In defence of Tareen, et al

The sugar subsidy controversy is swirling around Jahangir Tareen, Khusro Bakhtiar and others for receiving a rather hefty subsidy for exporting sugar.

They are perhaps the wrong target. After all, the approval for export and the subsidy for it was accorded by no other than the trio of prime minister, finance adviser and the chief minister of Punjab. However, even they ought to be absolved. After all, this has been the practice for decades and the trio was merely following on a very beaten path.

The fact is that Pakistan’s economy has been structured over the years to serve particular interest groups. The sugar industry is one of them. Sugarcane is grown by farmers, who receive a handsome guaranteed support price and because of which acreage has shifted away from cotton to the privileged crop; requiring cotton to be imported.

The movement of sugarcane is restricted, which means that farmers can only sell to mills within the restricted area. This renders farmers hostage to mill owners, who demand discounts and delay payments. The sugar mill owners comprise a cartel, which determines the market price of the commodity.

Overall, the price of sugar in Pakistan is higher than the world price. This is because of the high support price and price fixing by the industry, but more so because the sucrose content of sugarcane grown in Pakistan is lower than elsewhere.

Sugarcane is a coastal area crop, but it is cultivated in Punjab as well. Increased acreage results in high output of sugarcane and if output is high two years in a row, sugar stocks from the previous crop are still with the mills – and there arises the problem of storing sugar produced from the new crop.

In this situation, there are two choices. Either mill owners do not lift the new sugarcane stock or the government pays to export, out of taxpayer money, to cover for the world and domestic price differential. Both the farmers and the mill owners constitute powerful lobbies and the government succumbs to the pressure. Both are both richer in the bargain.

The other protected interest group is that of flour mill owners. Flour mills procure wheat from the market and are also provided for by the provincial government at subsidized rates. The logic for the latter is that the mills will supply flour at lower rates to render it affordable for the public.

However, the system works differently. Mills do not differentiate between higher-priced market procured and lower-priced government supplied wheat and average the flour price. The residual cost difference is pocketed as additional profit. All in the name of subsidizing flour for the public.

Yet another privileged interest group is the paper manufacturers, with the sector dominated by three large mills. The first year textbooks of trade and taxation postulate that import of raw materials be taxed at lower rates and import finished products thereof be taxed at higher rates. The logic is to induce local manufacture of the finished product to benefit from value addition.

Pakistan has been following the reverse logic in the case of paper. The import duty on pulp, which is imported for manufacturing paper, is kept low; however, duty on paper, which is the raw material for printing, is exorbitantly high, and printed material is duty free.

The result is that local publishers are now placing orders for printed matter with foreign printers and importing printed matter – duty free. This is true even for Urdu ‘qayedas’. Even the Holy Quran, which used to be a prize export, is now printed and imported from abroad. And the printing industry in the country, comprising several thousand units, is dying and taking down thousands of jobs with it.

The fertilizer industry is yet another favourite child. More than 90 percent of the raw material for fertilizer is natural gas, which is supplied to it at more than 80 percent subsidy. The ostensible rationale is that fertilizer price needs to be kept low to keep the cost of production of agricultural commodities low. However, as in the case of flour, the bulk of this subsidy is pocketed as additional profit. So much for managing the national economy efficiently and equitably.

The writer was a member of the 7th National Finance Commission.

Twitter: @kaiserbengali