Historically, one of the biggest strengths of Pakistan has been the textile sector which has surely seen better days. The plunge in textile exports continues unabated and there seems to be little relief in sight.
Recently this column discussed the history of textile exports and noted the effect of diminished cotton production as one of the primary reason for lower exports by the sector especially when it comes to value addition. A closer analysis is necessary to understand the underlying economic policies that have contributed to the demise in cotton production and the decrease in land under cultivation.
As sugarcane cultivation was incentivized, cotton production took the backseat, resulting in the mess that the country finds itself in today. A look at the graphs below illustrates the situation quite clearly. Cotton production in FY11 stood at 11,460 million tons and subsequently declined by 7 percent till FY17.
Meanwhile, the area under cotton declined by 14.2 percent year-on-year—the lowest since 1986. The latest Pakistan Economic Survey notes “exceptional losses from previous year's pest infestation and low domestic prices at the sowing time that pushed growers away from cotton to other competitive crops (sugarcane and maize)."
On the other hand, sugar production has flourished on the back of incentivisation by the government. Primarily, flawed economics is to be blamed here. One of the key lessons in economics is the effect of price floors on demand and supply. Policymakers which include eminent economists seem to have forgotten these basics and the results speak for themselves.
Introduction of a minimum support price (MSP) will almost always result in the creation of a supply glut because of distortion in demand-supply dynamics resulting in increased supply and lower demand at higher prices. In the last five years, sugar cane cultivation area has gone up by 7 percent whereas the production has gone up by 15 percent.
During FY17 crushing season, the provincial governments of Punjab, Sindh and KPK have maintained the minimum support price (MSP) announced in FY15. The MSP for Punjab and Sindh is Rs180 per 40 Kg ($43.3/ton), and for Sindh Rs182 per 40 Kg ($44/ton). Even though sugar mills are obligated to pay farmers the MSP, yet in many cases the farmers and sugar mills negotiate below-MSP rates if both parties agree.
The Pakistan Sugar Mills Association (PSMA) has raised a red-alert recently stating the mills will be unable to pay more than Rs120/40 kg for the purchase of sugar cane in the upcoming season. The reason is the record surplus sugarcane production which has led to a severe supply glut. According to the association, the mills still have 55 percent surplus stock available even after fulfilling the annual domestic demand of sugar.
To sum it up, flawed policies have resulted in the textile sector to suffer from raw material shortage due to sugarcane and other crops being incentivized by the government. At the same time, even sugarcane farmers will also eventually lose out because of the supply glut that has been created due to the imposition of the MPS. In addition, the differential in international and local sugar prices has made a government export subsidy essential. It is a classic lose-lose scenario—what will we do about it?