Falling farm income reverberates across wider economy

One of the key reasons for macroeconomic stability is the decline in commodity prices, driven by both global and domestic factors. However, this trend is taking a toll on the agricultural sector.

Farmers are earning less, which in turn reduces their capacity to invest in future crops. This decline in farm income is also dampening demand for agriculture-related inputs, construction materials, clothing, automobiles, and other goods. The ripple effects are far-reaching, suppressing overall economic demand.

In the last season, the government chose not to procure wheat at the support price. While this decision could lead to long-term benefits by allowing market dynamics to dictate prices and planting decisions, its execution was perceived as unfair by the rural community. Farmers operated under the assumption that the government would purchase their stock at an indicative support price.

Based on this expectation, they made planting decisions. However, the government later allowed the private sector to import wheat and refrained from buying from the domestic market, leading to a collapse in wheat prices. Even today, wheat flour prices remain one-third lower than their peak levels at the beginning of 2024. While this has contributed to lower inflation, a point the government celebrates has come at the expense of farmer profitability.

The uncertainty extends to other crops as well. The absence of a sugarcane support price is creating unease, while cotton production continues to decline. The brief rice export boom is also waning as international rice prices have dropped by an average of 15 percent and are expected to fall further with India’s surplus entering the market. This will significantly impact rice exports and overall farm income. Maize and sesame are similarly struggling, with exports normalizing and prices falling. Export earnings for sesame, for instance, are down nearly 40 percent fiscal year-to-date.

The outlook for major crops is grim. Wheat cultivation is projected to decline by as much as 15 percent, with production likely to follow unless there is a significant and unlikely yield improvement. Cotton output is estimated to drop by one-third, and no other major crops appear to offer a positive outlook. Important crops may almost certainly turn in a negative number in the current fiscal year.

This decline in farm income is also reflected in reduced demand for agricultural inputs. Urea stocks in October 2024 reached a six-year high, over three times the average of the last three years, as dealers accumulate stock due to weak farmer demand. Other fertilizers show an identical trend.

The general demand for goods and services in rural areas has also plummeted. Car dealers in southern Punjab report sluggish sales, and similar trends are observed in the two-wheeler and tractor markets. Demand for wash-and-wear fabric, commonly used for shalwar kameez, has dropped significantly, with industry experts estimating the market has halved. The construction sector, too, is under pressure. Real estate prices in areas such as DHA Multan have reverted to 2018–19 levels, reflecting diminished demand from rural landowners.

These challenges in rural areas are reverberating across the wider economy. Consumer demand for products that depend on the rural economy is falling, putting additional strain on organized retail. Retail brands, which weathered the hardships of COVID-19 and peak inflation, are now grappling with unprecedented declines over the past 6–8 months. Early shop closures to mitigate smog have further cut into peak-hour sales. Some major retail brands are even contemplating layoffs.

The broader job market remains stagnant, with businesses struggling to recover. Even falling interest rates may not significantly boost demand in the current fiscal year. This has implications for revenue collection, as the FBR reported a shortfall of Rs356 billion in the first five months. Without a waiver from the IMF, fiscal contingencies may be triggered, potentially further raising the tax burden on ordinary consumers, further weakening domestic demand.

The government faces the urgent task of addressing the challenges in the agricultural sector, which employs the largest portion of the labour force. The adverse effects on this sector are cascading through the social and economic fabric. However, the solution does not lie in reviving support price mechanisms or subsidies.

Despite the challenges, the absence of widespread farmer protests over suppressed income and the lack of support prices suggest that marginal farmers are managing to get by. Yet, as long as commodity prices remain low, farm incomes will stay suppressed. For farmers, low inflation, a benefit touted by the government—offers little hope.

A healthy agricultural economy is not just a rural concern; it is, in fact, a national imperative. By addressing the underlying inefficiencies and creating a supportive environment for farmers, the government can revive the rural economy and restore demand across sectors. It must take the required steps, the sooner the better.

Copyright Business Recorder, 2024