Support price for cotton

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There is a chance that, in order to please certain lobbies and win the next elections, some of the reform measures undertaken after a lot of efforts and hard work over the past many years, may be subjected to a reverse gear. According to reliable sources, the government is seriously considering the proposal to protect cotton growers and the textile industry from losses as the country is projected to harvest record 16 million bales of cotton, starting next month.

There are even reports that as the global cotton prices has stabilised at around Rs 7,000 per 40 kg for the new crop, the government is also considering announcing the cotton support price at around this level, to prop up its falling rate in the domestic market. To justify such an action, it is argued that the Chinese government had also announced a minimum support price of dollar one per pound to support its farmers and prevent buyers from taking undue advantage of the bumper harvest this year. Besides, the sudden drop in domestic cotton prices over the last few days had led foreign buyers to reduce their prices for almost all textile products being exported from Pakistan in anticipation of a further fall in the market.

Apparently, it was a serious issue for the government, especially in view of 2013 general election, and it wants to help the farmers who are considered to be the major vote bank of the Pakistan People s Party. According to certain estimates, an additional income of Rs 450 billion was transferred into the rural economy last year as compared to Rs 350 billion in the preceding eight years because of free trade mechanism in the textile sector.

The industry was obviously not amused by the reports of such a move. According to Gohar Ejaz, Chairman, Aptma, the best way of stabilising the cotton market and let the growers get a good price for their crop is to provide gas seven days a week to the entire textile chain - from spinning to processing. The industry has the capacity to consume 16 million bales, provided it gets uninterrupted gas supply to allow it to operate its full capacity. Ejaz, who had earlier lobbied with the government for ensuring a free trade mechanism for the textile sector, emphasised that the future of the country s cotton growers, textile industry and exports greatly depended on the continuation of a non-intervention policy of the government.

Aptma estimates indicate that Pakistan suffered a loss of dollar one billion last year because of a 43 percent gas shortage in Punjab. Ijaz Khokhar, Chairman, Pakistan Readymade Garments Manufacturers and Exporters Association, has opined that a sudden fall in cotton prices had certainly exposed the local cotton farmers to devastating effects but the intervention of Trading Corporation of Pakistan as demanded by farmers and ginners would be of no use.

The situation is, of course, dire for the cotton growers but the fixation of cotton support price at around Rs 7000 per 40 kg as advocated by farmers and under serious consideration of the government would be a highly retrogressive step and, in our view, totally absurd. To understand the logic of our assertion, one has only to study the reasons of abandoning the support price policy of agricultural products as a part of reform process in Pakistan a few years back. There is no doubt that, overall, such a policy was against the spirit of the free market mechanism, has led to misallocation of the country s productive resources, was a drain on the budget and did not allow the country to reap the benefits of comparative advantage in the international market.

It is also no mystery that there is no fiscal space available in the budget for the provision of higher level of subsidies which the government may be obliged to pay in case the support price for cotton is fixed. Printing of more currency notes to finance subsidies would be just catastrophic, due to high inflationary pressures already entrenched into the economy. Another problem would be the encouragement of farmers producing other commodities to demand the prescription of support prices in case the prices of their crops also decline beyond a certain level, thus raising the possibility of putting more pressure on the budget when the country is least able to afford it. Needless to add that the IMF would also fiercely oppose such a move.

The solution of the problem lies in successfully persuading the lobby of agriculturists that extreme volatility in the prices of farm products is inherent in the very nature of their sector/occupation. Farmers harvesting cotton crop in Pakistan earned windfall profits last year due to record cotton prices prevailing in both the domestic and international markets because of shortage of supplies in the world markets.

Now when there is a glut in the market due to the anticipation of a global increase in the crop output from China, the US, India and Pakistan and prices have dropped as a consequence, there is no reason to make such a hue and cry and force the authorities to make decisions that are not in the long-term economic interests of the country. On the other hand, it makes a greater economic sense at this juncture to shift the resources from subsidies to the critically needed infrastructure projects. Of course, various governments resort to manipulative tactics when the elections are near, but our economic situation does not allow them room to enjoy such a luxury.

Courtesy: Business Recorder

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