Abstract
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This paper attempts to estimate the effect of RGST on fertilizer and other inputs on the cost of production of major crops like wheat, rice, cotton and sugarcane. The rise in fertilizer price through RGST would affect the production of crops to be sown in 2011-12. Empirically it has been estimated that a 1 percent rise in the fertilizer price would reduce crop production by 0.127 percent. Meaning, thereby that the production of wheat, rice, cotton and sugarcane would be reduced by 0.518, 0.133, 0.045 and 1.098 million tonnes. Their respective value at current international prices is estimated at $ 168, 80, 32 and 47 million. Total production loss in these crops would be $ 326 million. The reduction in production would cause imports which would be burden on national exchequer. The reduction estimation does not include vegetables, fruit other important crops like maize. Inclusion of these crops would further expand the value of crop losses due to imposition of RGST.
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Masood Bakhtiar Siddiqui Chairman, API
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Agriculture inputs and implements are concessionary items on which GST was not applicable. Due to widening budgetary deficit Federal Government imposed RGST of 17 percent on fertilizers, seed, pesticides, insecticides, tractors and its implements etc. in an attempt to reduce the budgetary deficit. Imposition of RGST has variable impact on different crops.
A. Impact on Agriculture Machinery, POL and Electricity
Process of producing crops includes land preparation, seed and sowing operations, irrigation, weeding, interculture and plant protection, application of fertilizers and manures. All these operations require specific inputs. Land is prepared through tractor operations using specific implements. Tractors and its implements have been withdrawn from the concessionary facility (GST exemption). Tractors are operated on diesel. POL prices are revised every fortnight. Generally they are on the rise in sympathy with rising international prices. Moreover, from Ist July 2009 onwards diesel prices are being set above the petrol prices quite contrary to the existing price trend. It is, therefore, a continuous source of rise in COP of crops. Seed is an other major input in crop production. Other inputs used in crop husbandry are for the growth, sustenance and improvement of crop. Now seed has been placed under RGST. In irrigated agriculture, canal and tubewell are the major sources of irrigation. Tubewells are operated on diesel as well as on electricity. Most tubewells are diesel operated. Their operating cost is rising due to rise in diesel prices. Electricity driven tubewells, although lesser in number are also on the rise due to frequent rise in electricity charges. Now every unit of electricity consumed is subject to 2 percent excise duty. Weeding, interculture and plant protection are done manually, with tractor and through application of chemicals and sprays. Wages are rising due to inflation, tractor operation charges are dependendent upon diesel price and pesticides, weedicides, insecticides are now covered under the net of RGST. Fertilizer is the key input in irrigated agriculture. Its prices are on the rise in sympathy with rise in its international prices. Now it has been subject to 17 percent RGST. This paper attempts to capture the impact of RGST on prices of fertilizer and weedicides/insecticides etc. in the COP of major crops i.e. wheat, rice (paddy) cotton and sugarcane*. The analyses of the impact of RGST is given in Table-1.
· API’s policy analysis papers workout complete changes in the COP of specific crops at the time of its submission to MINFA.
Table-1:
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Impact of Imposition of RGST on Cost of Production of Major Crops
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Crop
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Share of Inputs*
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RGST**
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Impact on COP
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1
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3
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4
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5=(3x4)/100
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--------- Per cent -------
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Cotton
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26.16
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Punjab
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26.62
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18.36
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4.89
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Sindh
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24.35
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18.36
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4.47
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Punjab
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16.73
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Basmati
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14.96
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18.02
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2.7
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Irri
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21.6
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18.02
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3.89
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Sindh
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Irri
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20.32
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18.02
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3.66
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Sugarcane
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10.87
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Punjab
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10.13
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19.21
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1.95
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Sindh
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13.03
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19.72
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2.57
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KPK
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10.07
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19.55
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1.97
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Wheat
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21.18
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Punjab
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20.89
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18.02
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3.76
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Sindh
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23.07
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18.02
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4.15
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Total
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20.44
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Notes: * Inputs include seed, fertilizers and pesticides, insecticides etc.
** Markup on investment has been applied on RGST and Excise Duty according to the duration of the specific crop
Source: Policy Analysis Papers for specific crops
B. Cotton
Cotton is planted on about 3 million hectares. Its share in cropped area is 12.5 percent. About three-fourth of the cotton crop is planted in the Punjab and one fourth in Sindh. However, some cotton area is also planted in Balochistan and KPK. In the Punjab share of specific inputs in the total COP is about 27 percent. The impact of RGST on these inputs on the total COP is about 4.9 percent (Table-1). About 4.5 percent impact has been worked out for the cotton crop of Sindh. Therefore, collective impact on total crop is assessed at 4.8 percent. In 2010-11 cotton growers reaped wind fall profits as market prices sky rocketed due to short crop size and there was yawning gap of more than 3 million bales between the domestic production and demand of the textile industry.
C. Paddy (Rice)
Rice is sown on 2.8 million hectares. Its share in total cropped area is 11.7 percent. About 92 percent area is shared by Punjab and Sindh (Punjab 68 + Sindh 24) and KPK and Balochistan account for 2 and 6 percent, respectively. Rice (paddy) is our cash crop. Major rice crops of the country are basmati and IRRI. Both are exported in the world market. In 2009-10 country earned about US $ 3.5 billion from rice exports out of total exports of US $ 19.3 billion, an export share of 18.3 percent. In the Punjab on basmati crop share of inputs, on which RGST has been imposed, in the total COP is 15 percent. The Impact of which on total COP is worked out at 2.7 percent. The share of inputs on IRRI crops in the Punjab and Sindh is estimated at 20 to 22 percent. Its impact on COP is assessed at 3.9 to 3.7 percent (Table-1). The over all impact on the total crop is assessed at 3.4 percent. The growers can only bear the rising COP if the gains obtained at export front are shared with him. Other wise rising costs of inputs would affect the production and productivity of both basmati and IRRI crops which would ultimately affect our exports.
D. Sugarcane
Sugarcane is grown on about one million hectares occupying 4.5 percent cropped area. It is grown in the Punjab, Sindh and KPK. These provinces contribute 68, 21 and 11 percent in area and 68, 23 and 9 percent in production. It is the basic raw material of the sugar industry which consumes about 75 percent of the crop. The rest of the crop is used for seed, feed and Gur making. Fluctuations, in crop production, share in cane crushed by the mills and sucrose levels due to weather conditions affect sugar production levels in the country resulting in un-affordable prices by the consumers. The share of inputs on which RGST has been imposed in the total COP of sugarcane is calculated at 10.1, 13.0 and 10.1 percent for the Punjab, Sindh and KPK. The impact on their COP’s is worked out at 2.0, 2.6 and 2.0 percent. Overall impact at country level crop is assessed at 2.2 percent. The impact of RGST and excise duty would work as a double edge weapon for sugar sector as on the one hand cost of production of sugarcane will go up and on the other hand concessionary excise duty on sugar has been withdrawn. As a result price of sugar would bear two fold increase. PSMA has proposed cost of production of sugar at Rs 55 per Kg for the imposition of RGST.
E. Wheat
Wheat is grown on about 9 million hectares, occupying about 37 percent of cropped area. Punjab and Sindh share 75 and 12 percent in area and 76 and 15 percent in production. Wheat is the major staple food and pillar of food security of the country. Government procured 9.2 and 6.7 million tonnes from 2008-09 and 2009-10 crops at support price of Rs 950/40 kg. Imposition of RGST on fertilizer would disturb wheat and fertilizer parity. Now 17 percent more wheat units would be required to buy one unit of fertilizer. The share of inputs on which taxation measures have been imposed in the total COP of wheat is 21 and 23 percent for the Punjab and Sindh (Table-1). The impact of taxes is worked out at 3.8 and 4.2 percent while the over all impact is assessed at 4.0 percent. It has been empirically estimated that increase in support price of wheat fuels inflation in the economy. A 10 percent rise in support price would result in 2 percent inflation in the CPI therefore, government should try other options instead increasing support price. One option may be to exercise focused and well targetted supply of subsidized fertilizer to marginal and small farmers. Subsidy on fertilizer should not be free for all like air and water large farmers can absorb the price hike in inputs while small/marginal farmers are in vulnerable position they can not.
F. Impact on Production due to RGST on Fertilizer
It has been empirically estimated that 1 percent change in fertilizer price in real terms causes 0.1266 per cent change in production of food grain. This estimate can be used to prepare impact on crop production after the imposition of RGST on fertilizer. RGST on fertilizer is imposed at the rate of 17 percent. If fertilizer price is raised by 17 percent then its impact on production is worked out at 2.15 percent. The impact on 4 major crops is given in Table-2.
Table-2: Impact of Imposition of RGST on Crop Production
Crop
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Production*
(million tonnes)
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Impact **
(million tonnes)
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International price
$/Tonne
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Value of
Impact
($ in million)
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Wheat
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24.115
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0.518
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325
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168.35
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Rice (Total)
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6.178
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0.133
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600
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79.60
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Cotton
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Lint
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2.072
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0.045
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400
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16.00
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Cotton oil
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0.539
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0.012
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1300
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15.60
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Sugarcane
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51.052
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1.098
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Mill Usage
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38.285
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0.823
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Sugar
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3.637
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0.078
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600
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46.60
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Total
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326.15
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* 2008-09 to 2010-11 average.
** Reduction in production.
*** The above analysis holds of other things remaining the same. The impact would change with changes in the dependent factors.
G. Overall Impact
The impact of RGST on fertilizer would be highest on wheat, valued at $ 168.35 million, fallowed by rice at $ 79.6 million, sugar at $ 46.6 million and cotton at $ 31.6 million. The impact on four major crops to be produced in 2011-12 is estimated at $ 326.15 million which works out to about Rs 28 billion. At the time of imposition of RGST on fertilizer it was assessed to generate revenue of Rs 25 billion. The simple analysis brings to fore that losses would be more than gains. Due to short crop production increased imports of cotton, oil and sugar would further add to the losses. However, so far RGST has not been imposed, and adhere options, such as indirect taxation on agriculture inputs are being explored.
H. Conclusions
1. Revenue is estimated at Rs 25 billion.
2. Production losses due to RGST on fertilizer are assessed at Rs 28 billion.
3. Increased imports due to loss in production would add to losses.
4. Losses on vegetables, fruits, and maize crop would be additional
5. Relationship on increased use of fertilizer on food grain production be made.
6. Relationship on increase in real price of fertilizer on fertilizer use be established.
7. Government should introduce focused subsidy on fertilizer to small and marginal farmers.
References
- Wheat Policy Analysis various issues API, Islamabad
- Rice (Paddy) Policy Analysis various issues API, Islamabad
- Cotton Policy Analysis various issues API, Islamabad
- Sugarcane Policy Analysis various issues API, Islamabad
- Economic Survey 2009-10, Finance Division, Government of Pakistan, Islamabad
- Agricultural Statistics 2008-09, MINFA, Islamabad
- Daily ‘Dawn’ various issues, Islamabad.
- Fertilizer growth, imbalances and subsidies, Trends and implications, National Centre for Agriculture Economic and Policy Research
- Fertilizer Review 2009-10, NDFC, Planning Division, Islamabad
- Pakistan Agriculture: A description of Pakistan’s Economy, MINFA, Islamabad
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