Subsidising agricultural sector

Various associations and groups in Pakistan continue to insist on the provision of subsidy by the government to the agricultural sector on one pretext or the other. The latest to join in this effort was Khawaja Usman, President of Multan Chamber of Commerce and Industry (MCCI), who premised his plea on the ground of Indian instance to grant subsidies on various agricultural products and favourable attitude of the World Trade Organisation (WTO) for the continuation of subsidies for the sake of food autarky in a country. As India was demanding subsidy on agricultural products meant for Pakistan under Agreement on Agriculture (AoA), the acceptance of such a demand would imbalance the regional trade because in that case the Indian farmers would be in a position to supply their products at lower rates with the help of government financial support (subsidies). Exports of rice from India, for instance, would be available at lower prices in the international market as compared to Pakistani rice. The position of Pakistani exporters would be further undermined because the WTO and the International Monetary Fund have forbidden the country to provide subsidies to the agricultural sector. Therefore, the government should provide subsidies on those agricultural products, which were covered under the Global Food Security provision. Food processing, dairy products, agricultural equipments and machinery may be included in those products. The supply of energy and other utilities may be subsidised for food processing and agricultural industry. Inland freight subsidy could also be covered under this clause. In a nutshell, president, MCCI underscored the need for providing subsidy on agricultural products and farm machinery on the pattern of India to ensure food security.
The proposal of MCCI president would appear to be quite sensible, at least on paper, to ordinary people but is deeply flawed and is based on certain inaccurate information. Subsidy in any form or for whatever reason always leads to suboptimal allocation of country's resources and, as such, real potential of an economy in terms of productivity and growth can never be fully realised in such a setting. This is so because of the wrong price signals emanating from the market. Insofar as the argument of food autarky is concerned, there are many countries in the world that do not produce food and other agricultural products but concentrate on the production of other goods and services and import food in order to reap the benefits of comparative advantage in the cost of production to maximise the overall welfare of their people. The insistence of countries like India and Pakistan to have self-sufficiency in agricultural products does not make much economic sense and could result in loss in productivity and welfare of their citizens. Certain observations of Khawaja Usman are also contrary to the facts. For instance, he seems to suggest that the WTO does not have any objection on the provision of subsidies to the agricultural sector while the actual position is quite the opposite. The latest WTO meeting in the first week of August, 2014 had in fact failed to make progress due to India's obduracy to grant it the freedom to subsidise and stockpile food grains. The collapse of negotiations had forced certain developed countries like the US, the EU, Australia, Japan and Norway to consider excluding India from the agreement and push ahead regardless. Feeling the heat of such a non-supportive posture from other countries, India is reported to be rethinking its stance but nothing is certain as yet. The point to be made is that contrary to Usman's statement, WTO was and would never be in favour of subsidies. So far as selling of subsidised Indian agricultural products to Pakistan is concerned, it will not be in India's long-term interest for it will have budgetary implications and India will be reluctant to subsidise Pakistani consumers for a long time. Yes, it could resort to dumping for a short time to browbeat Pakistani farmers but Pakistan in that case could approach relevant international forums to censure India for such a deceptive policy. MCCI president has also asked the government to provide subsidies on a long list of agricultural inputs. We are afraid that such a suggestion is totally unacceptable in a situation where the government is bound to bring its fiscal deficit down to a reasonable level within a stipulated time under an EFF agreement with the IMF and is seriously concerned with emerging inflationary pressures in the economy. Supply of energy and other utilities at subsidised rates and inland freight at concessionary rates do not at all make any sense when energy sector and railways are already facing huge financial problems. Keeping all these factors in view, we would urge upon various trade associations not to ask for more favours and concessions, which the government cannot afford to provide but insist on their members to pay more taxes to meet the growing needs of the economy and current expenditures of the government. The need of the hour is to contribute more to the government exchequer rather than asking the government to open its purse for some purpose, which is of dubious value to the country.