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September 22, 2020

Losing economic value


September 22, 2020

LAHORE: Ordinary citizens most of whom are poor need protection from market imperfections, cartelisation, and leakages in the power and gas sectors.

Reforms needed in these spheres have not been initiated yet. It has led to the failure of the government to control prices. Market imperfections badly impact the farmers of this country. Take any agricultural commodity, you will find the farmer at the receiving end.

Farmers for instance parted with their wheat crop this year at Rs1,400-1,500 per 40kg. Immediately after the crop was lifted from the fields’ wheat prices started spiralling up gradually from Rs1,900 to Rs2,400 per 40 kg in Punjab and Rs2,800 per 40 kg in Khyber Pakhtunkhwa.

The beneficiaries of this price hike were neither the retailers nor farmers but the middlemen, who hoarded the commodity and minted money like never. Commodity markets in the country are operating without proper regulations.

Government estimates of the crop size are based on guess work. The farmers have not been facilitated to retain their produce. In fact, they are in a hurry to dispose of their stocks quickly to settle the debt they have taken from the middlemen during the cultivation period for buying seeds and fertilisers. We have seen that some multinationals enter contract farming with the farmers by providing them quality seed and other inputs guaranteeing to buy back the commodity at lucrative prices decided beforehand.

The middlemen in Pakistani agriculture operate on the same concept. The only difference is that they exploit the small farmers (87 percent farmers have land holding of less than 12.5 acres).

They supply the seed without quality assurance, some supply fertilisers, and pesticides at higher than the market rates. In return they buy the entire produce at much lower than the market prices.

The prices are settled before the supply of inputs and cash to the farmers. Wheat is not an exception we see this in all crops. Sugarcane is purchased at low rates by sugar mills and sugar is marketed at very high rate.

Farmers are banned from making their own gur from the sugarcane they produce otherwise some could produce their own brown sugar instead of parting with their crop at exploitative price (the price is further diluted by defective weighing, making cash payment through the middlemen at 10 percent discount, delaying the purchases till December-January when the crop water content is low and sugar content high).

For bulk commodities like sugarcane, wheat, and rice it is not possible for the farmers to take their produce to markets in cities. But fruits and vegetables do provide an opportunity to the farmers to sell their produce directly in different markets in the cities.

Those who can reach these markets earn relatively more. They still do not get the real market price because fruits and vegetables are sold through auction in the wholesale markets. Here the middlemen collide with each other to suppress the rates. The government lacks muscle to prevent these middlemen from over profiting or exploiting the farmers.

Most of the farmers now dispose of their produce from their fields instead of taking them to the markets. The farm to market road concept has failed because of the monopoly on markets enjoyed by entrenched middlemen.

Cartelisation in sugar, cement was already well known, now flour millers have joined this club. Similarly, the government has not addressed the inefficiencies and corruption in the power and gas sectors. It needs to come up with reforms.

Concessions obtained from independent power producers on capacity charges are good; but the benefit of the whole exercise is nominal in financial terms. It would not resolve or improve efficiency according to the gigantic issue of circular debt.

Reforms are needed at the management level. Government may hire experts on lucrative salaries and perks, but it should be conditioned with a planned reduction in line losses and theft and complete recovery of billed amount.

Any failure to the planned schedule should be accompanied with reduction of perks and salary by 25-50 percent and removal from job after six months. Government is losing Rs500-600 billion yearly due to power sector inefficiencies.

It could incentivise each grid by offering better re-numerations to each employee of the grid on reduction of each percentage of line loss and on recovery of the defaulted billed amount that has crossed Rs800 billion.

Grid is the lowest level from where improvement should come. The staff of grids that fail to improve inefficiencies should be removed after six months and any further increase in losses should be recovered from them. Similar exercise should be carried out in gas sector. Increasing tariff is not the solution; rather it is a penalty on honest consumers.