The Pakistan Development Review
34 : 4 Part II (Winter 1995) pp. 711—722
Agricultural Input Subsidies in Pakistan:
Nature and Impact
M. GHAFFAR CHAUDHRY and SHAMIM A. SAHIBZADA
Pakistan has a history of subsidising agricultural inputs. Although none of the
agricultural inputs were subsidised during the early 1950s, the process was initiated in
the second half of the decade by subsidising chemical fertilisers in order to popularise
their use [Niaz (1984)]. The list of subsidised inputs and the rate structure of the
subsidies were expanded considerably throughout the Sixties. Towards the end of the
Sixties, it was noted that almost all the agricultural inputs including fertilisers,
insecticides, seeds, irrigation water, tubewell installations, and the operation and
purchase of tractors and tractor-related equipment were subsidised in one form or
another [Aresvik (1967) and Kuhnen (1989)]. In the 1970s, some curtailment of
subsidies occurred as a result of input price increases which followed the worldwide
recession, a major oil shock, the credit crunch, the war with India, and the consequent
steep devaluation of Pakistani Rupee [Chaudhry (1982)]. Although the subsidies had
survived the onslaught of the Seventies and tended to persist on most inputs, the
government became totally committed to their removal beginning with the 1980s, under
pressures from the IMF and the World Bank [Government of Pakistan (1980)]. As a
consequence, there was a total withdrawal of subsidy from seeds, insecticides, tubewells,
and tractors. A phased-out withdrawal of fertiliser subsidy, culminating in 1984-85 in
the case of nitrogenous fertilisers and in 1989-90 in the case of phosphatic and potash
fertilisers, was also to be undertaken [World Bank (1986)].
The purpose of the present paper is to highlight the progress of withdrawal of
input subsidies in Pakistan, to study the nature of the input subsidies and possibly
analyse the impact of the withdrawal of subsidies on the farm sector. Needless to add
that the study is also intended to make policy recommendations on the various aspects of
2. THE NATURE OF SUBSIDIES IN AGRICULTURE
The emphasis on the withdrawal of subsidies from agricultural inputs has varied
with the nature of subsidies, the accrual of their benefits to specific classes and
Pakistan Institute of Development Economics, Islamabad.
M. Ghaffar Chaudhry is Joint Director and Shamim A. Sahibzada is Chief, Training Programme, at the
Chaudhry and Sahibzada
individuals, and the welfare of the farming community. Before going into such a
discussion, it seems important to look into the trends of subsidies on various inputs
beginning with 1979-80. While this has been done in the form of Table 1, the relevant
Many conclusions follow from the data in Table 1. First, the explicit or budgetary
subsidies were more important than the implicit or concealed subsidies during the early
Eighties, but almost vanished from the scene by 1994-95. This, in other words, implies
that the withdrawal of explicit subsidies was the main target of government policy with
little or no emphasis on implicit subsidies. As a result, explicit subsidies, despite
fluctuations, fell consistently; but implicit subsidies continued to witness positive
growth rates over the period under consideration. Second, fertiliser subsidy accounted
almost entirely for the explicit subsidies. In the case of implicit subsidies, irrigation
water was responsible for the lion’s share of almost 60 percent, followed by the shares of
institutional credit and electricity. Third, although much is made of the agricultural input
subsidies in most of the government meetings and public forums, they hardly exceeded
Rs 2-3 billion for most of the period, and never exceeded Rs 8 billion a year. Finally, as
a percentage of budgetary expenditure, total subsidies on agricultural inputs fell from
nearly 10 percent in 1979-80 to 1.54 percent in 1994-95.
It should be noted, however, that most of the calculations of subsidies on
agricultural inputs involve the differences between expenditures and receipts from the
supply of a given input. Although it is commonly assumed in most studies on input
subsidies that they accrue to agriculture, it would be true under such assumptions as
correct reporting of government receipts and expenditures on inputs, efficient operation
of production and distribution systems of agricultural inputs, and absence of externalities
and additional costs to producers beyond what appeared in government budgets. As the
actual conditions in Pakistan deviate considerably from the above ideal situations, it is
but natural to speculate that a significant proportion of the calculated subsidies may not
accrue to the farm sector.
For example, the budgetary expenditure and receipts may not reflect the benefits
and costs of irrigation water to the farmers. There is always over-reporting of
expenditures and under-reporting of irrigation receipts. Although no estimates of the
degree of escalation of expenditure in Pakistan are readily available, the Indian
experience with a similar irrigation system as that in Pakistan suggests that the actual
irrigation expenditure may be only half of that reported in the government budgets
[Wade (1982) and Rao (1984)]. Furthermore, the provincial irrigation departments in
Pakistan are overstaffed to the extent of 50 percent [Wolf (1986)] and would be
responsible for excessive expenditure. Apart from overstaffing, the recent surges in
irrigation expenditure must be attributed to growing illicit practices, steep increases in
the maintenance costs of public tubewells, and multiple increases in the salaries and
allowances of government employees. While the governments tend to treat any increase
Agricultural Input Subsidies by Inputs from 1979-80 to 1994-95
Budgetary or Explicit Subsidies
Concealed or Implicit Subsidies
as Percentage of
330 79 79
Source: [Government of Pakistan (1994) and (1994a)], Provincial Budgets and Qureshi (1993) and a communication from WAPDA, Lahore for electricity
subsidy from 1988-89 onward.
Chaudhry and Sahibzada
in expenditure as a subsidy to farmers, it is questionable whether the financing of such
expenditures should be the responsibility of the farm sector.
The under-reporting of receipts follows from two sources. First, water rates were
under-assessed by irrigation officials to the extent of 10 percent in the Punjab and the
NWFP, 30 percent in Sindh, and 60 percent in Balochistan [Government of Pakistan
(1990)], and so were irrigation receipts. Second, because of widespread corruption
among irrigation officials, farmers are charged illegal gratifications which do not appear
anywhere in the budgets and accrue directly to irrigation staff [Ilyas (1994); Chaudhry,
Majid and Chaudhry (1993); and Wolf (1986)]. Due to these reasons, it is doubtful if
the irrigation water in Pakistan was at all subsidised. Like irrigation, the supply of
electricity also suffers from the common distortions prevalent in Pakistan's irrigation
system. In the case of fertilisers, the sub-standard production, underbagging, and black-
marketing [Government of Pakistan (1993) and Government of Punjab (1991)] are
common problems and leave little for the farmers to benefit from subsidies. Similar
problems characterise the agricultural credit markets as the farmers incur more charges
on getting access to credit than the savings from low interest rates. Accounting for some
of the above distortions in input markets, the comparisons of effective and nominal
protection coefficients for agricultural crops in Pakistan [Appleyard (1987) and
Longmire and Debord (1993)] reveal that agricultural inputs in aggregate received no
subsidies but were implicitly taxed to the extent of 5–10 percent throughout the Eighties.
3. EFFECTS OF THE WITHDRAWAL OF SUBSIDIES
The withdrawal of subsidies from agricultural inputs could affect the trends of
national economy in various ways. In accordance with the norms of theory, the removal
of input subsidy by ending under-pricing of inputs should ensure greater efficiency of
input use in agriculture [Government of Pakistan (1985)]. It was also argued at least in
Pakistan that the subsidy bills have become huge and they impinge on alternative
investment avenues capable of yielding better returns to farmers and the national
economy [Government of Pakistan (1980)]. A further point is sometimes scored on the
ground that subsidy removal was essential to restore competition in major input markets
by privatisation, deregulation, and denationalisation.
While the above arguments carry considerable weight on theoretical grounds,
it is difficult to uphold them in real world situations especially in a less developed
country like Pakistan. For one thing, the use of modern inputs in Pakistan is much
below the recommended levels and raising the prices of inputs would push their use
downwards and add to the inefficiency of input use. As most subsidies are absorbed
by the inefficiency of the production and distribution systems, mere increases in
input prices are also the means of supporting inefficiencies outside the agricultural
Agricultural Input Subsidies
sector. It, therefore, follows that simple increases in input prices offer no solution
and might be associated with adverse effects on positive developments in agriculture
in the following important ways.
As a first step, the withdrawal of subsidy and the consequent increases in input
prices without any compensating changes in commodity prices tend to reduce
profitability in agriculture and induce adverse effects on the growth of agricultural
output. The experience with the withdrawal of subsidies in Pakistan has amply
demonstrated that it was accompanied by falling or even negative rates of profits on the
cultivation of major agricultural crops [Afzal et al. (1993) and Ahmad and Chaudhry
(1987)]. If this were to happen again (which is the most likely situation in view of
political resistance to increases in food prices), a slow-down or negative trend in the
growth of agricultural output might be expected. Although it may be a mere coincidence,
the growth of crop production tapered off to stagnation between 1979-80 and 1993-94
particularly during the last four years in response to steeper price increases in major
agricultural inputs over the same period [Government of Pakistan (1994a)]. Apart from
its adverse effects on output, a persistent low profitability of agriculture might induce
capital flight from agriculture and reduce savings and investment.
The adverse impact of subsidy removal on macro-economic aggregates is shared
disproportionately by the small and marginal farmers. For example, small farmers are
likely to suffer the greatest losses of production after the upward revision of fertiliser
prices. Being risk-averse and financially poor, small farmers take a much longer time to
adjust to price shocks and to reduce fertiliser use to a greater extent relative to other
farmers. Two studies have cited the relevant empirical evidence. For example, Naqvi,
Khan, and Chaudhry (1989) have demonstrated that small farmers compared favourably
with large farmers in the use of fertiliser during the late Seventies but lagged behind
large farmers during 1980-81 when fertiliser prices were raised by nearly 50 percent.
The same phenomenon was observed by the NDFC (1994). In response to a fertiliser
price increase varying between 11 and 44 percent for various types of fertilisers, small
farmers reduced their fertiliser input by 54 percent as against 13 percent by the large
farmers. As a consequence, fertiliser application rate for the small farmers went down
from 1.72 bags of 50 kg weight in 1993 to 0.79 bags in 1994. By contrast, large farmers
reduced their input from 1.90 bags in 1993 to 1.65 bags in 1994 [NFDC (1994)].
Similarly, the impact of the upward revision of intensity-based water rates on small
farmers would be 2-3 times that on large farmers [Chaudhry, Majid, and Chaudhry
(1993); Ilyas (1994)].
Being most likely to take up farm and non-farm jobs, small farmers would be the
first ones to be affected by the rising rates of unemployment. Most of the small and
marginal farmers would be hit hard by the rapidly rising rates of inflation because of the
regressive impact of inflation.
Chaudhry and Sahibzada
Last, but not the least, the removal of fertiliser subsidy (because of its excessive
burden on the incomes of small farmers) would reduce their abysmally low rates of savings
and further undermine their meager investment potential. In a nutshell, the rising fertiliser
prices do not only impinge on the current incomes of the small farmers [Ahmed (1981)] but
also reduce their prospects for earning a respectable income in the future. What should be
done and how their prospects of earning reasonable incomes in the future could be
brightened is a question that would be answered in the final section of this paper.
The situation outside the agriculture sector should be no different from that in
agriculture. While cost-based or averted-cost-based pricing system of inputs encourages
malpractices and supports inefficient production and distribution systems, many poor
people continue to suffer from the adverse trends in production, employment, and prices
of essential commodities.
4. POLICY RECOMMENDATIONS
In view of the many adverse effects on macro-economic aggregates, and
particularly on the welfare of the vulnerable groups, the policy redirections must
minimise costs of subsidy withdrawal by promoting an efficiency-based system of input
pricing. To accomplish this, the following discussion points to some of the policy
changes required in various input markets.
It may be noted that most of the agricultural input markets are still in their infancy
in Pakistan and suffer from even greater fundamental problems than the commodity
markets. For example, they are typically characterised by monopoly positions of one
kind or another; quality is no consideration and almost any product is saleable at the
asking price. These problems are particularly acute in the modern input markets such as
those dealing in seeds, insecticides, and fertilisers, with only a few exceptions in the
irrigation water and credit markets.
In order to take a start, seeds supplied by seed agencies are admixtures of all
varieties and have doubtful viability. This being so, there is hardly any justification for
premium prices for seed. Rather than emphasising the mushroom growth of seed
agencies and the quantities of seed marketed, quality should be the main consideration
with clear labels of the seed agency testifying to the variety of seed, its viability, and the
date when the seed was tested for germination. Any inconsistent results at the farm level
should be punishable by fines recovering all costs associated with seed purchases,
preparatory tillage operations, and efforts foregone in acquiring seed—for
reimbursement to the farmers affected by the malpractice.
A similar policy action may also be suggested to check the production and
marketing of sub-standard, fictitious, and underbagged fertilisers and insecticides. To
break up the monopoly of registered dealers and to promote competition, the
Agricultural Input Subsidies
government should withdraw from the production, trade, and distribution of fertilisers in
favour of free sales in the open market by interested parties and individuals.
In the case of irrigation water, the need for equitable distribution of water among
outlets and canals, elimination of overstaffing, and precise alignment of the water rate
assessment base with the water supply base can hardly be overemphasised. While all
three recommendations would be consistent with stepped-up water use or cost
efficiencies, the latter should also protect the small farmers from the onerous burdens of
current intensity-borne water rates. The unlimited powers of irrigation officers should
be carefully balanced by granting some powers to irrigation associations of the farmers
to wipe out corruption from the irrigation departments. The credit market needs to be
made more competitive with the same terms and conditions for agricultural credit as
those for other loans. While demand-creation strategies lead to much waste, effective
supply management with a view to reducing costs of loans to government should serve
as the basis of future credit strategy in agriculture.
In a nutshell, the emphasis of the government policy should be to minimise costs of
its programmes, ensure efficiency of resource use in agriculture, and, so far as possible,
discourage corruption and unnecessary intervention in agriculture. Although the private
sector can deliver many services to agriculture, its unbridled growth, based on excessive
profits and without specification of the rules of the game, would be equally undesirable.
5. SUMMARY AND CONCLUSIONS
The major aim of the present study has been to look into the problems of
subsidisation of agricultural inputs and its removal in Pakistan. It has been argued that
Pakistan has had a history of agricultural input subsidies beginning with the 1950s.
Despite the commitment to their removal, subsidies on agricultural inputs have tended to
persist. If they were open subsidies in the 1950s and 1960s, they have become
increasingly implicit in the recent years. It is for this reason that many of them may not
accrue to the farm sector but are eaten up by the inefficiencies of the production and
distribution systems. It should be noted that input price increases as a means of
eliminating subsidies tend to add to the inefficiency of input use in agriculture and also
provide support to the inefficient production and distribution systems of inputs outside
the agriculture sector. Unbridled increases in input prices are particularly harmful to the
cause of small farmers, income distribution, and rural poverty. The strategy of removal
of subsidies should, therefore, be based on cost savings and low prices of inputs in
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Pakistan. Unpublished paper, prepared for the “Symposium on Strategy of
Agricultural Planning in Developing Countries,” at the All-Pakistan Science
Conference held at the University of Sindh, Jamshoro.
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Pakistan’s Experience. The Pakistan Development Review 21:3 173–205.
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Policy of Irrigation Water Pricing in Pakistan: Aims, Assessment and Needed
Redirections. The Pakistan Development Review 32:4 809–821.
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It is an interesting paper discussing an important but controversial subject. The
authors are to be complimented for forcefully articulating some of the well-known
adverse effects of removing the input subsidies. Nevertheless, their arguments appear
to be lopsided as they have chosen to ignore the realities on the ground.
Two types of input subsides in the farm sector, i.e., budgetary/explicit
subsidies and concealed/implicit subsidies, have been addressed. The budgetary
subsidies included in the analysis relate to fertilisers, pesticides, seed, and tubewells,
while the implicit subsidies on irrigation, credit, and electricity are discussed. The
period of analysis covered in the paper spans from 1979-80 onward, coinciding with
the period when the tide started turning against the input subsidies.
The subsidy on fertilisers, as the authors quote authoritative sources, was
introduced to popularise their use. It is quite well-known, and also borne out by
empirical studies, that the use of fertilisers by small as well as large farmers, owner
as well as tenant, has become quite popular and made a significant contribution to
agricultural production in the country. But supply bottlenecks and shortages at
critical times, resulting in black-marketing of the input, are applying brakes on its
use. In periods of short supply and black-marketing, the small farmers, in whose
name the inputs are generally subsidised, lacking the requisite clout, are the worst
sufferers. Under such circumstances subsidisation of the input prices may not serve
the purpose. Moreover, it is not sure whether the budgetary subsidies actually
benefited the farmers or the oligopolies dominating the fertiliser marketing and
distribution, as the authors did not resort to an ‘economic’ analysis of the subsidy
The authors have forcefully highlighted the adverse effects of the removal of
subsidy on fertilisers on their use, but the arguments are couched in qualitative
terms. Had the authors supported their arguments with empirical analysis of the
output losses resulting from lower fertiliser use, this should have added an important
dimension to the analysis. Similarly, the authors have ignored the consequences of
the removal of subsidies on fertiliser, an important input accounting for 10–15
percent of the cost of production of major crops, for the export competitiveness of
Now, when the much talked about subsidy on fertilisers has been removed, I
hope the attention would shift to (i) ensuring adequate supplies, (ii) fine-tuning
methods and timing of their use, (iii) judicious mix of nutrients, and (iv) use of
complementary inputs and agronomic practices to make the best use of resources.
The removal of subsidies on chemicals may also have a positive fall-out for the
environment if it is helpful in correcting the imbalance and indiscriminate use of
Although the government in recent years has increased the minimum prices of
the output to offset the impact of increase in input prices on farmer’s cost of
production and their well-being, yet the real impetus in this direction is likely to
come from the removal of export taxes, increasing the role of the private sector in
the marketing of output, and the removal of restrictions on commodity movements.
Regarding the case of water, which has dominated the implicit subsidies, I
agree with the authors that a large part of this is due to the malpractices rampant in
the irrigation department. The lion’s share of the implicit subsidy on credit has been
usurped by the big landlords. Huge distribution losses of WAPDA may be largely
responsible for the so-called implicit subsidy on electricity. Power tariff for
tubewells has increased manifold in recent years, hitting hard the economics of
tubewell irrigation. In the wake of the exorbitant hike in the rates of power, farmers
are reported to be switching to other sources of energy for tubewells.
Things on the water front have gone much farther than just curtailing the
implicit subsidies and the increase in water rates. Donors have been pressing for
privatising the irrigation network, selling water to the highest bidder based on
demand. The situation is fraught with many problems. I wish the authors had not
chosen to remain silent on this vital issue.
I agree with the policy prescription of removing corruption and malpractices
from input markets and the irrigation department, as argued by the authors, but it is
easier said than done. Notwithstanding the removal of subsidies on fertilisers, their
use has continued to increase, albeit at a slower rate. Contrary to the authors’
assertion, agricultural output of major crops has expanded during the last 10 years.
For example, the output of cotton, sugarcane, wheat, and rice, four major crops
accounting for 63 percent of the cropped area, is estimated to have increased at the
annual rates of 3.5, 4.5, 3.3, and 1 percent, respectively. The setback to cotton during
the last three years had its origin elsewhere and may not be attributed to the removal
of fertiliser subsidy. Pakistan is endowed with some of the best farm resources,
which, however, have not been managed well to realise their potential.
In the changing circumstances when de-regulation, privatisation, and reliance
on market forces have become the keywords in the donors’ kit and professional
jargon, we ought to be careful that factor markets are not dominated by vested
interest and manufacturers do not monopolise the trading and distribution, as was the
case with fertilisers when manufacturers were also the distributors and importers and
short supply served their interest rather well. To ensure fair competition, there is a
need to ensure free entry as well as exit from the market, as well as provision of
adequate infrastructure. To forestall the undesirable side-effects of the above-
mentioned policy changes, which are here to stay, it is imperative to have indigenous
institutional capacity to continuously monitor the situation and analyse the impact of
policy changes on various sectors of the economy.
Agricultural Prices Commission,