element will be around Rs5 billion instead of the budgeted Rs25 billion.
Rs20 billion are for potash and phosphate fertilizers for which the government will provide a subsidy of Rs500 per bag. This is a welcome step. However, even after that, the prices that Pakistan’s farmers pay, will be much higher than those paid by farmers in India. Problems may arise on the way the subsidy is extended. If GST which is Rs625 per bag (17%) at the prevailing price of Rs3680 per bag is foregone; then there is no issue. However, if the subsidy will be provided later by government to fertilizer marketing companies, then fears of issues related to refunds, appear quite justified.
The remaining Rs20 billion will be due to the reversal of the recent increase of Rs200 per bag, on fertilizer. The prices were raised a couple of weeks back when the government increased the feed stock gas prices by 18 percent. Farmers were already contending with squeezed margins prior to this hike, so a reversal hardly qualifies as relief.
Whatever reduction is brought about in domestic fertilizer prices, will not be at the government’s expense anyway; as it shall negotiate with the domestic fertilizer manufacturers to get them to lower prices. A reduction in rate of feed stock gas will likely remain off the table though. If they are tapered; the government would be running the risk of annoying the IMF. Simply put, the fate of Rs200 per bag reduction in domestic Urea price is unclear and in most likelihood it won’t be paid for from the government kitty.
The government will provide insurance premium on the loans extended to farmers. The amount allocated for it is Rs2.5 billion and it will facilitate banks to extend loans to small farmers. This is a good step and should be increased in years to come. The relief package also includes Rs14.5 billion as interest subsidy spanned over seven years, for loans to small farmers for conversion of existing and new tube wells to solar power. The scheme has already been announced in this year’s budget and technically is not part of the new package.
Rs14 billion have been announced for electricity subsidy on existing tube wells in this fiscal year through the announcement of Rs10.35 per unit on the rate applicable to electricity used during peak-time and Rs8.85 for off-peak hours. Half of the subsidy will be provided by the federal government while provincial governments will bear the loss on GST. So in essence, the subsidy on this front is Rs7 billion.
In an attempt to modernize farms, the government has reduced import duty on farm machinery from 43 percent to nine percent. In FY15, farm machinery worth $89 million was imported. Assuming imports of $100 million in FY16; the relief will amount to Rs3.5 billion. This will encourage large farmers to import more machinery and will improve their yield. However, it is unlikely to help small farmers who lack the financial muscle to import expensive machinery. Similarly, the government has reduced sales tax on domestic and imported machinery from 17 percent to seven percent. This may marginally help the small farmers to commit some capital investment. The PM’s relief package has included already announced measures for improving the agri-value chain from this year’s budget. These include an income tax break for four years on production of Halal meat and a three-year tax break for cold chain businesses.
In order to address the issues pertaining to rice exports, the pending Rs34 billion loans payoff has been extended to June 2016 and turnover tax on rice exports has been abolished (estimated benefit is Rs2billion). The farm credit mark-up is reduced by two percent and government will bear Rs11 billion on this account. The government will provide 50 percent guarantee on farmers’ credit to reduce the risks of banks and has promised to provide one-window operations for facilitation of small farmers. This will help increase the credit pie extended to the agriculture sector in days of low interest rates.
In a nutshell, the relief is not as much as it sounds from the headline. However, given the fiscal strapped position of the government, it is a good move. The political gains are obvious as farmers plan to have their representatives in each constituency for local body elections. The PMLN government has attempted to win their hearts, and just in time.
Published: September 16, 2015.
