AGRICULTURE AND RURAL DEVELOPMENT PUNJAB 2017

105Punjab Economic Report 2017

3.0 Introduction
The agriculture sector continues to be the mainstay of Punjab’s economy and makes a substantial contribution to
the province’s economic growth and prosperity. The sector, comprising of crops, livestock and dairy, is responsible
for 19.82 percent of the country’s overall GDP and is the largest employer in the country, absorbing 42.3 percent of
the total population1
(Ministry of Finance). It also affords a large share in total export earnings from manufactured
products, such as textiles that constitute 60 percent of the country’s total exports (Pakistan Economic Survey,
2015-16). Due to the agrarian topography of the province and its large rural population (an estimated 68 percent
of Punjab’s population according to the Punjab Development Statistics of 2016) growth in the agriculture sector
is a necessary precursor both for the economic growth in the province and for rural development2
(Bureau of
Statistics Punjab). Punjab’s agriculture sector assumes national strategic importance as well since the surplus
generated in the region is vital for national food security. Even though agriculture has always been crucial to
Punjab’s economy, recent performance of the sector has not been encouraging. Between 2010 and 2015, per
hectare yield of wheat in Punjab has dropped, whereas the yields of rice and cotton have not shown any significant
improvement (Punjab Development Statistics, 2016). As compared to 2014-2015, all crop subsectors in Pakistan
(important crops, other crops and cotton ginning) registered negative growth rates in 2015-2016 whereas the
textile sector, which constitutes majority of the country’s exports, registered a negative growth rate of 8.2 percent
in 2016 as compared to the preceding fiscal year (Pakistan Economic Survey, 2015). This reflects poor performance
in Punjab’s agriculture sector, that had a production share of more than 50 percent in all major crops (with that
of wheat being 76.9 percent and of cotton being 73.6 percent in 2015). The total cropped area in Punjab has also
dropped between 2004-2005 and 2013-2014.
The sector’s lagging performance reflects gaps in production efficiency and the lack of a facilitative agricultural
market. The Government of Punjab is actively involved in multiple initiatives aimed at increasing productivity as well
as production in the sector, such as improvements in seed quality, plant protection and research expansion. In this
chapter, we will specifically examine the Kissan Package, introduced in September 2015, focusing on the benefits
of financial inclusion to productivity in a sector prone to the vagaries of sudden price shocks. SMART agriculture is
another initiative of the Punjab government that intends to use Information Communication Technology (ICT) to
spur innovation and improvements in the agriculture sector.
Improvements in the agriculture sector and rural development go hand in hand; existing backward and forward
linkages in the agriculture sector ensure that promoting growth in the sector has the largest impact on rural
poverty. At the same time, targeting development programs towards the rural population also feeds back into
improved agricultural performance. Rural development, through steps such as provision of public goods and
services, helps increase rural welfare by facilitating income growth and overall accessibility to basic amenities. The
government of Punjab is taking several initiatives, with a special focus on the least developed areas of the region,
to minimize regional disparities and ultimately alleviate poverty. These include the provision of tangible services
such as the provision of clean drinking water through the Clean Drinking Water for All (CDWA) project and the
elimination of sewage ponds from villages. At the same time, the government is also promoting social mobilization
and community led development through expanding the Punjab Rural Support Program.
Chapter 3
Agriculture and Rural Development
1
These statistics have been borrowed from the Pakistan Economic Survey 2015.
Ministry of Finance, Government of Pakistan, (2015). Pakistan Economic Survey 2015-16.
2
Bureau of Statistics Punjab, Government of the Punjab. (2016). Punjab Development Statistics. Retrieved from https://bos.punjab.gov.pk/system/files/Dev-2016.pdf

108 Punjab Economic Report 2017
In what follows, we will first look at some of the key statistics of the agriculture sector and its performance over
the past decade. We will then move towards a rigorous analysis of the existing efficiency gaps in agriculture where
we estimate an efficiency frontier for all major crops and the actual crop efficiency and performance are discussed
against that benchmark. We will then discuss the current agricultural pricing policy and market reforms proposed
by the government. The chapter will conclude by policy recommendations aimed at strengthening the performance
of the agriculture sector and bolstering rural development.
3.1 Key Statistics of the Agriculture Sector
According to the Punjab Development Statistics of 2016, about 62 percent of the total area of the province is
currently being utilized for agricultural activities, with 53 percent of the area sown and 9 percent fallow. The total
cultivated area in 2013-2014 was 12,667 thousand hectares, a marginal increase from the total cultivated area in
2004-2005 was 12,489 thousand hectares. Punjab bears a large share of the total area cultivated for all major crops
in Pakistan (Figure 1) and contributes more than 50 percent of the total volume produced of all major crops (Figure
2), indicating that reforms aimed at improving Punjab’s agricultural growth are crucial for advancing the country’s
overall agricultural sector performance.
Sargodha leads as the division with the highest degree of land utilization, but there are no substantial differences
in land utilization across divisions, indicating a spatially even usage of land across the province (Figure 3).
0
2000
4000
6000
8000
10000
Wheat C on Rice Sugarcane Maize
ThousandHectares
Pakistan Punjab

0
500
1000
1500
2000
2500
ThousandHectares
Net Sown Current Fallow
0
10000
20000
30000
40000
50000
60000
70000
Wheat C on ('000 bales) Rice Sugarcane Maize
ThousandTonnes
Pakistan Punjab

Wheat has the largest share of the total cropped area (about 42 percent), with the next two major crops being rice
and cotton (Figure 6). Whereas agriculture in Punjab is heavily dependent on irrigation, development spending
allocation on irrigation declined by 0.6 percent in 2015-2016 as compared to the last year (Punjab Development
Statistics, 2016). There was also no development funding allocated for tube wells in 2015-2016, even though
almost 73 percent of the irrigated land utilizes some form of tube wells (Figure 7).

3.1.1 Key Trends in the Agriculture Sector
The yields for major crops in Pakistan (and Punjab) tend to be below 50 percent of the progressive farmer yield.
Qualities a Progressive farmers usualy have a history of fixed investments in capital, the capacity and experience
of expanding productive activity, an active engagement with the end-market for produce, and a disposition to
innovation through adopting and responding to technology.
In addition to this, yields for major crops in Punjab lag behind yields for the same crops in comparable countries.
Lowcropyields,amongstotherfactors,hasresultedinPakistangoingfrombeingaleaderinTotalFactorProductivity
growth amongst comparative agricultural countries to lagging behind Bangladesh, India and Vietnam amongst
others.
Wheat Paddy rice Maize Sugarcane Co n Pulses
Yields in t/ha
Punjab 3.2 2.1 2.9 50 2.2 0.8
India 4 3.5 2.9 63.9 1.2
China 4.8 5.5 5.3 70.6 3.5 1.7
Vietnam 6.7 4
Source: , 2016.IFPRI

Concurrently, trends show that farm fragmentation has increased, with the percentage of farms with a total
landholding size of less than 2 hectares going up. This appears to have been due to a decrease in the percentage
of farms with a landholding size of 2-5 hectares, 5-10 hectares, 10-20 hectares and 20-60 hectares with no
corresponding increase being registered in large farms (landholding size of 60 hectares or more).
The gross value added of the agriculture sector as a whole and of its subsectors has also not shown any substantial
increase in the past decade, with there being a decrease in value added by crops in the last year.
3
We didn’t find more recent numbers for TFP growth for these countries.

The dismal performance of the agricultural sector exists even though costs of inputs has not increased substantially
over time, due to a large part to input subsidies put in place by the government. Agricultural subsidies add up to
almost $1.4 billion in a year, being 3.5 times as large as the amount allocated to development expenditure on
agriculture. Due to these subsidies, the retail prices of Urea and DAP fertilizers have fallen by 25 percent and 22
percent respectively, from 2015-16 to 2016-17 (Pakistan Economic Survey, 2016-17). In addition to these two
major fertilizers, there is also a decrease in the prices of other fertilizers. The fall in fertilizer prices due to the
impact of government subsidies must have increased fertilizer consumption, or reduced the cost of fertilizers for
farmers at any given level of consumption.
Figures 12-16 below show that there has been a noticeable decline in the cost of pesticides and the cost of water
inputs (including water drawn specifically through tube wells), since there has been no manifest increase in the
cost of fertilizer between 2005-2006 and 2015-2016.
Source: Punjab Regional Accounts Data, 2016.
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
Rupeesinmillion
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
1000000
Crops Co on Ginning Livestock Fishing Forestry Total
0
500
1000
1500
2000
2500
3000
3500
0
10000
20000
30000
40000
50000
60000
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
000N/Tons
Rupeesinmillion
Fe lizer for major crops in Million Rs. Fe lizer for minor crops in Million Rs.
Fertlizer cons on in Punjab in 000N/Tons

The cost of tube well water has also remained constant over the past four years, reflecting fuel price subsidies
provided by the government.4
These government’s subsidies have subsequently either lowered or maintained
input prices for farmers. Even though lack of increase in the cost of water has increased the total area irrigated by
tube wells in Punjab over the same period,expected increases in crop productivity, yield and gross value added
have not materialized.
4
Please note that there was a decrease in diesel price index (2007-08=100) from 257.74 in 2012-13 to 157.60 in 2015-16 and an increase in the price index of electricity from
226.10 in 2012-13 to 293.22 in 2015-16. While the number of electricity generated tubewells witnessed an average annual increase of more than 8% as opposed to only less than
1% increase in the number of diesel generated tubewells. The opposing change in energy prices and increasing number of electricity generated tubewells may be the reason for
the cost of tubewell water remaining constant during the 2012-13 to 2015-16.

In the next section, we look at productivity and efficiency gaps to analyze whether crop production in Punjab is
reaching its efficiency potential.
3.1.2 Minor Crops
Agricultural production in Punjab has increased only by 8 percent in the last six years. This increase has been
mainly attributed to the increased production of major crops, whereas the share of major crops of Punjab has
increased from 58 percent in 2009-10 to 65 percent in 2014-15 (Government of Punjab, 2016). However, minor
crop production share has dropped in the same proportion within the same period.
Minor crops can be categorized based on their perishability. Relatively less perishable commodities can be stored
for a longer time and can help in times of deficits in supplies, thus, facing less price fluctuations. Whereas, the
more perishable items cannot be stored for longer periods and hence the market faces a greater price fluctuations.
These perishable crops are also categorized as cash crops. The major cause of this price fluctuation can be explained
by the Cobweb Cycle. Most farmers do not have perfect information about the future so they generally form their
price expectations about future prices based on the current market prices of these crops. Like any individual, when
farmers see the price of a crop to be high in today’s time period they expect that the price will be high in future
period also, thus, decide to produce that crop in greater amount for the next time period which leads to a surplus
of that crop in the coming period. When there is a surplus in the market, the price of the crop falls below the
expected price of the farmers. Similarly, when the price of a crop is low, farmers form expectations about the price
to be low in the coming period as well and reduce the production of the crop which leads to deficit of the crop
in the coming season and hence a price of the crop increased. This Cobweb cycle of forming price expectations
continues, leading to price instability in the goods market for perishables.
It is generally believed that shifting to cash crop production reduces poverty in the rural economy. Cash crops
are often more perishable and experience more price uncertainty. As a result, farmers growing cash crops are
at higher risk. It is believed that this risk deters the farmers from growing the high-return cash crops. Previously,
when deficits were experienced in the markets, perishable commodities were imported from India which filled
the deficit gap and stabilized the market prices of perishables items. This trade policy resulted significant drop
in domestic supplies mainly through decreased modern tunnel growing in the country. However, recently trade
restrictions were imposed resulting price volatility once again.

The Government’s intervention to stabilize the market prices would be “welfare enhancing” by increasing supplies
of these perishable minor crops. Currently, prices of these commodities are being controlled using the district
administration which is not a sustainable solution. Instead, it is important that the government makes the farmers
more informed about the future outlook on supply/demand and price expectations at macro level. Media and cell
phone awareness campaigns can play an important role in achieving higher welfare levels by getting more stable
market outcomes. Moreover, there is also a need for improved supply chains and modern storage facilities which
will lead to better and longer storage time for these commodities.
3.1.3 Water Issue
Availability of water for irrigation is a major concern in agricultural production in Pakistan and other countries
around the world. Pakistan has one of the largest irrigation systems in the world with more than fifty million acres of
irrigated land, fifty six thousand kilometers of main canals, and more than one million tubewells. Pakistan currently
has only 1050 meters/capita availability of water and is categorized as high-water stress country (Government
of Punjab, 2015a). Furthermore, on average, Pakistan receives 154 MAF of surface water annually from Indus
River and its tributaries, 104.73 MAF is diverted for irrigation from which most of the water flows into the sea
(Government of Punjab, 2015a). In Punjab, more than 75 percent of the arable land is watered directly or indirectly
through canal system. Farmers in Punjab are only being charged an average Rs 135/acre for canal water to irrigate
their farms (Government of Punjab, 2015b). As a result of the current pricing policies of water, most of the farmers
are using flood irrigation technology to irrigate their crops. The use of this inefficient flood irrigation technology
along with the unregulated pumping of ground water is causing rapid depletion of water resources.
Low water charges for canal irrigation, limited water storage capacity, and excessive-use of groundwater are the
major challenges for the policy makers in Pakistan. Therefore, an appropriate pricing strategy for canal water and
regulated extraction of groundwater is required to address the problem of water scarcity and water use efficiency
in the country. An appropriate pricing strategy is needed to motivate the farmers in using water more sensibly to
help improve allocative efficiency in water use. Moreover, with the introduction of improved technology such as
sprinkle and drip irrigation systems, farmers can use less water in a more productive way. Also, an improved water
reservoir system is required in the country.
Government of Punjab (2015a), “Punjab Sector Developmental Plan 2014-2024 Drinking Water, Sanitation and
Hygiene”, Planning and Development Department , Government of Punjab, Lahore
Government of Punjab (2015b), “Punjab Agriculture Sector Plan 2015”, Agriculture Department, Government of
Punjab, Lahore
3.2 Productivity and technical efficiency analysis and capacity gaps
This section will analyze and account for productivity and yield gaps in Punjab since the year 2007, and highlight
the factors responsible for performance dips in the agriculture sector. The framework of analysis for calculating
yield gaps shall be similar to the one by Avila and Evenson (2010)5
and adopted in the previous report, in which
three types of yield gaps shall be identified and calculated for different commodities (Evila & Evenson). The
empirical framework employed in this report involves a stochastic production frontier first introduced by Aigner et
al. (1977)6
and Meeusen and Van den Broeck (1977)7
, which postulates the existence of technical inefficiency in
5
Avila, A. F. D., & Evenson, R. E. (2010). Total factor productivity growth in agriculture: the role of technological capital. Handbook of agricultural economics, 4, 3769-3822.
6
Aigner, D., Lovell, C. K., & Schmidt, P. (1977). Formulation and estimation of stochastic frontier production function models. journal of Econometrics, 6(1), 21-37.
7
Meeusen, W., & van Den Broeck, J. (1977). Efficiency estimation from Cobb-Douglas production functions with composed error. International economic review, 435-444.

the production process. This approach uses the concept of a frontier that depicts the maximum output obtainable
from given inputs, where technical inefficiency of a farm is estimated by deviations from the frontier.
The empirical framework employed estimates a stochastic production frontier that captures technical inefficiencies
during the production process by farms. This framework was introduced by Aigner et al. (1977) and Meeusen and
Van den Broeck (1977) and has been widely used in literature since then (Kumbhakar et al. (1991)8
, Battese and
Coelli (1995)9
, Hallam and Machado (1996)10
, Sherlund et al. (2002)11
, Mbaga et al. (2003)12
, Kompas and Che
(2006)13
.
3.2.1 Estimation Strategy
Let us assume that the crop production technology be represented as a function:
Yi = f (Xi, β) evi-ui

Where Y is the output of crop per acre on the ith farm, Xi is the vector of inputs and β is the vector of parameters
estimated as a result of running this model. The stochastic error term is decomposed into two parts: v and u. The
former represents random variation in output due to factors that are exogenous to the farm whereas the latter, a
positive random variable, captures farm specific inefficiency reflecting the gap between the farm’s actual output
and the potentially realizable efficient output. This means that if u=0, then the farm is producing at the frontier and
is achieving the maximum level of efficiency.
A two-stage procedure is adopted to carry out this estimation. In the first stage, the farm-specific stochastic frontier
is estimated. Subsequently, in the second stage, technical inefficiency (X-inefficiency) effects are regressed on a
vector of efficiency determinants as well as on farm characteristics that can potentially affect the inefficiency of a
farm.
We do this simultaneously using the FRONTIER Software and follow the model of technical inefficiency effects for
cross sectional data introduced by Battese and Coelli (1993, 1995).
The technical inefficiency effects are assumed to be a linear function of explanatory variables given by:
In sum, Y is the crop output or yield obtained from a farm in per acre terms, X represents the inputs employed in the
production of that output (these can be continuous or dummy variables), U represents the technical inefficiency,
Z represents variables that are potential determinants of inefficiency and ε is an unobservable random variable
obtained by the truncation of normal distribution with mean zero and variance σ2
.
9
Battese, G. E., & Coelli, T. J. (1995). A model for technical inefficiency effects in a stochastic frontier production function for panel data. Empirical economics, 20(2), 325-332.
10
Hallam, D., & Machado, F. (1996). Efficiency analysis with panel data: A study of Portuguese dairy farms. European review of agricultural economics, 23(1), 79-93.
11
Sherlund, S. M., Barrett, C. B., & Adesina, A. A. (2002). Smallholder technical efficiency controlling for environmental production conditions. Journal of development economics,
69(1), 85-101.
12
Mbaga, M. D., Romain, R., Larue, B., & Lebel, L. (2003). Assessing technical efficiency of Quebec dairy farms. Canadian Journal of Agricultural Economics/Revue canadienne
d’agroéconomie, 51(1), 121-137.
13
Kompas, T., & Che, T. N. (2006). Technology choice and efficiency on Australian dairy farms. Australian Journal of Agricultural and Resource Economics, 50(1), 65-83.
8
Kumbhakar, S. C., & Hjalmarsson, L. (1991). Estimation of technical efficiency and technical progress free from farm-specified effects: an application to Swedish dairy farms.
Memorandum-Department of Economics, Gothenburg University, School of Economics and Legal Science (Sweden).

The input vector, X, includes the same variables for each crop. These include the (log of) quantity of seed, urea,
DAP, other fertilizer, and the number of times water is given to the crop. We further include three dummy inputs:
whether or not pesticide/weedicide sprays were applied, whether or not the crop was affected by a disease
attack and whether or not gobber (cow dung) was used as a fertilizer. In the second stage, district and farm level
characteristics were included as determinants of inefficiency. These variables, captured by vector Z, include dummy
variables for seed type (home and certified), soil type (chikny, sandy and kalrathy), treatment of seed (treated and
untreated), and the mode of irrigation (canal, tube well, mix and nil) for each district. In addition, district level
control variables such as the number of reported crimes, the literacy rate and road density are also included in the
model.
The results indicate that Gujranwala was the most efficient in wheat production in 2013, Pakpattan was the most
efficient in 2014, Sheikhupura was the most efficient in 2015 and Lodhran was the most efficient in 2016. On the
other hand, Khushab was the least efficient in 2013, 2014 and 2016 (Chapter Appendix, Table 1).
In cotton production, results show that Rajanpur was the most efficient in both 2013 and 2014, while during 2016
Bhawalnagar was the most efficient, followed closely by Rajanpur and Vehari. Meanwhile, Chiniot was the least
efficient in 2014 and 2015, and Bhakkar was least efficient in 2016 (Chapter Appendix, Table 2).
For sugarcane production, DG Khan was most efficient in 2014, whereas Rahim Yar Khan was most efficient in 2015
as well as in 2016. On the other hand, Khushab was least efficient in 2014, Sialkot was the least efficient in 2015
and Narowal was the least efficient in 2016 (Chapter Appendix, Table 3).
Meanwhile, for rice production, DG Khan was the most efficient for all three years, whereas Mianwali was least
efficient in 2014, Jhelum in 2015, and Gujrat in 2016 (Chapter Appendix, Table 4).
Lastly, for maize production, Jhelum was the most efficient in 2014 and 2015 whereas Okara assumed this position
in 2016. On the other hand, Islamabad was least efficient in 2014, Multan in 2015 and Rawalpindi in 2016 (Appendix,
Table 5).
3.2.2 Is Production Efficient?
In addition to the district rankings presented in the Chapter Appendix that detail which areas were the most and
least efficient in terms of crop production, it is also interesting to understand the overall trends in efficiency and
the gaps from the potential efficiency frontier.
For all major crops, efficiency figures have not improved significantly in the past couple of years and on average,
they hover around 80 percent. Maize has the highest production efficiency at 82 percent whereas cotton production
is the least efficient (of the five major crops discussed) at 62 percent. The production efficiency for both rice and
wheat in 2016 was 79 percent, whereas it was 72 percent for sugarcane.
These figures exhibit that farmers were unable to utilize the full potential of the inputs made available to them.
There are three kinds of productivity gaps that exist:
• Gap between the production frontier (unrealized potential output) and the realized output;
• Gap between realized output in Punjab and that in comparable regions. Figure 9 shows that wheat, rice,

cotton, sugarcane and maize yields in Pakistan are all lower than crop yields in India, China and Vietnam.
Pakistan has also had a lower Total Factor Productivity growth compared to Bangladesh, India, China and
Vietnam between 2002-2011;
• Gap between production and progressive farmer yields (Figure 8). Yields in Pakistan are reaching only 50
percent of the progressive farmer yields (based on best farmer practices).
These efficiency gaps can be attributed to input mix distortions created by the changes in input prices. Low prices of
nitrogen-based fertilizers, for example, discourage farmers from using phosphate and potassium-based fertilizers:
instead of using the mix that would be most efficient for production, they use the mix as directed by input pricing.
Subsequently, crop production does not take place at the frontier because the given resources are not being
utilized in the best possible combination.
Although inefficiency estimates indicate that there is still some room for improvement, these efficiency figures are
not alarming. For almost all crops, production is occurring at 80 percent of the potential. This indicates that further
improvements in the agricultural sector would also require a shifting out of the production frontier itself: the
determinants of this frontier would include improvements in input quality which include better seeds and better
availability of water and fertilizer. These improvements cannot come only from agricultural subsidies that have
resulted in low input costs, but from investments in agricultural innovation and integrated markets. In particular,
directed efforts at improving research and development are necessary to push out the production frontier. With
improved variety of seeds and other inputs, and with the employment of progressive farming practices based on
efficient input combinations, it is possible to increase productivity and TFP growth in the future.

In the next section, we will review the current agricultural pricing policy and speak more about facilitative markets
that are required to spur growth in Punjab’s agriculture sector.
3.3 Agriculture Pricing Policy, Integrated Markets and Financial Inclusion
TheagriculturesectorholdsstrategicimportanceforthegovernmentofPakistansinceitmustmaintainfoodsecurity
while satisfying the urban consumer. This has resulted in the food price dilemma, whereby commodity prices need
to be high enough to incentivize production but low at the retail end to subsidize the urban consumer. Agricultural
price controls are also intended to safeguard the farmers against sudden movements in international commodity
prices; in order to do this, the government maintains the procurement price of wheat14
within a preannounced
band, only partially transferring the effect of international prices to the domestic farmer and consumer.
Intervention in the wheat market occurs through the setting of a domestic procurement price. The timing of the
procurement price and its discrepancy from the international price are crucial for determining how the local
market adjusts. It is important that the wheat price is announced before the wheat crop is sown to effect supply;
in 2008, government announced price increases too late for it to have any effect on the year’s harvest of wheat.
Furthermore, historically, the procurement price of wheat has been set below the international price (particularly
during the 2007-2008 food crisis, when a shortage in the international wheat crop caused international wheat
prices to skyrocket). This discrepancy induces further distortions in the domestic wheat market by encouraging
farmers to hoard their wheat supplies or to illegally export them to Afghanistan. The shortage resulting from large
quantities of wheat export leads to price increases in the domestic market and has a considerable impact on food
price inflation.
After the food crisis of 2007-2008 passed, the government of Pakistan continued to maintain a high procurement
price for wheat, which was significantly higher than the international price; in January 2012, this was about $325/
tonne compared to the international price of $275/tonne. The positive price discrepancy encouraged wheat
imports and effected sales of domestic produce.
Other than price support, both the provincial and federal governments are deeply involved in the procurement,
handling and storage of wheat.
14
The government no longer interferes in the market of rice, either through setting prices or through government procurement.

Table 1 lists the main government agencies responsible for wheat procurement in Pakistan. In addition to this,
provincial agencies also partake in the procurement and storage of wheat. In April 2017, Punjab’s cabinet approved
the wheat procurement policy for the year. The government has set a target of purchasing 4 million metric ton
wheat at the rate of Rs 1,300 per 40kg. This evidence supports the continued active intervention of the government
in wheat and other commodity markets in the agriculture sector.
The government is the main buyer of almost two-thirds of farmers’ wheat production (they retain about one-third
of their production for seed and household food consumption) with wheat procurement volumes often reaching
25 percent to 30 percent of total wheat production (Prikhodko and Zrilyi, 2013)15
. This high procurement volume is
driven predominantly by concerns for food security, due to which government procurement may also reach up to
50 percent of marketed wheat. This high level of state procurement of wheat leaves little room for private sector
trade and investment in the post- harvest supply chain.
In 2010/11, estimated monetary losses incurred by government-operated wheat procurement and storage
totalled PKR 3,750/tonne (approximately USD 44/tonne), or about 13 percent of the total costs. Assuming that the
government purchases 6 - 7 million tonnes of wheat per year, losses from government procurement operations
can reach PKR 23 - 26 billion (USD 248 to 289 million) per year (Prikhodko and Zrilyi, 2013).
Wheat procurement is financed largely by commercial banks that do not see lending to the government for
procurement purposes as a risky enterprise, since the loans are backed by governmental guarantee. United Bank,
National Bank, Muslim Commercial Bank, Habib Bank and Allien Bank (the top five financiers) decreased their
total share of commodity financing from 85 percent in June 2009 to 75 percent in September 2011. The Food
Department of the Government of Punjab borrows 37 percent to 48 percent of all the credit required for financing
commodity purchases. The Government of Punjab is followed by PASSCO, TCP and the Food Department of Sindh
as other leading government borrowers (Prikhodko and Zrilyi, 2013). High interest rates constitute a significant
cost item in government wheat procurement, adding 11 percent (PKR 3,279/tonne) to the costs of purchasing
wheat. To reduce government losses to zero, the government either needs to reduce the procurement price by
about 16 percent or to increase its release price by 15 percent.
Punjab’s total wheat production in 2014-2015 was at about 19 million tones (Punjab Development Statistics,
2015)16
, compared to the potential of 32 million to 38 million tones according to FAO estimates based on attainable
yields of irrigated wheat in high-input farming systems in specific agro-ecological zones (Prikhodko and Zrilyi, 2013).
This lagging performance indicates that improving yields requires not only a focus on better input practices, but
also on liberalizing markets and encouraging public private partnerships.
The following outline proposed steps that the government of Punjab can take to create conducive markets in
agriculture, particularly in the case of wheat:
• Existing private grain elevators being utilized for other commodities may also be utilized for wheat, with
the government offering long-term contracts for elevator utilization;
• Use of flexible wheat storage options like silo bags until more permanent storage options can be
constructed and utilized;
• Innovative approaches for collateralized lending mechanisms could help expand post-harvest financing
for producers, traders, processors and other agribusinesses (Baldwin, Bryla and Langenbucher, 2006).
15
Prikodhko, Dmitry and Zrilyi, Oleksandra. (2013). “Review of the Wheat Sector and Grain Storage Issues,” FAO and World Bank Cooperative Program.
16
Bureau of Statistics Punjab, Government of the Punjab. (2015). Punjab Development Statistics. Retrieved from https://bos.punjab.gov.pk/system/files/Dev-2015.pdf

3.3.1 Wheat Marketing and Engaging the Private Sector
Ensuring profitability for the private sector in the market for wheat procurement and storage depends on high
post-harvest prices. In a paper on wheat marketing, Burki and Khan (2005)17
build an intra-year pricing model of
wheat, assuming that wheat (a soft commodity) can only be stored intra-year and not across years. The model
develops an arbitrage condition, according to which private market profitability is positive only if the expected
post-harvest price of wheat is higher than the sum of the opportunity cost of money committed to buying wheat
at harvest time and the cost of storing wheat. More formally,
Simply put, the equation above indicates that expected post-harvest price must be greater than or equal to the
sum of harvest price of wheat; per unit opportunity cost of committing money for wheat storage; and per unit
storage cost. If we assume that the entry and exit in the storage market is free then the equality condition will hold
in the arbitrage equation above.
For the expected post-harvest price to be high, it is necessary that the government does not fix low release prices
(often lower than the import price). Price controls work as a disincentive for private storage firms to step in and
bear the cost of storage. Although annual quotas have been introduced for wheat storage, these quotas alone do
not ensure private market profitability in grain storage.
This arbitrage condition has the following implications for government policy:
• Government policies should not be announced in haste. Due to the absence of a second player, private
marketing firms made abnormal profits in the early reform period which had an adverse effect on food
security. Ideally, competition among private firms should bring abnormal profits to zero – this will ensure
that the engagement of the private sector lowers government costs of procurement, while safe guarding
government’s objective of food security;
• Selling of strategic reserves at subsidized price serves as a major disincentive to flour mills to enter in the
private storage market. Therefore, the government needs to gradually increase the release price relative
to the procurement price so that the incentives are present for millers to stay in the storage demand;
• Ban on intra- and inter-provincial movement of wheat conflicts with the dual objective of food security
and farm income stabilization. This policy goes against the interests of wheat farmers because excess
supply in wheat surplus provinces pushes harvest price down. Such a policy is also harmful for the
interests of consumers in wheat deficit provinces as it pushes price upward.
3.3.2 Price Distortions and its effect on Crop Choice
Price distortions also influence crop choice and diversification, due to their effect on returns to family labor. The
calculation of returns or profits in agriculture adjust the conventional profit equation for the transfer earnings of a
farmer. Whereas conventionally, profits are calculated as:
π = TR – TC
17
Burki, Abid and Khan, Mushtaq. (2005). “Wheat Marketing Reforms: Marketing Margins and Food Security in Pakistan,” Paper presented in South Asia Regional Conference of
International Association of Agricultural Economists and IFPRI.

i.e. the difference between total revenue and total cost, for our calculation, returns to family farms, RFF, shall be
defined as follows:
RFF = TR – TVC – R
Where TR is total revenue, TVC is total variable cost and R denotes opportunity cost on fixed capital (or transfer
earnings).Theequationaboveappreciatesthatfarmers’profitmaximizingdecision reliesonprofitsbeingcalculated
after including transfer earnings as a cost. Hence, if farmers enjoy profitability, i.e. as long as returns on family
farms are greater than the reservation wage, farmers continue operations. They only quit when returns go below
their reservation wage, regardless of the economic profits being earned in the conventional sense. Tables 6 and 7
in the Chapter Appendix calculate both conventional profits as well as returns to family labour.
Government intervention in price affects returns to farmers, and thereby affects their cropping choice. Maize,
rice and cotton are the major crops that usually register an exportable surplus. The government cannot intervene
with support prices for these crops due to their exportable surpluses as this policy would not be fiscally feasible
for Pakistan. Instead, an alternative short run policy which would be fiscally feasible is to provide targeted input
subsidies. However, due to food security concerns, Government does intervene in the wheat and sugarcane
market with support prices and minimum prices, respectively. When international prices of wheat and sugarcane
fall (as in 2016), domestic prices do not fall as much due to the Government’s support price policy. Farmers,
with a preference for income stabilization, are more inclined to invest in wheat and sugarcane crops, resulting in
significant exportable surpluses even though traditionally these crops do not create any exportable surplus. When
the price offered at harvest is low (due to shifts in international prices) but the cost at sowing is not low, permanent
interventions through support price are not a sustainable solution. Instead, this phenomenon of international price
drops should be addressed by temporary relief including short-term input price policies and targeted subsidies
towards wheat farmers – the Kissan package discussed below is one such example of a targeted subsidy that bases
eligibility based on farmer’s owned acreage.
The tables 6 and 7 (see Chapter Appendix) show a per acre comparison of costs of individual inputs, total costs, total
revenues, returns to family labor, and profits of five major crops in 2005-06, 2015-16, and 2016-17. The costs and
returns in 2005-06 come from a LUMS survey which covered 800 farms representing all farm sizes and all districts
in Punjab. The data in 2015-16 and 2016-17 come from a representative sample of Punjab collected by the Crop
Reporting Department of the government of the Punjab. The data clearly show that the cost of production either
increased or stayed constant during the last ten years while the profitability and returns to family labor generally
declined in the case of maize, rice and cotton between 2005-06 and 2015-16 with a slight recovery in 2016-17. A
more alarming situation was observed for cotton and maize where profitability and returns to family labor were
negative. In the case of wheat and sugarcane, where Government provides price supprts, the profitability has
either increased or stayed constant during this time. These results are quite consistent with our prior expectations.
3.3.3 The Case of Targeted Subsidies - Kissan Package
In September 2016, the government announced a “Kissan Package” intending to lend financial relief to the small
farmer. The relief package is targeted to the poor farmers having 5 acres or less of land, so that they can purchase
quality seeds and manure for increased production. Under the program, cash support amounting to a total of 32
billion is aimed to benefit 1.6 million farmers. The relief would be provided through interest-free loans to poor
farmers for the 2016-2017 rabi and kharif harvests.

During February 2017, the first tranche of funds was to be distributed to eligible farmers but the program found
that it was difficult to identify eligible farmers who were either landless or had small landholdings. This led to a
registration drive which may have beneficial effects in the long-run for rolling out other financial inclusion packages
for small farmers.
Key features of the Kissan package are as follows:
• The loan comprises a five-year-package aimed at facilitating 70 percent new borrowers either having
small holdings or those working as tenants. However, 30 percent of farmers are already availing the
facility but with clean credit history can also apply. Any interest accrued on financing beyond five acres
shall be on the account of the borrower availing the financing facility;
• The government intends to provide Rs. 25,000 per acre for rabi crop and Rs.40,000 per acre for kharif
crop with three installments on seasonal basis;
• After the third year, farmers will pay markup at 4 percent for the third year, 8 percent for the fourth year
and 12 percent for the fifth year;
• The process includes a potential beneficiary approaching a tehsil land record center, where an official
uploads the required documents onto the Punjab Information Technology Board’s (PITB) e-portal. The
documents can then be accessed by two designated government banks: Zarai Taraqiati Bank and National
Bank of Pakistan, and three PFIs: Akhuwat, Tameer Bank and National Rural Support Programme that
analyze the documents and approach the beneficiary for the loan approval process. Once the loan is
approved, the tehsil land record center officials are responsible for uploading land ownership/tenancy
documents onto the e-portal.
The Punjab Government has recently launched a registration drive for small farmers who face difficulties in
accessing tenancy documents from landowners. Considering a previous similar registration drive launched by the
Benazir Income Support Program (BISP)18
, it is encouraging to see that such an initiative will facilitate small farmers
towards financial inclusion. Although the package may be criticized for not being accessible to the poorest of
the poor due to illiteracy concerns, the government’s performance with BISP has shown that such hurdles can
eventually be overcome, leading beneficiaries to enjoy not only from the targeted program but also from other
financial opportunities.
3.4 The 18th Amendment and Agriculture in Punjab
The eighteenth amendment was passed unanimously by the parliament in April 2010, according to which fifteen
ministries from the concurrent Legislative List were devolved to the provinces, with a convergent enhancement in
the province’s fiscal powers. Accordingly, the Food and Agriculture Ministry was also devolved to the provinces,
with the powers of taxing agricultural income also falling under provincial purview. The Punjab provincial
government is now responsible for the rollout of targeted and across-the-board subsidies. Under this new role,
the Punjab government has initiated the Kissan package and has also introduced fertilizer and water subsidies that
have lowered input costs post 2011. The cost of water, the cost of tubewell irrigation and the cost of pesticides are
reduced dramatically post devolution (Figures 13,14 and 15).
The overall production of wheat has risen post 2011, but there have been no significant improvements in total
factor productivity. This points towards the need for the adoption of SMART agriculture, as elaborated below.
18
The Benazir Income Support Program is a federally administered targeted unconditional cash transfer to poor women, begun in 2007-2008.

The total level of government intervention in the wheat market has risen post devolution in 2011, with the
total level at USD 754 million in 2012. This high level of intervention creates room for rent seeking, which has
motivated the Punjab government to seek public-private partnerships in the promotion of better agricultural
practices. Liberalization of agricultural markets is foremost in this matter, yet the concern remains muddied as the
devolution did not result in the reallocation of PASSCO (Pakistan Agricultural Storage and Services Corporation) to
the provincial level.
The subject of seed testing and seed certification has been reallocated from the Ministry of Food and Agriculture to
the Ministry of Science and Technology, while PASSCO has been transferred to the Ministry of Commerce and then
moved to the Ministry of Food Security. The Punjab government demanded that the aerial survey should remain
with the department of plant protection, whereas, seed testing and seed certification should be devolved to the
provinces and the Pakistan Agricultural Storage and Services Corporation (PASSCO) should also be transferred to
the Punjab government, as food and agriculture fall under the provincial government.
3.5 Agriculture in Punjab and Trade
Almost 80 percent of Pakistan’s total exports originate from agriculture directly and indirectly through forward
linkagestoagro-basedindustries(e.g.,textiles),withPunjab’sshareinitatalmost60percent.19
In2014-15,Pakistan’s
major exports include cotton manufactures (54.9 percent), leather and leather manufactures (5.1 percent) and
rice (8.8 percent). During 2015-2016, exports within the food group declined by 11.6 percent, with rice exports
declining by 12.3 percent in value despite an increase in total production volume of almost 7.6 percent.20
Partially,
this drop in export volume can be attributed to the drop in world demand during the same period. However, there
has also been a drop in export shares with specific countries, such as with China, whose export share has dropped
from 10 percent in 2014 to 8 percent in 2016, while the import share from China has improved from 17 percent in
2014 to 27 percent in 2016. The food group also constitutes about 12 percent of the total import bill.
An important caveat in Punjab’s agricultural sector performance is the lack of investment in the value addition
of commodities. Valdes (2013) suggests that introducing an incentive framework, which emphasizes that trade
and price policies can direct the allocation of land, labor and water to higher valued uses by altering returns on
infrastructure and other investments. The government’s historical intervention in the pricing, procurement and
storage of agricultural commodities, along with the presence of import tariffs on input commodities result in
negative effective rates of protection, reducing the incentive to shift towards high value-added production.
During the past two decades, the crop sub-sector has declined from 65 percent in 1990-1991 of agricultural value
added to 42 percent in 2010-2011. Livestock’s share has increased from 30 percent to 55.1 percent over the same
period (Valdes, 2013)21
. The growth rate of the agricultural sector has declined, with a noticeable decline in the crop
sub-sector despite high international prices. This low growth may in part be due to the government’s distortionary
trade regime. A process of trade liberalization was started by the government in 1996, which by 2003 resulted in
the elimination of quantitative restrictions and government procurement of commodities, as well as a lower of
tariffs. However, in 2006, exemptions were reintroduced, particularly for specific commodities including wheat,
sugarcane and rice. Along with these exemptions, Statutory Regulatory Orders (SROs) were also introduced, that
could be used to create exemptions (sometimes full) for some tariffs and to increase others (Valdes, 2013).
19
Agriculture Department, Government of Punjab, 2016.
20
Pakistan Economic Survey, 2015-2016.
21
Valdés, A. (2013). Agriculture Trade and Price Policy in Pakistan. Policy Paper Series on Pakistan PK, 17, 12

Pakistan’s current agricultural trade policy is deliberately complicated and includes a combination of the following
six basic types of taxes:
1. The Customs Duty (CD), the standard tariff assessed on an import’s Cost, Insurance and Freight (CIF)
value;
2. A Regulatory Duty (RD), a special Federal Government border tax, which is applicable to the CIF value,
applicable in some cases to exports;
3. The Federal Excise Duty, FED, and the Special FED on CIF value;
4. The Provincial Excise Duty (PED) on CIF value;
5. The Sales Tax (ST) on the duty paid value;
6. The Withholding Tax (WHT) on duty and the sales tax paid value.
These complicated taxes often result in negative effective rates of protection for the farmers, harming their farm
income. In order to improve the sector’s export competitiveness and growth, the following policy changes are
recommended:
• Move towards a simplified, uniform low tariff, with the sales tax also applied uniformly to both imports
and domestically produced goods. Provincially levied taxes should also not discriminate between foreign
and domestic goods.
• Evaluate the feasibility of a varying tariff pegged to the moving average of international commodity
prices. This could be an alternate measure to stockholding of commodities which will likewise safeguard
farmers from sudden changes in world prices.
• Evaluate the feasibility of gradually phasing out the fertilizer subsidy which poses a large fiscal cost in
addition to driving negative effective rates of protection.
• Remove quantitative restrictions on exports (although in some cases these restrictions may help in value
addition by decreasing input cost for downstream industries).
3.5.1 Future Opportunities for Trade in Agriculture: The China-Pakistan Economic Corridor (CPEC)
The China-Pakistan Economic Corridor is a collaboration of infrastructure projects being constructed in Pakistan,
with the objective of developing an economic land belt along the original Silk Road route. It includes provisions
for cooperation in the agriculture sector, including cooperation in management of water resources, livestock, and
other fields of agriculture. This presents a unique opportunity for Punjab, not only to benefit from investments in
agricultural infrastructure, but also to exploit the potential for trade with China.
The current Long-Term Plan for cooperation in agriculture includes the following focused areas:
• Planting and Breeding: Agricultural modernization along the corridor; guiding agricultural mechanization
and scale production; demonstration projects in Punjab of improved varieties to improve productivity;
• Agricultural Products Processing: Introducing modern agricultural product processing equipment
and facilities; an agricultural industry cluster could be built around Islamabad and Lahore to create a
processing base which satisfies international standards
• Storage and Transportation of Agricultural Products: Warehousing and logistics facilities in Islamabad
and Lahore to form a warehousing and logistics network system connecting cities and covering the area
along the corridor;

• Infrastructure Construction: An agricultural mechanization demonstration and leasing center in Punjab to
promote drip irrigation under plastic film and other water-saving agricultural techniques, and protected
cultivation for the development of facility agriculture;
• Epidemic disease prevention and control: A plant and animal disease prevention and control system
should be established in Faisalabad and Lahore to reinforce R&D in view of the current cotton leaf roll
virus and other plant viral diseases.
While CPEC focuses on the infrastructural development and technological exchange, Punjab government has three
overriding objectives: to develop enhanced productivity, encourage farmer-centric service delivery and foster
private-sector led growth. These objectives can be met by pushing the sector to exploit trade opportunities with
China, a country that has about $1 trillion of food consumption and has surpassed USA in becoming the largest
food importer in the world (International Growth Center, 2017). Figure 18, below shows that the world is already
making use of this opportunity by having increased their food exports to China in the recent years. Agricultural
and food imports, however, have a major limiting factor: that of distance. Pakistan can benefit from its location
by exploiting the distance advantage, particularly in the export of food and agricultural commodities. The top six
categories of Pakistan’s exports to China in 2015 were all sourced in agriculture, with the highest value of exports
being in cereals, followed by beverages, spirits and vinegar; edible fruit and nuts or citrus fruit; lac, gum, resins and
other vegetable extracts; residue from food industries including prepared animal fodder. Even though Pakistan’s
structure of trade with China is heavily dependent on agriculture, there have been a few missed opportunities.

Figure 18: China Agricultural Imports by supplying country: 2000-13

Pakistan’s rice exports to China rose in 2012, but have since then petered off, even though there was an increase
in world exports between 2012 and 2014.
Pakistan exported a large quantity of its total world export of sugar to China till 2011, with the quantities
exported to China matching those exported to the rest of the world, but since then exports to China have

fallen far behind the rest of the world’s exports. This is due to the large volume of sugar exports being directed to
Afghanistan, often through export leakages. It is estimated that almost 90% of Pakistan’s total sugar exports are to
Afghanistan.
Pakistan citrus exports to China grew in 2011-2012 but have been negligible since then, indicating a huge window
for trade, particularly since China imports $266.89 million worth of citrus fruit from the rest of the world, with only
$0.01 million from Pakistan (International Growth Center, 2017).

The case for guavas and mangoes is similar, with exports to China falling off after 2012. Again, China imports almost
$260.01 million worth of guavas, mangoes and mangosteens from the rest of the world and only $0.01 million in
this category from Pakistan. Pakistan’s total exports in this category are almost $184 million, UAE being its largest
export partner.
The government of Punjab can leverage the opportunities presented by CPEC by focusing on the following areas:
• Examining and negotiating existing tariff structures with China, and ensuring that they are at least at par
with those faced by other countries and trade associations such as ASEAN;
• Evaluating non-tariff barriers including Sanitary and Phytosanitary (SPS) requirements imposed on goods
sourced in Pakistan;
• Addressing existing market distortions that adversely affect both the volume and direction of trade and
encouraging market based reforms in the agriculture sector;
• Using CPEC cooperation and technical expertise to improve infrastructure networks, particularly those
focusing on irrigation, water supply and post-harvest storage and marketing;
• Institutionalizing public-private partnerships, especially in the area of post-harvest storage, handling and
marketing;
• Incentivizing exports through informational interventions (an alternate to direct price and quantity-based
interventions).
3.5.2 Meeting WTO Standards
The alleged excessive use of pesticides has obstructed Pakistani agricultural products from being exported to
destination countries since they do not meet hygiene standards stipulated by the WTO. This category of restrictions,
labeled Sanitary and Phytosanitary (SPS) measures pose a significant challenge for Punjab’s agricultural exports.
While quality accreditation bodies exist in the country, it is necessary to synchronize their quality control measures
with those expected by the WTO. According to Mustafa and Ahmad (2003)22
, “effectively targeted and appropriate
technical assistance and greater regional co-operation between Pakistan and other developing countries in South
Asia should be accorded priority in these initiatives” (see Table below).
22
Mustafa, Khalid and Ahmad, Sarfaraz. (2003). “Barriers against Agricultural Exports from Pakistan: The Role of WTO Sanitary and Phytosanitary Agreement,” The Pakistan Devel-
opment Review, 42:4. pp 487-510.

3.5.3 Memorandum of Understanding with USAID
According to recent newsletter from Punjab Board of Investment and Technology (PBIT), the government signed a
Memorandum of Understanding with USAID with a focus towords promoting Punjab as a desirable destination for
investment in agriculture. The objective of the MoU is to encourage investment and job creation in the Livestock,
Dairy and Horticulture subsectors, while stimulating the business environment in the province that can also
overcome challenges in trade. This will be carried out through the USAID funded Punjab Enabling Environment
Project which is a five year, $15 million project.
With its focus on forging public-private partnerships and illuminating trade and investment areas for both domestic
and international investors, the project can be helpful in developing trade with China via CPEC. With all efforts now
promoting market-based reforms instead of interventionist policies, it can be hoped that a less distortionary trade
regime will emerge for Punjab’s agricultural sector.
3.6 Climate Change and Agriculture in Punjab:
ExtremetemperaturesandachangingglobalclimatehaveseriousimplicationsforthefutureofagricultureinPunjab.
Changing climate affects both cropping patterns as well as crop productivity through changes in temperatures and
precipitation levels. A recent study by Siddiqui et al (2012)23
finds that the impact of climate change is statistically
significant (over crop productivity and climate data for Punjab from 1980-2008) and that it differs by type of
crop, by the cropping stage and by district. The study’s estimates show that increasing temperatures have a non-
negative impact on wheat production, but have a negative impact on the production of rice, cotton and sugarcane.
In most cases, increase in temperature has a positive impact on production up till a certain optimal temperature
23
Siddiqui, Rehana; Samad, Ghulam; Nasir, Muhammad and Jalil, Hafiz Hanzla. (2012) “The Impact of Climate Change on Major Agricultural Crops: Evidence from Punjab, Paki-
stan,” Pakistan Institute of Development Economics.

(27 degrees Celsius in the case of rice), after which the impact turns negative. Furthermore, precipitation’s impact
on the production of rice is almost negligible since most rice agriculture in Pakistan is supported by irrigation. The
optimal precipitations for the first two stages of wheat production are 111 mm and 84.50 mm respectively. That
is, beyond these optimal limits, further precipitation will adversely affect plant fruition. Both precipitation and
temperature levels do not influence the wheat crop in the third stage. In the case of cotton, the results indicate
that a one-degree centigrade deviation of temperature from the maximum required level (which is 32 degrees
Celsius) during the whole period, reduces the production of cotton by 42.33 thousand bales. Similarly, a one-
millimeter deviation of precipitation from the maximum required level (which 40 mm) reduces the production of
cotton by 0.50 thousand bales. This is a significant loss in the production of cotton due to change in the climate
variables. For sugarcane, the most important and vulnerable stage is third or vegetative stage of production, when
an initial increase in temperature causes increase in productivity which may be possibly the optimal temperature
ranged from 28-38 degrees Celsius in this stage.
A more recent study finds that maximum temperatures adversely affect wheat production, while the effect of
minimum temperature is positive and significant for all crops. Rainfall effect towards the yield of a selected crop
is negative, except for wheat. To cope with and mitigate the adverse effects of climate change, there is a need for
the development of heat- and drought-resistant high-yielding varieties to ensure food security in the country.24
Although these studies have their statistical limitations, they have shown that climate change has real and adverse
implications for the future of agriculture in Punjab. The government’s continued efforts in collecting better climate-
related data and crop data can assist better studies to estimate the impact of climatic changes. Subsequently,
awareness about these climatic patterns and the changes that they may require in cropping patterns, seed type
and quality as well as irrigation practices, should be communicated to farmers. Subsidies such as the “Kissan
package”, may be made contingent on the farmers attending information sessions where such knowledge is made
accessible. Another concern is the impact of agriculture itself, on climate: deforestation for agriculture and the use
of methane and nitrate fertilizers may lead to further environmental degradation and worsening temperatures.
Fertilizer subsidy policies and farmer usage should also be informed by its subsequent climatic impact.
3.7 Livestock and Dairy Sector
The livestock sector contributes around 12 percent to the gross domestic product (GDP) and about 56.3 percent
to agricultural value added of Pakistan (Burki and Khan, 2016)25
. Gross value addition of the livestock sector has
increased from Rs.778 billion in 2013-14 to Rs.801 billion in 2014-15, which translates to 3 percent in the value
added of the livestock sector. Punjab’s share in the total number of Pakistan’s livestock is substantial; almost 54.8
percent of Pakistan’s cattle and 68.3 percent of the country’s buffaloes are accounted for by Punjab. About 45.5
percent of all households in Punjab own some form of livestock as an asset, and this percentage rises to 62.5
percent for rural households in the province (Multiple Indicator Cluster Survey for Punjab, 2014)26
. Small, non-
corporate dairy producers who earn incomes on a daily or weekly basis, dominate the livestock sector.
24
Ali, Sajjad; Liu, Ying; Ishaq, Muhammad; Shah, Tariq; Abdullah, Asir Ilyas and Izhar Ud Din (2017) “Climate Change and Its Impact on the Yield of Major Food Crops: Evidence
from Pakistan,” Foods, 6(39).
25
Burki, A., & Khan, M. (2016). Pakistan’s Dairy Sector: Lessons from the Past to Build a Resilient Dairy Industry.
26
Bureau of Statistics, Government of The Punjab. (2014). The Multiple Indicator Cluster Survey (MICS) Punjab. Retrieved from http://bos.gop.pk/mics2014

Compared to 2000, Punjab experienced a growth in the number of all types of livestock, with inter-census growth
rates of cattle at 54 percent, cattle at 22 percent and goats at 27 percent.
This growth rate was experienced across the entire province, with almost all divisions experiencing growth rates
for cattle and goats.

Within the dairy sector, there have been structural shifts towards smaller farms who sell their produce through
informal channels rather than to the milk processing industry. A survey of dairy households in rural Punjab,
conducted by the Lahore University of Management Sciences in 2005 and then in 2014 shows that there is an
increase in the number of small farms (under 5 acres).

At the same time, selling milk to the milk processing industry has been a popular choice 10 years ago, but this
pattern has changed since dairy farms who sell milk to the milk processing industry has declined by 14 percentage
points over the two survey rounds, which should be a matter of concern for the processing industry (Burki and
Khan, 2016). Despite growth in the number of livestock, per animal productivity has not increased by much. Due
to the lack of a recent livestock census (the last one was conducted in 2006), productivity measures are dated.
However, the LUMS survey (2014) further documents that returns to small farms have dropped and that incentives
to sell to milk processing industries have dropped significantly.
The poultry sub-sector in Punjab is small but has suffered some set backs in recent years, mostly due to increase
in costs of maintenance and power shortages. Around 2009, the industry experienced incredible growth in
response to a 20 percent increase in demand for Pakistani poultry at home and in Afghanistan. Modern farming
techniques have been employed, including environmentally controlled houses. However, a government ban on
exporting poultry to Afghanistan in 2010 resulted in the shutting down of poultry farms, with the total number
declining from 25,000 to 22,500 in Punjab. High prices of poultry feed, electricity shortages and the inability to
combat widespread poultry diseases have discouraged farmers from diversifying into this sub-sector. There is very
little value addition in the industry. Most poultry are slaughtered in open and unhygienic markets. Other areas
for expansion include frozen poultry, already exported to Pakistan’s neighbors from France and Brazil; however,
Pakistan’s cost structure makes the industry uncompetitive, regionally and globally.27
Currently, the Punjab Government is focusing on the following objectives for its livestock sector28
(Planning and
27
USAID (2009). Pakistan’s Food and Agricultural Systems. http://pdf.usaid.gov/pdf_docs/Pnado507.pdf
28
http://www.pndpunjab.gov.pk/system/files/ADP%202014-15%20LIVESTOCK.pdf

Development Department, Government of Punjab, 2017):
• Promote per animal productivity rather than increasing livestock numbers by appropriate measures to
improve the genetic potential;
• Encourage the livestock farmers, to adopt improved methods of animal husbandry by demonstrating
greater efficiency and better returns as compared to traditional methods;
• Divert focus to enhance the quantity and nutritional quality of feed and fodder supplies and its processing;
• Transforming of livestock business from subsistence to the commercial venture;
• Reformulate regulatory regime to attract private investment; and
• Involve community organizations and joint ventures with foreign investors in the field of livestock
production.
The government is currently undertaking the following strategic interventions:
• Rural growth and poverty reduction through enhanced production and marketing of livestock products
in Layyah, Mianwali, Khushab and Bhakkar;
• Restructuring and re-organization of breeding services;
• Exploration of biogas energy resources at livestock farms in holistic manner.
In 2015-2016, the Punjab Government allocated 1.79 percent of its annual development program fund towards
the livestock sector, which was a 2.6 percent decline from the previous year. It is evident that the Government
focuses more on the crop sub-sector than on livestock and dairy. With the increase in demand for milk and milk
products and the potential for export offered by the China-Pakistan Economic Corridor, the Punjab Government
should focus on strengthening farmer-to-market linkages and on ensuring a steady flow of supply from farmers to
the milk processing industries.
3.8 Land Record Computerization - LRMIS
The maintenance of land records in Punjab was historically managed by the Board of Revenue, responsible for
the collection of taxes on land. Land records were kept in cloth bags by patwaris, who were the lowest-level
administrative tax officers in the province. Any restructuring of land, sales or rental process had to be whetted
by the patwaris, a label that has almost become synonymous with corruption. In addition to corruption, making
land rights secure and easily transferable is crucial for expanding land markets in the province. Lack of access to
land records, tenants’ insecurity, disputes over land rights and an unequal distribution of land have been crucial
hindrances to rural and agricultural development in Punjab. Further, the long-winded process of accessing land
records through patwaris, which could take as long as two months and several bribes, has also isolated women
from their rightful share of land holdings. Unfair divisions of land in inheritance has disadvantaged women who
were unable to privately access land records.
The Land Records Management Information System (LRMIS), launched in March 2016, is a landmark project of the
government of the Punjab that has transferred the cloth-based records to a digital system, making them accessible
to owners at a small fee. The Project has been rolled out in all 36 districts of Punjab and has successfully tested
linkages between the land records system and the deeds registration system. It has successfully reduced transaction
time from 2 months to around 45 minutes, with land record services now being provided on an automated basis
through 150 Tehsil Centers. While the Board of Revenue provides direction to the implementation of LRMIS at the
provincial level, local district level data is being collected through the establishment of about 150 Arazi Record

Centers. For data validity and completion, scanned images of village maps (masawi) are available in the database
in the service center to identify the piece of land. At the same time, all records are also available with the patwari
whose help can still be summoned before approaching the service center.
In Punjab, the LRMIS will help tackle the high transaction costs and difficulties associated with the previous system
of land records, that imposed significant harm to land owners (particularly the poor who had smaller land holdings
and less access to information). This made them especially vulnerable to the predatory behavior of middlemen and
affected the liquidity of family assets as a whole. Obstructions in recording and transferring land, which is also a
form of capital, affected the potential income that could be generated from that land through rent, cultivation, sale
or access to credit. Well-defined land rights are crucial for productive development and factor market functioning.
They also have significant empowering effects, particularly for women to whom the succession law can now be
easily applied. The Arazi Record Centers also have reserved areas to service women and senior citizens; these are
operated by female staff and are therefore contributing to women’s participation in the workforce.
As a whole, LRMIS is not only an initiative to digitize land records, but also an example of a technology based
intervention that can directly address social exclusion and women integration. With the one-year transition phase
of the project almost complete, it can be hoped that the patwari culture and its attendant corruption will decline
in the future. A recent agreement of the Punjab government with the Bank of Punjab to open a counter in the
service centers will further improve LRMIS.
3.9 Rural Development in Punjab
The road to economic development for a province like Punjab, where around 68 percent of the population is
classified as living in rural areas, depends on policies focused on rural development. The agriculture sector, defined
broadly to include the crop, livestock, forestry and fisheries subsectors, employs almost 51 percent of the rural
workforce in Punjab; therefore, policies focused on raising farm incomes have a direct impact on rural incomes.
Further, rural development also encompasses increasing these areas’ accessibility to urban centers, reducing their
need to travel out of town for necessities including health and education, improving their infrastructure through
the provision of electricity and gas while expanding opportunities for non-farm employment.
3.9.1 Rural Development Indicators
Educational attainment continues to be a challenge for rural Punjab, with an estimated 54.6 percent of people
being literate compared to 62 percent in urban areas. Less than half of all females in rural areas are literate (44.6
percent) while around 65 percent of all males have obtained some form of education. It is important to note
here, that not only are these numbers estimates based off the 1998 census figures, they also mask the quality of
education provided in rural areas. Simple literacy ratios are insufficient to compare the gradations of educational
attainment present in the province, with rural areas losing out due to single teacher and ghost schools, which
suffer from unstable attendance and functionality. The primary school Net Attendance Rate in rural areas was 54
percent in 2014, compared to 68 percent for urban areas of Punjab (Punjab MICS, 2014).
Health institutions in rural areas have not registered any significant improvement, with Rural Health Centers
increasing only marginally from 337 in 2012 to 350 in 2015, and the number of Basic Health Units decreasing by 36
units between 2012 and 2015 (Punjab Development Statistics, 2016). Child mortality indicators are heavily skewed
in rural areas, with under-5 mortality rate at 105 per 1,000 births compared to 69 per 1,000 births in urban areas

and infant mortality rate at 83 per 1,000 births compared to 57 per 1,000 births in urban areas.
The agriculture sector provides the largest source of employment in the rural areas. However, skewed ownership
structures have limited income generation opportunities for rural workers. Only 41.1 percent of rural households
exhibit any form of land ownership (this does not comment upon the actual size of the landholding), and 62.5
percent of the households own livestock. According to the Agriculture Census of 2010, 68 percent of owned farms
in Punjab have an area of 5 acres or less and 75 percent of owner cum tenant farms have an area of 12.5 acres or
less.
Households that identify as non-agricultural, comprise 50 percent of all rural households in Punjab, with 27.5
percent of the agricultural households being mainly livestock households and 72.5 percent being farm households.
Non-agricultural labor is an important source of income for rural households, with 33 percent of all rural households
citing it as a source of income. This is true both for agricultural and non-agricultural households; nearly 27 percent
of agricultural households draw income from non-agricultural labor. The largest proportion of non-agricultural
households (38.7 percent) cite non-agricultural labor as a source of income.
Rural area development should be two-pronged: focusing on improving the existing infrastructure thereby
facilitating the current structure of the sector to generate higher incomes and diversifying the sources of income
available to the rural sector by investing in education and non-farm related production activities.
3.9.2 Key Policy Initiatives and the Provision of Public Goods
The Punjab Rural Support Program (PRSP), initiated by the Government of Punjab, uses a community-led approach
to poverty alleviation in the province. Community driven development programs, encourage group mobilization
and active participation by community members to improve their wellbeing. Social mobilization is incentivized
through the provision of skills, the need to provide social capital for credit creation, and the introduction of voting
to choose local capital and public works projects. Such a process is meant to better identify local level priorities
and sustain a process of diversified growth of economic, human and natural resources at both the household and
the village level.
Currently, the PRSP is running initiatives focused on health, education and access to credit. For their primary
and reproductive health initiative, they have partnered with the Punjab Poverty Alleviation Fund for up-scaling
and increasing the number of basic health units and paramedical staff. Their education initiative builds on
community partnership: they received an Rs. 81 million development grant from the Education Department to
set up 300 Community Primary Schools. These schools are intended to be run by Village Education Committees
composed of village members responsible for the administration and financial handling of school accounts. Their
second education initiative provides support for public schools whereby management of public schools has been
transferred to NGOs for better functioning. The PRSP is also co-running an interest-free loan program to provide
access to credit for the rural poor; this program is also run in collaboration with the Punjab Poverty Alleviation
Fund.
Other initiatives being undertaken by Local Government and Community Development in Punjab include:
• Elimination of sewage ponds from villages;
• Establishment of Cattle Market Management Companies to improve the livestock trading environment

and to discourage extortion and corruption. Nine companies in each division have been established; and
• Clean Drinking Water for All initiative whereby 307 water filtration plants have been installed;
• Khadim-e-Punjab Rural Roads program.
3.9.3 Addressing Rural Poverty and the Way Forward
Evidence-based research has shown that community led development has a significant impact on household level
development indicators; the World Bank is engaged in multiple education and health related programs that are
modeledonengagingcommunitymemberstoplayleadershiprolesindevelopmentinitiatives.However,addressing
rural poverty requires more than just community engagement. To facilitate the functioning of agricultural and
non-agricultural land and labor markets, the government needs to initiate market reforms while investing in
infrastructural projects.
Market reforms should include reforms to restructure land ownership amongst the poor since small landholdings
and exploitative tenancy contracts are amongst the proximate determinants of household level rural poverty. There
is also a need to develop infrastructure that generates a demand for non-agricultural labour. Diversifying away from
agricultural livelihoods allows rural households to guard against sudden income shocks that are a hallmark of the
agriculture sector, to achieve year-around employment opportunities and to acquire skills more pertinent to value-
added production. The development of infrastructure has taken a strong hit, particularly from the energy shortage
in the province that has set back previous efforts to improve rural electrification. Farm to market road mileage in
Punjab has only increased by 6.2 percent between 2004-2005 and 2014-2015. The development of these roads is
important for ensuring satisfactory transportation of agricultural commodities including fresh produce.
Improving educational attainment, provision of health services, construction of infrastructure and the involvement
of the community in spearheading these development initiatives, is necessary to push forward an impactful
provincial rural development strategy. Whereas agricultural pricing policies and reforms pertinent to farm
households are crucial, it is also necessary to focus on developing markets for non-agricultural labor to effectively
tackle rural poverty in Punjab.
3.10 Next Steps: Towards Agricultural Innovation and SMART Agriculture
ThePunjabGrowthStrategyaimsforinclusivedevelopment,encouragingtheagriculturesectortoadoptinformation
communication technology (ICT) for farmer-centric service delivery, enhance productivity and promote private
sector led growth. The paradigm shifts that comprise Punjab’s vision are highlighted in the table below:

Initiatives that the government has undertaken to push the agriculture sector in this direction include the
farmer-targeted subsidies through the Kissan card, encouragement of the private sector to participate in wheat
procurement by announcing that wheat procurement will be brought down to 1 million tones from 5 million tones
and encouraging the use of ICT based solutions by floating interest-free loans to poor farmers disbursed through
an online portal.
Short term fixes that have been proposed under the Asian Development Bank’s Formulation Strategy 2017-2018
include:
• Completion, consolidation & operationalization of key projects;
• Increasing focus on PPPs with government investments acting as a catalyst;
• Special Development Programme targeted towards the poorest districts;
• Enhance focus on private sector development & regulatory reform;
• Increased focus on population issues, income generation & skills;
• Innovation & research to inform service delivery projects;
• Stronger alignment to attain Sustainable Development Goal commitments; and
• Bring discipline to the ADP process – departmental performance management and project prioritization
matrix.
Given the sector’s yield and productivity performance, it appears that input subsidies that have significantly
brought down input costs have not substantially improved either crop yield or crop acreage. Instead, innovative
solutions focusing on engaging the farmers and facilitating private markets are needed. It is encouraging that the
roll-out of BISP (although not directly related to agriculture but targeting a large rural population in Pakistan) has
already introduced a technologically diverse system of financial inclusion. The introduction of the Kissan package
and the Kissan card will further the same inclusion, bridging the gap between commercial banks and credit starved
farmers. It will also induce competition that might introduce competitive loan rates even when the Kissan package
is rolled back later.
Figure 27 above shows that agricultural loans disbursed by the five big commercial banks have registered a
substantial increase compared to only a slight increase in loans disbursed by the Zarai Taraqiati Bank Ltd. This trend
indicates the increasing importance of the private market in bolstering Punjab’s agriculture sector.

It is important to note that Punjab’s economic climate is still marked by security challenges. Improving public private
partnerships in the context of a security state can be undertaken with the government acting as a middleman. This
is the case in the introduction of cash grant and loan programs like BISP and the Kissan package as they reduce
the risk for commercial banks by pitting the government as a guarantor. At the same time, development is not an
objective for commercial banks which may lead to errors in disbursement (as the government disburses to the
bank with the bank disbursing to the beneficiary). While the use of technology for registration, identification and
authentication will slowly become a default requirement in a security state like Pakistan, steps need to be taken to
ensure that poor and illiterate farmers are adequately educated to fully utilize these programs.
An increasingly liberal market structure, a cap on commodity prices and financial inclusion for farmers are the
steps needed to push crop yields towards the efficiency frontier and to push the frontier to new limits.

3.11 Annexure

2014

Note: Returns to family are calculated by subtracƟng all input costs excluding the implicit cost of family labour.

Figure A.1: Mean Efficiency for Sugarcane and Maize

AGRICULTURE AND RURAL DEVELOPMENT PUNJAB 2017

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