Agriculture: Critical issues

Chapter 5
• In this lecture, we will introduce the nature of agriculture
production –crops grown, yield, area under cultivation etc.
• After that, salient contemporary issues such as agriculture pricing,
agriculture credit, mechanization, agriculture tax and water will
be discussed.
5.1 An overview of major trends
• The agriculture sector in Pakistan is classified as containing five
sectors.
Major crops
Minor crops
Live stock
Fisheries and
Forestry
Derek Byerlee divided the growth in output due to technical change in
countries like Pakistan into four stages.
1. The pre green revolution phase where growth is driven mainly by
irrigated area expansion and productivity growth is modest.
2. The green revolution Phase when growth is driven by high yielding
varieties with increased responsiveness to input.
3. The First Post green revolution Phase where growth is driven by
intensification of input use – chemical fertilizers, multiple
cropping
4. The second post green revolution phase when input use begin to
plateau and sources of growth becomes increase in input
efficiency.
• On the overview of agriculture sector of Pakistan, it seems that
Pakistan is in second post Green revolution phase, where input
efficiencies are seen to be the main success of growth.
• Future growth must rely almost entirely on efficiency gains. These
efficiency gain may arise through market determined output
prices, efficient credit allocation and introduction of a large
number of institutional reforms.
5.2 Agricultural pricing Policy
• Govt can play a critical role in what and how much to produce
through its pricing policy. Along with the right types of seeds,
fertilizers, water, other input as well as a package of technology
and credit, the pricing policy of agriculture input and output can
determine the direction of agriculture productivity and produce.
• Agri pricing policy can also significantly impact on income
distribution, industrial productivity, urban wages, exports, cost of
living, determining terms of trade between the agriculture sector
and other sectors.
• A good agriculture pricing policy can be defined as one where,
ceteris paribus, price acts as an incentive to produce certain goods
in required quantities.
• This has not always been the case with Pakistan and agricultural
prices has been used for various purposes by different regimes.
The Objectives of an Agricultural pricing
policy.
Pricing of agricultural inputs and outputs would be a major element of
the dynamic agricultural policies necessary to achieve national targets of
agriculture production. The pricing of input and output should be closely
coordinated keeping in view the following objectives.
1. A balanced increase in production of agri. products so as to fulfil
domestic consumption requirements. Increased earnings of foreign
exchange and reduced import bills of agriculture products.
2. Gradually rising but stable prices
3. The pricing policy should help to achieve and maintain equitable
terms of trade for agriculture sector and support the incomes of
farmers.
4. It should maintain stable food prices for consumers.
5. It should keep domestic prices of export commodities and
potential exports largely in line with international prices to
maintain competitiveness of agriculture commodities and
minimize subsidies.
6. It should encourage large investments in agri. Production.
7. It should encourage increase in agri. Productivity and reduction
in production costs.
Pakistan has not always been successful in achieving the objectives of
pricing policy and agricultural prices has been used for various
purposes by different regimes.
The report of National Commission of agriculture in 1988 point outs;
1. The govt’s main concern in regulating agricultural prices was to
keep the cost of food low for urban industrial worker and provide
cheap raw material to domestic industries to increase
competitiveness of infant industry.
2. Heavy export duties on cotton which reduces domestic cotton
prices for the benefit of local textile industry.
3. Procurement of wheat and rice kept their prices low in order to
minimize subsidies to consumers
4. Inter district and inter province moving was restricted which
reduces prices in production surplus areas.
5. Prices of vegetable ghee was controlled at artificially low level.
6. Proceeds from agri. Exports were converted at an overvalued
fixed exchange rate system. In contrast industrial sector benefited
because of low cost imports.
7. Agri produce was exchanged with for industrial machinery and
inputs to the disadvantage of the agri. Producers.
The above mentioned policies imply that agri. Sector was used as a
mean to subsidize industrial production and urban consumers.
Clearly these policies were not focused on improving and
expanding agriculture output.
It was assumed that farmers would not be price sensitive and would
produce at their most efficient and best outputregardless of the
prices received by them.
The dismal conditions in agriculture sector prior to the Green
revolution forced the government to reconsider its approach to
agriculture sector and along with technical package, new pricing
policies were also introduced to encourage agriculture output. (the
high growth rate in sixties may be attribute partly to improved
agriculture pricing policy)
The first step that govt took in this direction was to begin to
subsidize inputs and not to raise support or procurement prices of
output. During the 1960s and 1970s, an extensive structure of
agriculture input subsidies was evolved which covered fertilizers,
seeds, plant protection, tube wells and agricultural machinery.
The main beneficiaries of subsidizing inputs were large farmers.
Some observers felt a need to look beyond subsidies as a policy
instrument and pay serious attention to such matters as improving
the overall supply position of the inputs… such as seeds, fertilizers,
and pesticides and to ensure their timely availability.
In 1981, the agriculture price commission was established.
The government introduced the concept of minimum price support
programme, which shielded the farmers from severe fluctuations in
the international prices and ensured a minimum return to
producers.
In case of international prices rising, it makes sense to increase the
domestic support price also. But what does the government do if
international prices fall, as they did in 2011 and 2012?
It makes sense to subsidize and protect domestic farmers under such
conditions but consumers end up paying more for food which can be
imported at cheaper prices on the international market.
Since 1988, on the advice of IMF and world bank, under the term of
structural adjustment programme, many subsidies were eliminated and
domestic prices were freed to come at par with international prices.
Procurement prices are set by government and are not free.
5.3 Rural Financial Markets and
Agricultural credit
There have been a number of studies and surveys conducted by different research
institutes and by the State Bank of Pakistan which examine the nature and sources
of rural credit.
1. Informal credit remains the principal source of credit despite a significant
increase in the borrowing from formal sources since 1985 onwards.
a survey (1972-73) showed that 90% of borrowing by farm households was from
non institutional sources.
a 1985 survey showed that 68% of the credit to agriculture was provided by non
institutional sources.
another study demonstrates that 85% of the small farmers obtain their loan
from non institutional sources compared to 40% in the large farmers category.
2. A significant portions of loans disbursed by institutional sources are
either proxy loans or roll over funds.
A 1995 World Bank study examining the extent degree of rural finance in
Pakistan reached the following conclusions.
1. Credit plays an important role in agricultural productivity and output.
2. Non-institutional or informal sources of credit dominate the rural
sector.
Only 32% of the rural households take loans (10% from institutional
sources). The main sources of institutional credit are ZTBL (76%),
commercial banks (17%) and cooperative societies (6%).
90 % of the households take loans from informal sources, mainly from
friends and relatives (67%) and landlords (11 percent).
3. Both sources of credit tend to be short term, but serve different
needs. 94% of the institutional credit is for production and
investment while 47% non institutional credit is used for
consumption purposes.
4. There is an inverse relationship between wealth and access to
credit.
5. The access by poorer households to institutional sources of credit
is constrained by complex procedure and informal sources are
much simpler and more flexible often requiring little collateral.
A study known as access to finance (2009), reports that
1. Only 14% of all Pakistanis, rural and urban, use a financial
product or service of a formal financial institution, which
includes savings, credit, insurance and remittance services.
Around 50% of Pakistani have access to some sort of financial
services, whether from the formal sector or from the informal
unorganized or informal organized sector. The organized informal
sector comprises of committees, shopkeepers, money lender,
hawalas etc. The unorganized informal sector comprises friends
and relatives.
2. Rural areas account for only 10% of the total value of bank
deposits in Pakistan by value, and only 7% of the total value
deposits and advances from banks. Only 15 % of the farmers are
reached by the financial system as a whole.
3. There is a very large imbalance in access to formal finance which
favours large farmers.
4. Since the formal sector is small and a large number of Pakistani
borrow, most borrow from informal sector which is mainly for
consumption smoothing purposes.
Reasons of preference given to informal loans by farmers

• Easier access
• Absence of cumbersome procedures
• Availability as when and where required
• Availability of credit for consumption purposes or emergency
loans
• Possibility of deferred payments if crops fail.
• No collateral
• Low transaction costs
Formal sources of credit
Different Types of Loans:
Rural credit is usually classified as
short term (up to one year) are needed for meeting annual production
costs such as seeds, pesticides and fertilizers
medium term (one to five years) are needed for the purchase of
livestock, improvement of water resources and for equipment not
expected to last more than five years.
long term (exceeding five years) for improvement of a more lasting
character like sinking of wells and tubewells, purchase of new land or
repayment of old debt.
Another classification of loans in based on their use, i.e. productive and
unproductive loans.
5.4 Mechanization
• In Pakistan mechanization is essentially tractorization.
• Mechanization has a late and slow start in Pakistan because of the
believe of policy makers that it would displace farm labour and
cause the problem of unemployment.
• Despite this there has been an astronomical increase in the
number of tractors available in the country. 1665 in 1960 to 187255
in 1986 which further increased over time.
5.5 Agricultural Income Tax
Should agriculture be taxed?
• Arguments Against income tax on Agriculture
1. Farming in Pakistan is of subsistence type and not commercial. Farmers do not
maintain standardized accounts of their costs and returns, it is difficult to assess
their incomes. Hence inconvenient to both, the tax collectors and tax payers.
2. The numbers of farmers is very large scattered all over the country, many in
remote accessible areas. It would cause considerable loss of time and money to
even contact to potential tax payers.
3. Agriculture income is uncertain as it depends heavily on nature. It is not even
insurable. It is quite probable that large number of farmers may frequently move
across the tax exemption limit.
Arguments in favour of income tax on agriculture:
1. It is unfair and illogical to make a distinction between agriculture
and non agriculture incomes for the purpose of taxation.
2. There is considerable evasion of tax by those having both
agriculture and non agriculture incomes.
3. Agricultural income tax would be more income elastic than land
revenue. With a greater yields per acre, higher procurement prices
and mechanization, income in agriculture sector has risen
considerably but yield in terms of direct taxes from agriculture has
not risen. Between 1972-3 and 1978-9, the yield from direct
taxation on agriculture increases by 78% while value added in
agriculture sector at current factor cost increased by 157%.
• Is Agriculture already over taxed?
1. Agriculture is subject to a number of direct, indirect and hidden
taxes. Indirect taxes constitute over 85% of the total revenues of the
federal govt. Since these taxes are paid by all, it can be safely assumed
that the agricultural population (being about three fourths of total
population) bears a heavy burden. There are hidden taxes in form of
low procurement prices, export duties on agriculture commodities.
2. Increase in income is offset by increase in population and higher
expenditure on agricultural inputs and equipment.
3. Higher taxation on agriculture will adversely affect the motivation
for saving and investment and bringing new land under cultivation.
• Further capacity for agriculture taxation
1. Direct taxes on agriculture have risen at a slower pace than growth
in agriculture incomes.
2. Any comparison of an aggregate tax burden on agriculture with
another sector have a little meaning.
3. The population argument is weak because the urban population
has increased faster than rural.
4. The major benefits of a rise in incomes due to higher yield in
agriculture went to large farmers. This has intensified inequalities
in income in the rural sector.
5. The rise in income is not accompanied by any corresponding
increase in the level of domestic savings.
5.6 The Water Crises
• Pakistan’s agriculture rely heavily on irrigation.
• Pakistan has the world’s largest contiguous irrigation system
• Pakistan ranks 4th in the world as for as irrigated area ( About 7%) is
concerned. About 36 MA( About 75% of the cultivated area) in
Pakistan is irrigated land.
• Pakistan has invested heavily in the irrigation sector. Allocated about
$ 8 billion in this sector upto the year 2011-12
Consumption Pattern of Water
 Water Resources of Pakistan
Rainfall
Annual rainfall (125mm in South-East to 750mm North-West)
Total water generated by rainfall is around
32 BCM (billion cubic meters)
Contribution to crops is 10-20%

Groundwater
Exploitation of Groundwater is 59 BCM
Over 9,00,000 private tubewells
40% of total supply at farm-gate

Surface Water Resources

Total Inflow is 171 BCM
Tarbela (10.38 BCM - 485 ft),
Mangla (5.90 BCM - 380 ft)
48 Canals (61000 km), 19 Barrages
1,70,000 Watercourses (1.6 Million km)
 Existing Situation

•Water is becoming scarce with each passing day. Per capita availability of fresh water in Pakistan has decreased by about 800% since 1950.
•Efficient and judicious use of the irrigation water is the only sustainable option left with us.
•Surface water is still the largest source of irrigation in Pakistan (31% as a single source)
•Irrigation system is over burdened and loosing its efficiency due to increasing gap in actual and required Operations &Maintenance
expenditures (Actual O&M expenses made only about 20-30% of required expenses)
•Govt. has to subsidize major portion of the O&M expenditures (about 70% according to an estimate)
Freshwater availability scenario (Per person)

 Global
 1950 – 16,800 cubic meters per annum
 2000 – 6,800 cubic meters per annum
 Reduction: 60 % in 50 years
 Pakistan
 1950 – 5,300 cubic meters per annum
 2000 – 1,200 cubic meters per annum !!!!
 Reduction: 77 % in 50 years
 Critical limit 1,000 cubic meters per person per annum
Future Water Scenario
Year Population Water availability
(Million) per capita (m3)
1951 34 5300
1961 46 3950
1971 65 2700
1981 84 2100
1991 115 1600
2000 148 1200
2010 168 1066
2020 196 915
2025 209 850
Rising Water Demand But Stagnant Water Availability

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 Current Irrigated Area
Irrigated Area 36 million acres
(14.56 million hectares)

Length of Canals 56,073km

Length of Water 1.6 million km
Courses
 Losses at different levels
Loss
Delivery at
Head
(MAF) % age MAF

Main and Branch 106 15 16

Canals
Disty. And Minors 90 8 7
Watercourses 83 30 25
Fields 58 30 17 30%
Crop Use 41
Total 62 65
The additional irrigation water requirement at farm gate has been estimated at 12.61
MAF, which is 31.93 MAF at canal head (PWSS 2002). Which we can save even if we
save water at water course level

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Major Concerns/Problems
A : Problems from management perspective

oOverall water scarcity, low water availability during winter and at the
beginning and end of summer with limited reservoir capacity.
oPhysical and technical limitations of the system.
oLow efficiency in delivery and use.
oInequitable water distribution.
oInadequate operation and maintenance of the system
oExcess seepage and wastage in the system.
oInsufficient cost recovery ( O&M expenditures are more
than recovery of Aabiana).
oAdministrative and financial constraints.

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B- Problems from Farmer’s Perspective
oUnreliable and inequitable distribution of irrigation water.

oDeterioration of the canal system and frequent breaches due to weak

bands.

oIncreased cases of water theft and failure of management to check them.

oIncrease in water disputes and delay in actions and justice.

oPolitical interference in system management.

oIncreasing cost of groundwater extraction

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 C- Problems From Society’s Perspective

o Overall poor performance of Government agency managed irrigation system.

o Wastage of water and low water use efficiency.

o The failure of government to finance, recovery from farmers and high cost of
management.

o Financial mis-management and poor accountability.

o Lack of farmers participation in decision making.

o Political influence in management of irrigation water delivery system.

o Overexploitation of future water resources espacially the groundwater

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5.7 Land ownership, power and land
reforms
Arguments for land reforms:
Large farmers have greater access to state bureaucracy, fertilizers,
credit and output markets. 75% of the loans from ZTBL have been
towards farmers with holdings of more than 5 hectares.
In a study conducted in Pakistan in 2003, found that poor felt that
they are poor because of lack of access to land. The concentration of
land holdings was a cause for the impoverishment of the poor.
Hence land reforms in favour of the poor, the landless, and small
farmers are essential.
• Arguments against Land Reforms:
Some economists have shown empirically that the land reforms in rural
areas may not lead to economic growth, and hence have argued that such
reforms are not worth pursuing.
Due to inheritance laws in Pakistan land has already, over the generations,
been made smaller which will be further fractured.
Structure of agriculture sector is no longer feudal so no need of land
reforms.
The process of urbanization is also doing away with large land holdings
and that is just a matter of time, when most of Pakistan will become urban,
relegating the issue of rural land.