Pakistan's Rural Economy Showing Strength

Since taking the reins of power almost three years ago, the coalition government in Islamabad, which is led by the Pakistan Peoples' Party, has been increasing the support prices of wheat and other agricultural commodities every year. This policy has had the following effects:

1. It is transferring the additional new income of about Rs. 300 billion in the current fiscal year alone to the ruling party's power base of landowners in small towns and villages, from those working in the urban industrial and service sectors.

2. It has driven up food prices dramatically for all Pakistanis, particularly hurting the poor people the most.

3. It has reduced government tax revenues because the agricultural income is not taxed by either the federal or the provincial governments, and resulted in growing budget deficits.

4. It has significantly increased demand for consumer and industrial goods and services in the rural areas.

5. It has forced the State Bank of Pakistan to maintain a tight monetary policy which is drying up the much-needed credit for the industries and the average consumers alike.

6. It's likely to slow rural-to-urban migration and relieve pressure on major cities and their inadequate infrastructure.



In 2008, the government pushed the procurement price of wheat up from Rs. 625 per 40 kg to Rs. 950 per 40 kg. This action immediately triggered inflationary pressures that have continued to persist as food accounts for just over 40% of Pakistan's consumer price index. According to State Bank of Pakistan (SBP) analysis, cumulative price of wheat surged by 120 per cent since 2008, far higher than the 40 per cent between 2003 and 2007. it is also many times greater than the international market price increase of 22 per cent for wheat in the same period. Similarly, sugar prices have surged 184 per cent higher since 2008, compared with 46 per cent increase during 2003-07.

The transfer of additional Rs. 300 billion to Pakistan's agriculture sector during the current fiscal year 2010-2011 by higher prices of agriculture produce and direct flood compensation to 1.6 million affected families at the rate of one hundred thousands rupees each will boost economic confidence in the countryside. It will generate rural demand for consumer items including consumer durables such as fans, TVs, motorcycles, cars, refrigerators, etc.

The big feudal landowners have been the biggest beneficiaries of the PPP's gift of high crop prices. However, the policy has helped small farmers as well, as shown by a recent survey reported by The Nation newspaper. The survey of 300 farmers in Sind's Sukkur district was conducted by Sukkur Institute of Business Administration for the State Bank of Pakistan (SBP). It has highlighted the following about district's rural economy:

1. In Sukkur district, majority of the farmers are subsistence farmers. 31 percent of them own less than 5 acres of land, and another 34 percent own up to 12.5 acres of land.

2. They spend an average of Rs. 1,611 a month on their children's education, with some of them spending up to Rs. 12,000 a month.

3. Wheat, rice, cotton and sugarcane are the major crops being cultivated by 93 per cent, 58 percent, 37 percent and 12 percent of the respondent farmers in that order.

4. 24 percent of them are also growing fruits including dates, mangoes and bananas.

5. 22 percent of the respondent own livestock.

6. About half (49 percent) use privately purchased seeds for wheat cultivation, 33 perecent use their own retained seed and 18 perecent use the seed purchased from Public Sector Seed Corporations.

7. On average, a farmer uses 96.73 Kg chemical fertilizer per acre with the maximum and minimum of 350 Kg and 40 Kg respectively. The average per acre cost of wheat production is Rs. 10,670.

8. All 300 farmers are using tractors for cultivation and preparing land for crops, and some are using tractors for fetching their crop produce to market.

Already, the upside of the government policy is that Pakistan's rural economy is being spurred by high crop prices that may help the GDP growth this year and next. Increased farm incomes are whetting the rural households' appetite for industrial and consumer goods in 2011 and beyond.



A key indicator of growing rural economy is the double digit increase in the sale of tractors. Millat Tractors Limited, the largest supplier of tractors in Pakistan, had record sales of 41,500 tractors in the calendar year 2010, an increase of nearly 11% over 37,537 tractors sold in 2009. Of these 41,500 tractors, a record 5000 tractors were sold in the month of Dec, 2010 alone, acording to The Nation newspaper. Millat sold 10,000 units under Benazir Tractor Scheme and 5,000 units under the Sindh government tractor scheme in the last fiscal year. Another 10,000 units were sold as part of the Punjab government scheme, 70 per cent of the units were sold, according to Dawn News.

Earlier, the sales of Fiat and Massey Ferguson tractors grew to 1,632 and 3,194 units in September 2010 from 537 and 3,100 in August 2010. The overall sales of these tractors rose to 13,931 during July-September 2010 as compared to 12,690 units in the same period of 2009, according to Dawn news.

Over 50 per cent of the motorcycles and 40-45 per cent of cars in Pakistan are purchased by people living in rural areas. Total car sales in July-September 2010(including Suzuki Bolan) rose by 12 per cent to 30,030 units as compared to 26,812 units in the same period of 2009, according to Pakistan Automotive Manufactureres Association PAMA). Furqan Punjani of Topline Securities said car sales are expected to reach 154,000 units by the end of June 2011.

In addition to rising demand for cars and tractors, there is also an upward trend in two-wheeler sales. The cumulative sales of motorcycles in July-September 2010 rose to 126,701 units from 105,862 units in the same period of 2009.

While it is good to see Pakistan's rural farm economy perk up, it is also important to recognize that the overall national economic outlook can not improve significantly unless the growing budget deficits and rising inflation are brought under control. And this will require the ruling feudal elite to pitch in by paying their fair share of income tax on their rising farm incomes. It is time for them to lead by example.

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World Bank Report on Rural Poverty in Pakistan

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Silicon Valley Pakistanis Hit By High Food Prices

The prices of rice, chappati, besan, daals, spices and almost all staples consumed by silicon valley South Asians have experienced triple digit price inflation during the last year. After reading about food price inflation and shortages of staple foods in their home countries, Pakistanis and Indians are now feeling the pinch in Silicon Valley as Basmati rice is in very short supply even with a 300% price jump. Jamsine rice, preferred by East Asians, has also disappeared from the grocery shelves at Costco stores. Costco management has decided to limit each customer to two bags of rice to control panic buying or profiteering.



Even with these dramatic price increases, the impact on their wallets from food price inflation is relatively small because Silicon Valley South Asians spend a much smaller percentage of their incomes on food than their friends and families in South Asia. Nonetheless, higher energy costs and the costs of various goods and services used by them everyday is causing them to be careful with their monthly budgets.

Many governments, including Pakistan's and India's, realize the possibility of civil unrest in the event of severe food shortages or famine, and some have taken minimal steps to ease the crisis in the short term, such as reducing import tariffs and putting export restrictions. On December 20, China did away with food export rebates in an effort to prevent domestic shortages. Russia, Kazakhstan, and Argentina have also implemented export controls.

According to reports from London this week, the executive director of the World Food Program, Josette Sheeran, warned that more than 100 million people will be pushed into poverty by a "silent tsunami" of sharply rising food prices. "This is the new face of hunger - the millions of people who were not in the urgent hunger category six months ago but now are," Sheeran said. "The world's misery index is rising."

The Bush administration, after sitting on the sidelines for months, is finally taking notice of the situation. The Washington Post reported today that the administration and Congress have been caught flat-footed by rapidly escalating global food prices and are scrambling to respond to a crisis that they increasingly view as a threat to U.S. national security, according to government officials, congressional staffers and human rights experts.

Among the major international concerns about "instability" leading to increased threats of "terrorism", the food price inflation and shortages of staples have now risen near the top. However, the $200m allocation by the US is much too small to deal with the global nature of this crisis. The Secretary of State Condoleezza Rice said the administration is planning “further steps to help ease the burden of rising food prices on the world’s neediest people.” Options include building more overseas storage facilities and roads to reduce food spoiling, and making the food crisis a top priority for the G-8 summit of industrialized nations in July, administration officials said. Top Senate Democrats, meanwhile, are pressing the White House to devote more money to emergency food aid — up from $350 million to $550 million — as part of a supplemental Iraq war budget package.

The consensus seems to be emerging in Washington that these are just the first steps toward a bigger commitment with a comprehensive strategy to follow soon.

India Follows Pakistan To Food Inflation

The food inflation has hit India a few months after it rose its head in Pakistan. This sequence makes sense based on the fact that Pakistani economy is considered freer than India's economy and the food inflation is driven by rising global demand and tight supplies. In today's global world, it is hard to isolate any national economy from the impact of international economic problems.

In terms of economic freedom, Pakistan is ranked ahead of many regional economies, according to a worldwide index of economic freedom. The 2007 Index of Economic Freedom, jointly conducted by The Heritage Foundation and Wall Street Journal, has put Pakistan at the 89th place while India is ranked 104. A free economy means an economy that is based on liberal rules that preclude extreme measures against free trade and price increases. Such measures do not prevent problems, they simply delay the impact of such problems, as just demonstrated by inflationary pressures seen in South Asia.

As Indian economist Paranjoy Guha Thakurta recently wrote for the BBC that milk costs 11% more than last year. Edible oil prices have climbed by a whopping 40% over the same period. More crucially, rice prices have risen by 20% and prices of certain lentils by 18%. Rice and lentils comprise the staple diet for many Indians.

Thakurta says, "Food inflation is bad news for ruling politicians because the poor in India vote in much larger numbers than the affluent. Roughly one out of four Indians lives on less than $1 a day and three out of four earn $2 or less."

"Food riots in India, Yemen and Mexico, warnings of hunger in Jamaica, Nepal, the Philippines and sub-Saharan Africa, empty shelves in Caracas have been witnessed in the recent past which was not seen in decades of low global food commodity prices,"
a report by the UN FAO said.

A rise of more than 10 per cent is recorded in India and Russia while food price has inflated by 18 per cent in China, 13 per cent in Pakistan and Indonesia, according to the UN agency.

Meanwhile, there is shortage of beef, chicken and milk in the countries as governments try to keep a lid on food price inflation, it added.
Reports say that there are 854 million hungry people in the world and 4 million more join their ranks every year. Wheat has doubled in price, maize is nearly 50 per cent higher than a year ago and rice is 20 per cent more expensive, the UN said. FAO claimed that global food reserves were at their lowest in 25 years and prices would remain high for years. Moreover, any natural disaster such as a drought or flood might lead to an international crisis.

The price rise is a fallout of record oil prices, US farmers switching out of cereals to grow biofuel crops, extreme weather and growing demand from countries like India and China, the FAO said.

According to the US Dept of Agriculture, the average person in the developed world of Western Europe and North America spends less than 10% of his or her income on food. By contrast, South Asians' food expenditures account for 40% of the average income. Thus the impact of food price inflation is much greater in South Asia than in the industrialized world.

Like Pakistan, the current crisis in Indian agriculture is a consequence of many factors - low rise in farm productivity, low prices for cultivators, poor food storage facilities resulting in high levels of wastage. Also, big differences between domestic and world prices encourage smuggling to neighboring countries resulting in local food shortages.

South Asian governments need to encourage higher food production by various incentive programs such as higher prices for farmers and subsidies for farming inputs such as seeds, fertilizer, and machinery. At the same time, better farmer education, reliable food storage, transportation, better water management and modern irrigation techniques and infrastructure require greater attention by the agriculture officials. A serious longer term effort is also needed to encourage substitution and diversification of the sources of calories for the average South Asian.