Development Dichotomies: Limiting Discretion in Wheat Procurement

Development Dichotomies: Limiting Discretion in Wheat Procurement
Pakistan had a bumper wheat crop in FY2020-21: the government claims to have produced wheat in excess of 28.75 million metric tons (mmt). According to 2018-19 data, the cost of a 40kg wheat bag was Rs.985 at the farm - add Rs. 35 to it and the cost per 40kg bag at mandi was estimated at Rs. 1020. Since the costs for years after FY 2018-19 are not available; let us compare the production costs of FY 2018-19 with the wheat support price, a form of government subsidy, for the year. The minimum support price (MSP) for FY 2018-19 was fixed by the government at Rs. 1,300, which at the mandi cost of Rs. 1,020, indicates a profit slightly greater than 25%. The MSP in Pakistan increased from Rs. 1,150 in 2011-12 to Rs. 1,800 in FY 2020-21, reflecting an increase of 56%. However, while wheat procurement subsides exist in nearly all regions of the world, they have done little to protect the small farmer from exploitation and to enhance both farm and non-farm productivity. The bureaucratic control over the distribution of the bardana (gunny bags) makes the wheat subsidy exclusive for those with enhanced access to the corridors of power. While wheat production in both India and Pakistan increased in FY 2020-21, this rise had little to no impact on farm profitability and the level of exports in the two countries.

In Pakistan, the excess production is allocated to build strategic reserves instead of diverting it to the export markets. Despite 28.75mmt of wheat production, the government has taken a policy decision to import 4.0mmt of wheat to build strategic reserves. Domestic wheat consumption, that was estimated at 26.2mmt for FY 2020-21, was easily accommodated within the existing production level. However, given a population rising at a rate of 2.4% per annum and the volatility that Pakistan has experienced in the production of wheat in the past, the decision to build strategic reserves, while seemingly defensive and an unnecessary drag on the markets, is an essential step towards allaying the food insecurity fears.

However, while government intervention in the wheat market is desirable from the perspective of regulating stockpiles, its management of the pricing system, primarily instrumented through fixation of the MSP, has proved to be counterproductive. While subsidies are being phased out from non-essential sectors like oil and gas – or atleast that is what several policy proposals prescribe so as to allow greater efficiency, competition and market power – subsides in essential sectors like wheat exist somewhat alike in nearly all developed and developing countries. The least that the government can do is – if not eliminate subsidies – to at least make them more effective. That can be done by formulating a wheat procurement policy to minimize discretion in the fixation of the MSP and in the issuance of the bardana bags. That can only be achieved if subsidies are linked to KPIs and farm and non-farm outputs.

Photo credit - Arif Ali/AFP/Getty Images

France, the largest agri-economy in Europe, lays claim to the wheat subsidy provided by the EU. The EU operates with a centralized regulatory regime under which all European nations access EU subsidies to support their local farmer. France maintains a wheat inventory of around 3.6mmt and exports around 10.5 mmt. Its exports are thus 300% of the inventory that it maintains for domestic consumption. Bloomberg reported that French stockpiles are at an all-time high, with exports also rising. China is the highest importer of French wheat even though it has a large domestic wheat production capacity. Despite having an excessively large wheat export base, France continues to incentivize its farmers through an export subsidy that is in addition to the support price that the government pays to procure wheat from the farmers. However, despite a seemingly efficient wheat procurement and distribution mechanism, none of the top 20 recipients of government subsidy in France are individual farmers. Data indicates that a very large part of the government subsidy is availed by large institutional farmers. Non-farm subsidies are negligible in France, raising serous concerns over the inclusivity of government interventions.

The situation in India is very similar. India produced 107 mmt in FY 2020-21, of which the government procured around 42 mmt. The MSP was fixed at Rs. 1,975 per quintal which, like Pakistan, has increased from Rs. 1,120 in FY 2010-11. The current consumption is around 99.6 mmt, leaving India with around 7.5 mmt to add to its staregic reserves, which currently stand at 24 mmt. However, while most of these countries continue to support farmers, wheat subsidies have had a dampening effect on farm productivity and profitability. The non-farm sector – that should have been the real beneficiary of government support – is often excluded from such benefits, leading to severe income and wealth inequalities in the wheat industry. Many such inequalities reflect in the mass variation in landholding between the big and small farmers.

The State Bank of Pakistan has recently approved wheat procurement rules. As per the practice in the government, the procurement rules should create legal and regulatory space for a uniform procurement policy in the wheat subsector. That would streamline the wheat procurement process and lead to a both sustainable and profitable price and non-price regulations in the wheat subsector.

Subsides are essential towards ensuring sustainable food security. However, with the discretion that currently prevails in the wheat industry, government interventions have only contributed towards low productivity, decreasing farm profits and rising inequalities between farmers who have access to bardana and those do not. While the MSP continues to be affected by bureaucratic discretion in India too, the decision to build strategic reserves has become non-discretionary: with the government fixing it at 7.46 mmt. That indicates to the government what it should produce, how much it should allocate for consumption and how its food security needs would evolve with the changing future demand for food.

Pakistan must also rethink how it can make subsides more effective and allow efficiency and productivity – not subsides themselves – to dictate the terms of the exchange. In my article on this page next week, I would try to initiate thinking on what the proposed wheat procurement policy should look like.


The writer is an economist and ex-Director of the Burki Institute of Public Policy (BIPP). He tweets at @AsadAijaz