WHAT ARE THE IMPACTS OF GOVERNMENT POLICIES ON

THE ECONOMIES OF LARGE SCALE FARMERS IN PAKISTAN?

By

GHASHIA RIAZ
MSC Economics
Roll no 08

Assignment submitted to as a partial requirement to the course Eco-409

3rd semester

DEPARTMENT OF

BZU

ECONOMICS

BAHADUR

CAMPUS LAYYAH
LARGE FARMERS
Definition

Large farmers means a farmer

cultivating (as owner or tenant)
agricultural land of more than
5 hectares

INTRODUCTION
The roll of Pakistans Government in the agriculture sector should be to
encourage the development of a smoothly functioning market, through

institutional and regulatory reform that facilitates market efficiency and

private sector activities. Where market is not an issue and Government
inefficiency is evident, Governments role should be drastically reduced.
Government involvement in Pakistans agriculture sector has benefited
farmers little. Thats why recommends reform of agricultural policies and
institutions. In agricultural sector, there are many Government policies that
are beneficial and harmful for farmers. These policies are adopted for
improving agricultural sector.
POLICIES
Some Government policies are as follows;
INPUT PRICING POLICY
The backwardness of agriculture sector is also attributed to the neglect
of agriculture sector on the part of Government. There was ruthless craze to
develop industrial sector at the cost of deterioration of agriculture sector in
the pressure, that agriculture sector should be promoted. In this respect, in
addition to other measures, it was decided to set-up a structure of
agriculture inputs subsidies. Such policy will aim at proving the fertilizers,
improved seeds, plant protection tube well and agriculture machinery at
reduced prices. Thus the policy measures which will be taken to provide
agriculture inputs at subsidized prices are accorded as input pricing policy.
The objective of such policy is to provide greater production incentives and
to encourage the use of superior technology. The subsidization of inputs
would make it possible to use the new and advanced technologies pertaining
to agriculture development. As the agriculture support prices help the big
farmers to get reasonable process and have exceedingly more income while
the input pricing policy will induce the small farmers to increase agriculture
production by having used the cheaper and superior inputs. The subsidized
inputs will help in reducing the costs of agriculture products and this making
them available for urban population at lower prices. It means that the
subsidized agriculture inputs will become helpful in maintaining the standard
of living of the urban population. However in order to finance subsidy, the

urban population will have to be taxed, the government will have to borrow:
the government will have to print new money.
In case government gives very nominal subsidies on agriculture inputs they
will not reduce the costs of production of the agriculture goods will be
benefited. They will not have an appreciable impact on farmers profits and
production incentives. The subsidized inputs may result in undesirable
substitution effects: the availability of cheaper fertilizers may reduce the use
of traditional organic manure etc,; the cheaper implements like threshers
and harvesters may results in adoption of capital intensive techniques
instead of labor intensive technologies of threshing and harvesting and, the
subsidy on the installation of tube wells may result in wastage of water. The
input pricing policy will also be beneficial for the big landlords. The big
landlords having an easy access over financial institutions, revenue
department and agriculture department are in position to attain subsidized
fertilizers. Seeds, credit tractors and tube wells. They will sell the water to
those farmers who failed to install the tube wells even at subsidized prices.
They will provide the services of tractors and threshers etc. on hire basis. It
means that the subsidized agriculture inputs will also lead to widen the gap
between the rich and the poor farmers. Moreover, it is said that the subsidy
should be provided on the temporary basis, it should not be made a
permanent feature because after the adoption of modem technologies at a
larger level there has been a greater increase in agriculture incomes of the
fanners. Again the opportunity cost 'of the funds allocated for the subsidies
will have to be analyzed. The subsidies should be flexible enough; they could
be adjusted according to the demand, cost and supply situations which tend
to change rapidly.
In Pakistan the subsidy on fertilizers was made available on a limited scale
during the 50's. The total amount meant for this purpose was only Rs 20
million. In the late 60's along with the beginning of 'Green Revolution',
government heavily stressed upon providing the improved seeds. the
installation of tube wells and plant protection measures. Thus for such all

purposes, the amount specified for agriculture inputs went on rising. The plant
protection which included both insecticides (imported) and sprays operations
was free upto 1966. So this was the major start 111 respect of subsidization of
agriculture inputs, In 1966 - 72. the subsidy covered 88% total cost faced by
the government in providing pest control measures. In 1972, it further
reduced to 50% in Punjab and 75% in other provinces. But in 1972, the
subsidy, in respect of insecticides and sprays, was withdrawn from all
provinces, except Baluchistan. Now it is the private sector which performs
the function of import and spray of pesticides. But still the sale of sprayers is
substantially subsidized. The subsidies which are in respect of agriculture
inputs are accorded as development expenditures of the government. In
1979 80, the subsidy bill for agriculture inputs was amounted to 14.1% of
the consolidated development expenditures in 1979-80 was against 6.7% in
1972-73. In 1979-80 the subsidy bill regarding fertilizers was Rs. 2985
millions: regarding plant protection it was Rs. 326 million: regarding tube
wells it was Rs. 48 million and regarding wheat seeds it was Rs. 8 millions.
It means that during 70s government had to face a reasonably large
amount in respect of agriculture input subsidization. It was the fertilizers
which were at the top. In addition to these agriculture inputs government is
providing electricity to the farmers at concessional rate. Again, same is the
case with canal water. In the 60s and early 70s the income from water
revenue exceeded the current expenditure of the irrigation department in
carious provinces. From 1974-75, this situation was reversed, because canal
irrigation expenditure increased far more than canal irrigation revenues. In
1978-79. The government canals irrigated the areas about 11 million
hectares. The government expenditures in this respect were Rs. 787 million
while government revenues were Rs. 532 million. Accordingly, there was a
gap of Rs. 225 million in between revenues and expenditures. It means that
the subsidy per hectare amounts to Rs 24, while it was Rs 15.40 per hectare
in 1974 - 75. This means that government has to bear a lot of expenditures in
respect of providing canal irrigation water to the farmers. Thus it may be

accorded as an implicit subsidy to the farmers. Had the farmers been getting
the water through the sources other than the canals, they would have to
incur exceedingly high expenses. Again at present, the government is
providing subsidy on the installation of tube wells. The amount of subsidy
provided by the government was respectively as: Rs 24000/- per tube well in
the canal command area; Rs 32000/- per tube well in the Slaba areas and;
Rs 48000/- per tube well in the 'Barani' areas .. Because of being self sufficient in the production of 'Urea' fertilizers as well as because of
achievement of popularity target, government has withdrawn the provision
of subsidy on this type of fertilizer. However, government still provides
subsidy On the use of DAP fertilizers. At present, such subsidy consisted of
10% of the price of DAP fertilizer per bag .. In respect of provision of new and
modem seeds, the government is Dot providing any type of subsidy. With the
implementation of Kisan Banking Window at ADBP, the government will have
to bear subsidy in respect of providing 'Green Tractors to the farmers.
Finally, there rises a question should the policy of input pricing be continued?
It is well - evident fact that subsidies also played their role in aggravating the
problem of budget deficit in the country. Accordingly, the IMF and World Bank
authorities have always stressed upon the removal and abolition. of
subsidies to reduce budget deficit. Thus the agriculture subsidies are a big
burden on the nation. As the farmers have got a lot of acquaintance with
fertilizers and new variety 'of seeds; their incomes have also risen to the
greater extent because of ever rising demand for food grains; "hence there is
no need of giving subsidies on such items. In respect of water, the policy of
subsidization in the installation of tube wells should remain continues. Again
the sprays and pest control measures should also be provided at reduced
prices. However, there is a need to raise the water charges so that the
government burden in respect of canal irrigation be reduced.

AGRICULTURE PRICE POLICY

MEANING AND CONCEPT

An agriculture price policy consists of all those policy measures which are
adopted by the government to influence the prices of agriculture outputs as well as
agriculture inputs like fertilizers, seeds, water, machinery and credit. In the
presence of effective demand and supply forces, the need for such a policy is
hardly realized and automatic forces will operate in such a way that the
target of increased production and productivity will be attained. But in case
of Pakistan like country, where the market imperfections are strong enough
to offset the role of economic automation, the need for some policy package
is sure to occur. Accordingly, to safeguard the interest of the growers and
boost the agriculture outputs there is need to pursue some agriculture price
policy.

"Such

policy

will

aim

at

providing

different

incentives

and

inducements to the farmers. The provision of agriculture inputs to the

farmers at subsidized rates will have the effect of reducing their costs and
increasing their outputs etc. Such all will be concerned with agriculture inputs
pricing. We discussed earlier the implications of input pricing policy. But at
present, we will discuss the role of agriculture output price policy in creating
the inspiration amongst the growers discuss the role of agriculture output
price policy in creating the inspiration amongst the growers regarding
increasing the agriculture production as well as protecting the incomes of the
growers
AGRICULTURE OUTPUT PRICE POLICY IN PAKISTAN
But this policy could not be sustained because of following factors: (1) there
was severe increase in population which created shortage of food in the
country. Hence, a need was felt to increase agriculture production. This
necessitated to uplift the lot of agriculture sector. (2) There was a dire need
to enhance the exports so that the imports could be financed. (3) Agriculture
sector should not be ignored because it supplies necessary raw material to
trimester industries. (4) A stability was to be brought in the urban cost of
living. Along with this, a shift of emphasis occurred and agriculture sector
was thought to be uplifted by giving different incentives and inducements. In

this respect, the agriculture price policy was inducted in the country based
upon.
(1)To stipulate the prices of agriculture, outputs. In this regard, the
support prices or procurement prices of agriculture goods will be
determined and announced every year.
(2)The Input prices are stipulated. In this regard. the agriculture inputs
like seeds, water, fertilizers, agriculture, machinery, tube wells and
pesticides will be provided at subsidized prices.
The input price policy got much more attraction during 1960's. But in the
coming years, the output price policy got importance. We now discuss the
salient features of agriculture output price policy.
Agriculture output price policy comprises three types of pricing decisions:
( 1) To fix the procurement prices for wheat, rice and other food grains.
(2) To determine the support prices for export crops like cotton, rice, potato
and onion etc.
(3) To fix the sale prices of commodities as raw materials, for example,
Sugarcane, cotton and seed cotton.
This must, be remembered that the support price represents the minimum
price of a product and the price is not allowed to fall below that minimum
price. Because of bumper crop the price of a product will fall in the open
market. But the minimum procurement price announced by the government
will not allow it fall below this announced price. On the other side, if there is
crop failure, because of natural vagaries etc. the prices of crop will rise. But
the procurement price set by the government will not allow the prices to rise
more than the official prices. Now we discuss the operation and the role
played by support price or procurement prices of wheat, rice and other food
- grains etc.
We have a very comprehensive type of price control regarding the
procurement of wheat. Government announces the price of wheat often
before sowing it. Then the wheat is purchased by the government at that
price. Moreover, government also fixes a target of the wheat to be purchased.
The' control system also covers the milling process and the distribution of

wheat for urban areas through rationing. The objective of such policy is to
create incentives and inducements amongst the farmers to increase the area
and production of wheat. But this is a contradictory in the sense that it has
the impact (II' eroding the purchasing power of the people belonging to fixed
income groups of urban areas. In other words, the betterment of farmers was
to be increased at the cost of decrease in welfare of urban people.
During 50s and in early 60s the procurement price of wheat, more or less,
remained same. In 1947-48, it was 26 paisa per KG while in 1966-67 it was
38 paisa per KG as a result, the output of wheat could not be increased to
the greater extent. Perhaps, in those days the policy experts were of the
view that the agriculture products are not sensitive to the support prices
announced by the government. However, they failed to recognize that the
export subsidies and low procurement prices are responsible for reduced
agriculture outputs. In those days, the shortage of food grains was met
through the PL 480 programme initiated by US Government. Accordingly, the
government

as

well

as

bureaucracy

never

noticed

the

agriculture

backwardness. Professor Griffen was of the view that the wheat imports
under PL 4~0 have had an impact of stagnating the wheat production in the
country, in that period.
In 1960's when the era of 'free economy' was initiated, the controls
were abolished or reduced and imports were liberalized. The 'voluntary'
procurement of food grains replaced the system of compulsory procurement;
controls on the prices and movement of wheat were lifted. Moreover, it was a
pressure on the government that it should pursue such a price policy which is
more favorable to agriculture. It was thought, that it is the agriculture
backwardness and lower demand for domestically produced goods which
have worsened the BOP problem. Therefore, it was stressed upon enhancing
agriculture production which could be possible through providing different
incentives to the farmers. Moreover, the incentives will have the effect of
increasing the cropping area. per hectare yield and changing the cropping
intensity etc. Our farmers are unable to face the risks which occur in

agriculture sector. Therefore, they need protection and the inducements etc.
Thus in 1973, the price of wheat was raised from 40 paisa per kg in 1967 to
63 paisa per kg in 1973, while it was raised to Rs 1.31 per kg in 1979 - 80. In
1947 - 48, the procurement price of wheat was Rs 9.50 per 37.32 Kg which
rose to Rs 37 in 1975 -76. And rose to 46.65 per 37.32 kg in 197980.Government has formulated Agriculture Prices Commission (APCOM)
which recommends the agriculture support prices. In 1992 - 93, the
procurement price for wheat was Rs 130 per 40 kg and this rose to Rs 160
per 40 kg in 1993- 94. The task force on Agriculture, in addition to a Jot of
recommendations, also suggested for a fair return on agriculture products,
through effective implementation of price policy. Procurement price was
Rs.26Q per 40 kg in 1997- 98.1n 1999 - 2000 the price of wheat was raised
to Rs.300 per 40 kg. In the year 2003, the support price of wheat also
remained Rs.300 per 40 Kg. While in the year 2005 - 06 the support price of
wheat was Rs.425 per 40 kg. In the year, 2012-13, the support price of
wheat was Rs.1150 per 40kg.
The wheat was procured to regulate its supply for urban consumers.
Before the separation of East Pakistan the rice was purchased to send
it to East Pakistan. But after Separation it became an export item. In 1948 49, the procurement price for 'Basmati' was 57 paisa per kg which rose to 73
paisas in 1962 - 63. In 1968, it was Rs 1.07 per kg. In 1972 - 73, it was Rs
1.29 which rose to Rs 3.09 per kg in 1979 - 80. In 1947 - 48, the support
price for 'Basmati' was Rs 22.06 per 37.324 kg which rose to Rs 90 in 1975
-76 and Rs 110 in 1979 - 80. In 1992 - 93, such price was Rs 175 per 40 kg
which went to Rs 185 per 40 kg in 1993 -94. The support price of Irri-6
(Superior) was Rs 95 per 40 kg in 1992 - 93 which was increased to Rs 100
per 40 kg in 1993 - 94.
Because of official purchases the agriculture prices are stabilized
because government builds buffer stocks. But the success of buffer stocks
depends 'upon the availability of warehouses and cold storages etc. In the
late 60's and in early 70's the inducements helped in boosting agriculture

outputs, particularly the wheat and rice. Despite this fact that government
announces price support policy each year, but the price of wheat and rice is
more in open market as compared to the prices announced by the
government. For example, the price of wheat in open market was above Rs
200 per 40 kg in the months of July to December 1994 while the
government support price was Rs 160 per 40 kg. In such situation, the
farmers were reluctant to sell their surplus amounts of wheat and rice to the
PASSCO. Moreover, the procurement price for rice was low as compared with
international price of rice. Therefore, government earned a reasonable profit
by exporting the rice. Accordingly, such profit may be accorded as a tax on
growers of rice. Such situation may discourage the growers of rice. The low
procurement price of wheat created 'wheat crisis in .1997.
If procurement prices of wheat and rice arc kept at a higher level it
will have the effect of raising the output - hence meeting the increased
demand for wheat and rice which is a recurring feature of our economy. If the
increased demand for food - grains is not met through domestic sources,
they will have to be imported and it will have negative effect on the BOP of
the country. Thus the increased support prices for foodstuff may lead to
self - sufficiency in the foodstuff. If the procurement price is low, the need
for imposing the agriculture tax will not rise. But such lower prices will fail to
inspire the farmers in respect of raising the production of food grains.
Therefore, the better it would be to set the procurement price by considering
the fluctuations in the prices of other goods in the country.
(2) In case of seed cotton, cotton lint, oil seeds. maize onions, potatoes and
pulses the minimum support prices are fixed so that the growers could be
protected against steep price declines, particularly in the international
market. Through such minimum support price the profit margins of the
growers 'Could be maintained. In case of our country because of bumper
crops of potatoes, onions, pulses and oil seeds the prices often fall sharply.
Therefore, the PASSCO was assigned the task of purchasing such products' at a
price which is reasonably higher than the market determined price.

The Government of Pakistan continued the policy of imposing export

duty on the exportation of cotton during the period of 1947 - 67, except the
year 1952 - 53. Since the world market for cotton is 'highly competitive, the
export duty could not be transferred to the foreign buyers. It discouraged
the domestic cotton growers. After the devaluation of 1972 the export duties
on cotton remained operative. However, Dcsi Cotton was given exemption in
1976. Even during the period of 1976 - SO the duties on export of cotton
remained operative.
In 1973 Cotton Export Corporation (CEC was formulated to purchase
cotton, The CEG had monopoly in its exports. It was also assigned the duty of
maintaining the cotton prices at the level determined by the government. With the passage
of time it was realized that the export duties arc unnecessarily restricting the
exports. Therefore they were abolished. Since 1992 - 9} the cotton crop was
being victimized by the leaf - curl virus. As a result a big shortage of cotton
was observed in the country and the price of cotton far exceeded the
procurement price settled by the government. However, the support price for
cotton seed (Phutti) was set at Rs 275 per 40 kg in 1992 - 93 for 'Desi' Cotton
Rs 300 for NIAB 78, 86. While it was raised to Rs 290 for Desi and Rs 315 for
NIAB, 78, 86 in 1993 - 94. In 1999 - 00 the price of cotton was set at Rs.750
per 40 kg. In the year 2003 - 04 the price of cotton ( Phutti) was set at
Rs.850 per 40 kg which was raised to RS.925 per 40 kg for the year 2004 - 05
.
Regarding cotton supply, the situation is such a deplorable that it badly
hits the textile industry in the country and fairly a large number of textile
units in the country have closed. In a package announced by Commerce
Minister It was allowed to import the 'Cotton from the former Russian States.
In such state of affairs, there is a dire need to provide the subsidies in
connection with agriculture inputs to the farmers. Moreover, there IS an
urgency to boost the procurement price for cotton-must be close to the
existing market price of cotton.
(3) The sale price of sugarcane was introduced in 1961, so that the interest

of sugarcane growers and sugar industry could be protected. In the

sugarcane growing areas, there were a few sugar mills who had monopolistic
powers in respect of purchasing the sugarcane. The settled sale price set by
the government protects the interests of sugarcane' growers when they have
bumper crops which they have to sell to a single crushing mill. During 60's
the sugarcane
support prices remained stagnant around Rs 0:07 per kg but in the 70's it
was raised to Rs 0.15 per kg in 1975 - 76 and to Rs 0.19 per kg in 1979 - 80,
In the year 2003 - 04, the sugar cane support price was set at Rs.42 per 40
kg, In the year 2009-10, sugarcane support price was set at Rs. 100 per 40
kg, However, the open market price was higher. In 20 I 0-11 because of
bumper sugar-cane crop its price fell and in the open market the price of
sugar was Rs.50 per kg. In the year 2011-12, the price of sugar cane was set
at Rs. 80 per 40 KG.
Because of establishment of more sugar mills in the country, the tendency to
grow more sugarcane is increasing day by day, even displacing the
production of cotton and reducing cotton cropping area.