Commodity price mysteries in Pakistan are dime a dozen. On one hand, the free market types complain that prices of basic food items in domestic markets are usually at a premium to international markets, citing inefficiencies in value chain and rent seeking behaviour of suppliers. Yet, the same people applaud price interventions by the government at DC level, as if one kind of intervention justifies another.
Consider Islamabad’s report yesterday that the Prime Minister has directed provinces to control price of roti (bread), as if the price of roti is set in vacuum. Granted that last month government had taken a U-turn on commercial rates for ‘tandoors’, but that has failed to curb the hike in bread prices, and perhaps rightly so.
Since PTI government came into power in August-18, price of ten kg flour, primary raw material for bread, has increased by 10 percent. But like 1930s Germany that blamed a certain religious group for all ills of the society, not everything that goes wrong is PTI’s fault.
Flour prices were already on an upward trajectory since a year before. More accurately, after bottoming out close to Rs361 per ten kg bag in August-17, flour prices had climbed by seven percent by the time Islamabad was taken over by forces of change.
In turn, flour prices have moved in tandem with price of wheat, which has been inching slowly forward since June 2017 since picture became clear on Rabi crop output for that season. And it was in no way pretty.
After posting record acreage under wheat at average nine million hectares for several consecutive seasons, acreage had declined to 8.7 million hectares. Additional decline in acreage was recorded in the following season, which ensured that wheat and flour prices saw no respite in the domestic market in the two years since, apart from seasonal variations.
Never mind that according to PBS not only the per hectare yield had continued to improve - effectively maintaining annual output at average 25 million tons, but also the heavy carry over stocks previous years with government procurement centres such as PASSCO.
The only thing that PTI can take the blame for, and happily so, that it made announcements to the effect that payment of support price of Rs1,300 per 40 kg wheat bag to growers will be ensured. Whether that actually took place or not is unknown; however, what was ensured that price of both wheat and flour went wild come harvest season for 2019.
Prices floor, in economics, are imposed to make sure that retail price in domestic market stabilize to the benefit of producer. In that respect, the support price policy of the government is a resounding success, because higher CPI wheat prices indicate that the raw material is being traded at a price higher than floor in the open market. The brunt of price floors, in theory, is to be borne by the consumer, and that too is taking place in the form of higher flour and roti/bread prices.
The public and intelligentsia need to make up their whether they want to continue complaining about untargeted government subsidies, whether through price floors on production or DC controls on consumption side, or have a government that controls prices of everything and passes it on in the form of higher taxes. You can’t have your cake, and eat it too, at least not forever.