TARGETING AGRICULTURE FOR ECONOMIC GROWTH
Poor capacity utilization of agro-based industries provides enormous opportunities
By SHABBIR H. KAZMI
Mar 01 - 07, 1999
Agriculture sector has the potential to provide necessary impetus for faster economic growth, expand exports and massive industrialization in Pakistan. However, the successive governments have failed in exploiting the potential due to lack of clarity of objectives, inability to formulate and implement the required policies. As a result, Pakistan's GDP growth rate is very low, it is a single crop country and its economy and exports are mostly dependent on cotton.
The successive governments have experimented various philosophies i.e. promotion of agro-based industries, import substitution, promotion of specific sectors and specific areas. The outcome is imbalance growth of various sub-sectors, poor capacity utilization, eroded competitiveness of local manufacturers and uneven playing field within the country. At the best, Pakistan can only be classified as the producer of low quality low price products. This has lead to proliferation of smuggling and local exporters cannot compete in the global markets. Poor capacity utilization results in higher cost of production. Reduction in repayment ability of borrowers been inflating the non-performing loan portfolio of financial institutions. Sector specific incentives have attracted investment only in a few sectors. Area specific incentives have promoted inefficiency in the manufacturing sector.
In the early years and till late sixties, the government of Pakistan (GoP) used to announce 5-year plans and promulgate policies to achieve the specified targets. But, gradually annual development programmes became a norm. Inconsistent policies were announced to please various pressure groups. Ad hocism became another norm due to lust of people in power to gain extra political mileage by introducing policies which were not in the larger interest of the country. This attitude rendered almost all the five-year plans redundant.
In this backdrop when one looks at the performance of agriculture sector, process of industrialization and composition of exports, it appears that the country has failed in achieving the required GDP growth rate. The country after achieving self-sufficiency in wheat, has once again became a net importer of basic food item. Despite producing the best varieties of rice, the country is gradually losing its share in the global markets.
Though the country produces improved varieties of cotton, the fiber is damaged due to outdated ginning equipment. Nearly half of the yarn produced has to be exported due to insufficient and obsolete weaving and processing facilities. Sugar industry operates around 50 per cent capacity utilization. All these factors have resulted in poor GDP growth rate and dismal performance of the large scale manufacturing sector.
One of the serious problems, faced by Pakistan, is low yield of crops. The average yield of different crops is nearly half of the yields achieved in India having similar climatic and soil conditions. Various reasons for this poor output are: exceptionally large or economically unviable small land holdings, poor availability of certified quality seeds, inadequate supply of fertilizer, agricultural implements and irrigation water. It is also difficult for small farmers to acquire credit as bulk of the funds is extended to big landlords. The other problems are supply of adulterated pesticides, water logging and salinity, in adequate farms to market roads and exploitation by the middlemen.
Area under cultivation
(000 hectares)(major crops)
Crops 1997-98 1996-97 1995-96 1994-95 Wheat 8,355 8,109 8,377 8,170 Rice 2,317 2,251 2,162 2,125 Cotton 2,960 3,149 2,977 2,653 Sugarcane 1,056 965 963 1,009 Source: SBP Annual Report 199798
PERFORMANCE OF ECONOMY IN 1997-98
Notwithstanding a major disruption that took place in May, after the nuclear test, the economy performed well during 1997-98 as compared to previous year. GDP achieved the real growth rate of 5.4 per cent. The marked improvement in GDP growth rate stemmed from recovery in the commodity producing sectors of agriculture and industry.
The growth of agriculture sector mainly resulted from an 8.4 per cent growth in the output of major crops. Among the major crops wheat and sugarcane set new records, though the cotton output was slightly more than the domestic consumption. Factors contributing to better performance of agricultural sector included enhanced availability of credit, favorable weather conditions, timely revision of support prices adequate supply of other inputs.
The industrial sector comprising manufacturing, mining and quarrying, construction and electricity and gas distribution registered a growth of 6.2 per cent in 1997-98, Manufacturing sector registered a growth of 7 per cent which was mainly due to 6.2 per cent growth in large scale manufacturing. The improved performance of this sector was attributed to the performance of sugar industry. The output of sugar industry grew by almost 50 per cent. Trends in production in the large scale manufacturing sector show that full impact of economic packages is yet to take effect.
All this indicates at least one point that agriculture has the potential to lead economic growth of the country. If concerted efforts are made to improve production and productivity of two food crops, wheat and rice, and two cash crops, sugarcane and cotton, the output can be, at least, doubled in a short span of time. The enhanced output will, on the one hand help in reducing the import bill while on the other hand help will boost the exports.
Cotton offers the twin advantage. Additional production and availability will help in stabilizing its prices in the local market, enhancing local production of yarn, fabrics and made-ups and reducing import bill of edible oil. The country has the potential to produce 20 million bales, double the quantity, produced at present, from the same area under cultivation.
At present there are 8.8 million spindles and 148,000 rotors installed in the country but the average capacity utilization is around 75 per cent only. With the additional cotton not only capacity utilization can be improved but the country can also earn extra foreign exchange from export of surplus raw cotton, exporting more yarn, fabrics and made-ups.
By enhancing production of sugarcane, capacity utilization in sugar industry can be improved. At present industry has an installed capacity to produce 5.5 million tons as opposed to its domestic demand of around 3 million tons. The average capacity utilization was around 50 per cent in the recent past. Therefore, by operating the mills at optimum capacity utilization the industry can earn US$ 400 million by exporting at least 2 million tons of sugar. The enhanced production of sugar can also help in bring down its cost of production.
In order to increase production of textile and sugar industries, there will not be any need to establish new spinning units or sugar mills. However, funds will be required for BMR of spinning units which face technical obsolescence. While it is necessary to revitalize spinning sector, being the producer of basic raw material, additional funds are required for establishing weaving and textile processing units.
(000 Tonnes)(major crops)
Crops 1997-98 1996-97 1995-96 1994-95 Wheat 18,694 16,651 16,907 17,002 Rice 4,333 4,305 3,967 3,447 Cotton (bales) 9,184 9,374 10,595 8,697 Sugarcane 53,104 41,998 45,230 47,168 Source: SBP Annual Report 199798
At present half of the locally produced yarn is exported due to insufficient weaving facilities. Bulk of fabrics is exported in unbleached form. Establishment of weaving and processing units will help in boosting export of value-added products besides providing employment. Production of better quality fabrics will also improve the quality of made-ups being exported from Pakistan. Since bulk of export of textile products from Pakistan is mainly to countries which come under quota regime, the export of superior quality made-ups will not only improve unit price realization but will also increase the export earnings from these products. Pakistan can double the earnings from textile products by improving quality leading to higher unit price realization.
(Rs.per 100 kilograms)(major crops)
Crops 1997-98 1996-97 1995-96 1994-95 Wheat 600.00 600.00 432.50 400.00 Rice (Basmati) 1141.58 1141.58 1037.50 972.50 Cotton (Phutti) 1125.00 1100.00 850.00 850.00 Sugarcane (Sindh) 90.00 61.25 54.38 51.88 Source: SBP Annual Report 199798
Since investment in weaving and processing sector will improve value-addition, the import of plant and machinery for such units should be declared duty-free. As such, most of this machinery is not manufactured in the country, therefore, there should not be any duty applicable on these equipment.
Improving the average yield of various crops is the responsibility of federal and provincial governments. This includes availability of certified seeds, adequate quantity of various types of fertilizers, duty-free import of agricultural implements and supply of irrigation water at the far ends. Though efforts have been made in the past, availability of inputs remain a serious problem.
Fertilizer industry is almost capable of meeting the indigenous demand of urea. DAP production has started in the country but nearly 60 per cent of requirement is still to be imported. Fertilizer industry has been facing loadshedding of gas leading to import of urea despite having the installed capacity. The operations of some of the urea plants has been affected due to reduced supply of gas in winter. As more and more gas is being discovered in the country the GoP must ensure full supply of gas to fertilizer plants. The industry, if operated at optimum capacity utilization, has the potential to export surplus production after meeting local demand and earn extra foreign exchange to finance import of DAP and other types of fertilizer. Efforts should also be made to contain prices of various types of fertilizer the price of urea in particular as gas is supplied to manufacturers at subsidized rates.
Though various land reforms were introduced in the past, the land holding pattern in the country is very odd. Nearly 90 per cent of the land is owned by big land lords. Most of them fall under the category of 'absentee land lords' and virtually do not play any role in agricultural activities. Whereas there are numerous small land holders. Most of the land owned by them, has become too small to be an economically viable unit.
Therefore, the country needs two types of land reforms: 1) to recover the land from large land holders and 2) to consolidate uneconomic land holding. The objective of first type of action is to distribute the land to 'landless' peasants who actually cultivate the land, owned by absentee land lords. This can bring more area under cultivation as the farmers get the ownership rights of the land.
The objective of second type of land reforms is to consolidate the small land holding. The small land holders have formed cooperatives in many countries including India. However, the concept could not materialize in Pakistan due to many reasons. This includes various scams of cooperatives in the country.
However, formation of cooperatives can not postponed for indefinite period. The yields, achieved by small land holders, is poor because they still use ages old agricultural implements and cannot buy certified seeds and fertilizer in required quantity. At the best whatever food grain they produce is consumed by them or sell the cash crop and continue to live below subsistence level.
The provincial government must also consider imposing tax on income from agriculture seriously. While the corporate sector is being 'milked', the tax evaders hide their tax liability by classifying all of their earnings under income from agriculture. However, this objective cannot be achieved as long as 'Benamee' holdings continue to exist in the country.
During the past fifty years, Pakistan has suffered due to following the policy, 'maintain status quo', and inability of decision makers to make some difficult decisions. This practice must discontinue. While the efforts to expand manufacturing base may continue, the impediments affecting the performance of agriculture should be removed. Improved agricultural output can ensure better capacity utilization of agro-based industries.
Production of Selected Manufactured Items Item Unit 1997-98 1996-97 1995-96 Cotton Yarn Million Kg 1533.1 1520.8 1495.1 Cotton Fabrics Million Sq.Met 339.9 333.5 327.0 Vegetaable Ghee 000 tonnes 733.2 714.3 732.8 Cooking oil 000 tonnes 102.0 95.9 88.9 Sugar 000 tonnes 3554.8 2383.0 2425.80 Source: SBP Annual Report 199798The nation in general, and people in power, must learn to make difficult decisions rather than making popular decisions to get extra political mileage. But before that the objectives have to be defined clearly. Then policies should be made to achieve these objectives. The efforts should not be aimed at pleasing a few but to achieve economic development in the country even if these few elites feel deprived. They have enjoyed their turn, now it is the time to do something for those who have remained deprived, for half a century.