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May 17, 2021

Consumers protected from worst inflation

May 17, 2021

ISLAMABAD: Although the increasing inflationary pressures that had peaked to over 11 percent in April 2021 have created more difficulties for the urban consumers, the government has claimed that it has diverted additional Rs1,100 billion to the rural economy, making the rural population more prosperous.

Now the government has adopted a strategy to ensure sufficient stocks of essential food items such as wheat, sugar, and pulses to protect the consumers, officials said Sunday.

The rural farmers have obtained additional resources of Rs1,100 billion through the increased production as well as jacked-up support prices of major crops.

Government officials also say that financial resources were diverted towards the rural economy insisting this was reflected in bigger earnings of cultivators.

Growers of basmati rice earned Rs268 billion in the fiscal year 2019-2020 against Rs170 billion in 2017-2018, registering an increase of 57.6 percent.

Under the PTI-led government, maize growers earned Rs45 billion in 2019-2020, against Rs28 billion in 2017-18, registering an increase of 60.7 percent.

Cotton growers made Rs26 billion in 2019-2020 against Rs24 billion in 2017-2018, registering an increase of 8.3 percent.

The government has also raised the support prices, as the price of wheat went up from Rs1,206 in 2017-2018 to Rs1,492 per 40kg in 2019-20, registering an increase of 23.71 percent.

Earlier, the government had faced criticism for not investing resources in agriculture and was urged to incentivize domestic production, a senior official said.

The maize prices increased from Rs964 per maund in 2017-18 to Rs1,287 per maund, sugarcane from Rs180 in 2017-18 to Rs220 per maund in 2019-20, Basmati Rice from Rs3,845 per maund to Rs5,000 per maund in 2019-20, Irri Rice from Rs1,441 per maund to Rs1,897 in 2019-20 and cotton from Rs2,996 in 2017-18 to Rs3,783 in 2019-20.

So in totality, the government has estimated that it diverted around Rs1100 billion towards the rural economy.

The rising prices impact the welfare of consumers, as their purchasing power falls, experts say. At the same time, inflation serves as an incentive for growers to produce more. The increase of output prices compared to input costs might result in more areas being cultivated by growers in the next year and potentially generate higher incomes; this is called the ‘Cobweb phenomenon.’

Cobweb refers to the market fluctuations in which the quantity supplied by producers depends on prices in previous production periods.

Cotton: This is a major cash crop and is often seen as the lifeline of Pakistan’s economy. Cotton-based products contribute more than 50 percent to total export. According to government statistics, in fiscal year 2018-2019, both areas under cultivation and yield declined by 12 percent and six percent respectively, compared to the previous year 2017-2018. This created a large gap between supply and demand.

Inflation and the widening gap between supply and demand led to an increase in the prices of cotton by about 27 percent, but the cost of production grew by only 11 percent. This increase in revenue raised profits by 111 percent in 2018-19 compared to 2017-18.

However, in the following year (2019-2020), area and yield moved in the opposite direction. Owing to the unfavorable weather conditions, decline in yield was almost double than the increase in area under cultivation. Thus, cotton prices remained stable. However, the cost of production driven by inflation increased by 26 percent, which led to decline in profits by 32 percent compared to the profit in 2018-2019. However, if one compares this with 2017-2018, there is an increase of 44 percent in profits, official data says.

Inflationary effect on input prices is more glaring than output prices, but it appears that inflation has benefitted cotton farmers by increasing profitability of their crop by 44 percent in the last three years.

Sugarcane: This is another high value cash crop as it generates raw material for the sugar industry which is Pakistan’s second largest agriculture industry after textiles. The area allocated to sugarcane declined by 18 percent in 2018-2019 compared to 2017-2018. Due to unfavorable weather conditions, yield also declined by about two percent during the same period. This put pressure on sugar mills to offer higher prices to meet their demand. Farm gate prices increased by seven percent while costs of production grew by 15 percent between 2017-18 and 2018-19. Higher inflationary effect on input prices led to decline in profits by about 12 percent during the two consecutive years. However, the inflationary effect on input prices became more prominent in 2019-20 when the costs of production grew by 32 percent compared to 2017-2018, while output prices increased by 22 percent only during the same period.

Rice: Rice is a major staple food crop and an important export commodity. Both the costs of production and farm gate prices observed an increasing trend due to inflation.

The cost of production of basmati rice grew more than 23 percent while farm gate prices of basmati rice rose by 30 percent. The higher increase in farm gate prices than costs of production led to increase in profits by 34 percent. A similar trend prevails in the case of IRRI varieties. The sluggish increase in input prices due to inflation could be the result of input subsidies on water and fertilizer. The increase in profits of IRRI varieties is nearly 10 percent higher than basmati rice over the last three years. It appears that inflation has increased profitability of rice farmers but this situation cannot be sustained over a longer period of time.

Wheat: Wheat accounts for 8.7 percent to value addition in agriculture and 1.7 to the GDP. The area and yield of wheat has been declining over the last three years – although yield increased slightly in 2020-2021. Costs of production increased by more than 40 percent in the last three years, while farm gate prices grew by only 24 percent. Higher increase in costs of production than wheat prices led to decline in profits by about 21 percent in three years. Inflation has negatively impacted the wheat farmer’s profitability.

Maize: Both costs of production and farm gate prices of maize are increasing. Costs of production increased by 30 percent while output prices increased by 34 percent over the last three years.

The increase in prices of both inputs and outputs highlights impacts of inflation. However, inflationary effect is stronger on output prices compared to input costs. Inflation has increased maize farmers’ profitability by 49 percent.