GST fears ripen for farmers

The presidential ordinance has not pleased the farming community as fertilisers would no more be waived from GST. The decision is bound to affect farming income - which some say will be marginal, while other say will be substantial.
The decision in principle is a bold and a wise one, as it was long due that the farmers be taxed - GST on inputs may not be the most desired form of tax, but that will do for the time being in absence of the will to impose agricultural tax. How this will affect, if at all, the fertiliser demand in Pakistan is the big question - and the opinions are divided among various stakeholders.
It should be kept in mind that domestically produced urea is sold at a 30-35 percent discount to international market prices. The fertiliser companies, back in January 2011, announced the biggest monthly revision of 18 percent in urea prices following gas curtailment. Now, the GST application of 17 percent is bound to raise prices by 13-14 percent, taking the year-to-date increase to well above 30 percent in just three months.
This increase is massive by all counts and hence the divided opinions as to how would it affect demand. Local manufacturers and a few analysts are of the view that urea demand will remain unhurt as farming income in the past 2-3 years has increased manifold enabling farmers to absorb the price hike.
A cursory look at major crops output reveals that farming income from the four major crops has doubled within four years. That is a massive improvement from the prior 4-year period, when the output only marginally increased by 30 percent.
The input cost of fertilisers has also more than doubled during the same phase, without hampering the farming margins a great deal - a testimony to the idea that the rural economy is strong enough to absorb the shock.
What is different this time is that such a massive increase in input cost is unprecedented in history, making it tough to gauge the possible impact on fertiliser offtake.
"Urea demand will definitely take a hit as urea priced at Rs1250/bag was unimaginable three months back. We may witness a 10-12 percent drop in urea offtake after the GST imposition," said Aurangzeb Magsi, an agriculturist, speaking to BR Research.
While there is a visible opinion difference on the impact it will have on urea demand, there seems to be consensus on the impact GST will have on phosphate offtake, mainly DAP. The price of DAP is expected to be increased by a massive Rs500/bag to an all-time high Rs3700/bag - a situation that the farming community is terming a disaster recipe.
DAP offtake has historically been highly correlated with price movement - 2008 was a perfect example of abnormally high prices almost halting the offtake. The situation this time around is even worse as DAP is no more subsidised, which is why industry experts see DAP demand dipping by as much as 30~35 percent.
And that will not be a good sign for the farm yields, which are already on the lower side because of imbalanced fertiliser application. The next few months will reveal the true strength of farmers economic strength and knowledge both, whichever way the fertiliser demand goes.