Developing agriculture value chains is the low-hanging fruit in Pakistan’s economy – especially the Punjab economy. One silently growing area was in creating a value chain from fruit to pulp to juice making before the heavy taxation hit the formal sector.
Around 80 percent of fruit procurement and manufacturing of pulp and juices takes place in Punjab, and lately, the industry has been on a decline due to increasing prices owing to inflation and increased taxation.
The farmer is already stressed due to the absence of wheat support, and the lack of growth in other sectors is just adding pain. Principally, the government should not support any crop itself (like it happens in wheat and sugarcane) but should go all out to facilitate the private sector’s initiatives – the success of maize demonstrates how private sector financing and technical support helped the farming economy to grow, and the proof is in the pudding. Then an international company is helping certain forms of potatoes to grow to expand the chips industry.
A similar story was building up in the juices industry. In 2022, the industry procured around 100k tons of mangoes, kin nows, apples, peaches, and guavas from farmers to produce pulp. However, additional taxation measures have reversed the process, and the procurement is slashed to half.
In last year’s budget, the government imposed an FED of 20 percent on juices, which brings the total indirect tax incidence to 42 percent (including GST of 18%). The overall market has shrunk, and part of the formal sector is being captured by illicit and inferior products. This is hindering the formal value chains to grow.
The farmer is at a loss, as formal fruit pulping and juice-making companies were helping the value chain to grow by providing financing and other support to the farmers. That is missing now.
Then the government is not generating additional revenues, as the formal market size is dipping. This year total tax collection (GST +FED) is expected at Rs15-16 billion. Had the sales not declined, the collection from GST could have been Rs12 billion, and reached Rs15 billion by next year.
The revenue collection for the government is small but the impact on the farmer community is significant. The federal government should experiment with this sector by removing FED and evaluating the impact, as its opportunity cost of losing revenue is insignificant. The gain is to be accrued by Punjab and its farmers; the provincial government should advocate to the federal counterpart to abolish FED.
The fruit pulping and juicing industry has been developing fast in the past few years, as new manufacturers have entered the formal market seeing the growing demand. However, taxation has suppressed the demand, and today the capacity utilization of the industry is around 30 percent.
The processing is very low in Pakistan where over 90 percent of the fruit is being eaten fresh while it’s the other way round in developed markets where 95 percent of the fruit is being processed.
The gap is huge, but the market was moving in the right direction. The government should let the sector evolve to ensure better utilization of fruits, generation of employment, and potential for exports.
Some players have already started the export market, and once they have scaled, developed, and tested products locally, they can scale up the exports.
It’s a win-win for all. Chief Minister Punjab and Finance Minister federal governments should grab this low-hanging fruit.
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