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Plight of agri sector

Agriculture has historically served as the backbone of Pakistan’s economy. At the time of Partition, the share of agriculture in the GDP was 53 percent. Today, it directly contributes almost 24 percent to the GDP, still higher than the contribution of industry to the GDP of 19 percent.

However, what is generally not realised is that the agricultural sector has strong forward and backward linkages. First, it provides inputs to agro-based industries like textiles, sugar, tobacco, beverages, etc. These industries account for 59 percent of the output in manufacturing. Second, it has backward linkages with industries like fertilizer, chemicals and tractors. Third, almost 53 percent of the income generated in the wholesale and retail trade is through sale of agricultural items, while 42 percent of the value-added in the transport sector is through the movement of agricultural goods. Overall, it is estimated that 39 percent of the GDP is generated directly or indirectly by the agricultural sector. It is truly the ‘primary’ sector of Pakistan’s economy.

Other key macroeconomic variables are also linked to the performance of the agricultural sector. Thirty-nine percent of the national employment is in this sector. Agricultural exports have a share directly in exports of 20 percent and indirectly of almost 34 percent. 30 percent of private investment is in agriculture.

The above facts clearly demonstrate the central role still of agriculture in the economy of Pakistan. A 1 percentage point higher growth rate of the sector can raise the GDP growth rate by almost 0.4 percentage point. On top of this, the sector makes the biggest contribution to food security and poverty alleviation.

The tragedy is that for many years now it has remained a largely neglected sector. The emphasis of Governments and planners has shifted to power generation, highways and industry. Consequently, the growth rate of the sector has plummeted badly with the inevitable negative impact on the GDP growth rate.

The buoyancy of the sector was at peak in the three decades of the 60s, 80s and 90s. During the 60s, the Green Revolution substantially raised yields, especially of wheat and rice. The impetus to high agricultural growth of 5.4 percent annually in the 80s was provided by the Tarbela Dam, which increased the availability of water for agriculture by almost 10 percent. The high growth rate in the 90s of 4.4 percent was the result of pro-agriculture policies, especially those related to pricing of inputs and outputs. By 2000, food self-sufficiency had been attained.

During these three decades, the growth rate of agriculture ranged from 4 to 5.5 percent. Since 2000, the growth rate has plummeted to between 2.5 to 3 percent. During the last five years, it has been as low as 1.9 percent.

There is need to understand why the performance of the agricultural sector has been so disappointing? In particular, what has happened to the terms of trade of agriculture? What are the structural factors which have held back realization of the full agricultural potential of a country with one of the finest irrigation systems in the world?

The first set of explanations relates to the slowdown in the increase in access to inputs. First, the cropped area has remained largely unchanged since 2013-14 due to lack of increase in availability of water. No major dam has been constructed over the last forty years. Initially, there was investment in tube wells for extraction of ground water, but limits have been reached and the number of tube wells has remained, more or less, unchanged since 2014-15.

Second, the use of fertilizer has shown little growth annually since 2014-15 of only 1.7 percent. The nutrient content has been characterized by over use of nitrogenous fertilizer. Between 2005-06 and 2012-13 the prices of fertilizer rose very sharply by over 18 percent per annum, especially after the levy of the Gas Infrastructure Development Cess, which fortunately was withdrawn after 2016-17.

Third, the availability of credit has been limited. The share of agriculture is 12 percent currently. A big portion is pre-empted by large farmers. Fourth, the pace of mechanization has also slowed down, especially in recent years due to the jump in the price of tractors following the big rupee devaluation. The use of insecticides has not increased significantly despite frequent pest attacks.

There are four structural factors which have contributed to the lack of realization of the full agricultural potential. The first is the extremely skewed ownership of farm land. The top 1 percent of the farmers own as much as 23 percent of the farm area. These farms are characterized by relatively low land use and cropping intensities and wasteful use of water. At the other extreme, 43 percent of the farmers own / operate very small farms of less than 2.5 acres and do not possess the resources to invest in improved seeds and technology. Pakistan today has one of the most skewed distributions of farm land, but land reform does not feature anymore in policy debates as in the decade of the 70s.

The second structural impediment is the policy of providing little or no protection to domestic output of agriculture. According to the WTO tariff profiles, Pakistan has the lowest MFN tariff on agricultural imports of only 8 percent, as compared to 17 percent in Bangladesh, 33 percent in India and 24 percent in Sri Lanka. In fact, there is a zero duty and sales tax today on cotton imports.

The third factor is the lack of institutional support to agriculture. Perhaps, the biggest failure is in providing research, extension and loan services especially to small farmers. Less than 1 percent of the agricultural value added goes to Research and Development, especially on new varieties of seeds for crops like cotton.

The fourth key factor is pricing policy on agricultural outputs. There was a time when Pakistan used to have a procurement/support price regime, to reduce risk perceptions of farmers, on wheat, rice, sugarcane, cotton (phutti), potato and onion. Now it is only offered for wheat and sugarcane.

The overall consequence has been not only a fall in the sectoral growth rate of agriculture but also a fundamental change in cropping patterns. The biggest change since 2004-05 is the 14 percent increase in the area under sugarcane and 26 percent decline simultaneously in the area under cotton due to the influence of the powerful sugar lobby. Also, the area under maize has increased significantly since 2004-05 by 40 percent.

This is a reflection of the changes in the ratio of output to input prices of different crops. The overall terms of trade of major crops have deteriorated by 9 percent in the last two years. The biggest drop in profitability is in the case of cotton, followed by wheat. If the profitability in wheat cultivation was to be preserved in 2019-20 then the procurement price of wheat should have been 1600 Rs per mound. Instead, it was kept at 1400 Rs. Given the high prevailing international price, it should have been set for the next crop at close to Rs 2000 per mound, equivalent to the landed cost of imported wheat and a subsidy of Rs 50 billion given to PASSCO.

Based on all the above factors which have contributed to the plight of agriculture, we see now a true indicator of the state of collapse of agriculture. For the first time in Pakistan’s history, we will see large imports simultaneously of three major agricultural items. These are 2.5 million tons of wheat, 0.5 million tons of sugar and as much as 5 million bales of cotton. The combined import bill will approach $2.5 billion. Export competitiveness, in particular, of textile manufacturers will also be adversely affected.

It is truly unfortunate that Pakistan which was once a net agricultural exporter will now become a net agricultural importer of as much as $3.5 billion. Sensible and prudent pro-agricultural policies could have avoided this situation. There is need for a high-powered Agricultural Commission to investigate the reasons for the debacle of agriculture and to identify the set of reforms and policies to restore the buoyancy of agriculture.

Otherwise, high inflation in food prices, big rural-urban migration due to lack of agriculture absorption of the incremental rural labor force, rising pressure on the balance of payments because of larger agricultural imports and greater poverty will be the consequences.

Dr Hafiz A Pasha, "Plight of agri sector," Business Recorder. 2020-12-01.
Keywords: Social sciences , Economic growth , Economic activities , Pakistan-Economy , Agricultural sector , Growth rate , Pakistan , PASSCO , WTO

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